Small Cap Value Report (Fri 24 Mar 2023) - LUCE, MFX, STAF, SAG, BOOM, INCH, CRST, AMGO, IDOX, SFE, CARR, W7L, QTX, JDW, PTD

24th Mar '23 by Paul Scott

44 comments 8392 reads

Good morning from Paul!

We're off to a flying start today! I had a rare burst of energy yesterday afternoon/evening, and reviewed most of the backlog items that had built up this week, with brief comments below. There's also a full section on Luceco (LON:LUCE) which several readers had requested, and I find quite interesting too.

Today's report is now finished. Have a lovely weekend, and do tune into my weekend podcast (on main podcast platforms, called "Small Caps podcast with Paul Scott". I'll aim to record that late morning tomorrow.

EDIT: Saturday at 13:30 - Two podcasts are up now - one for companies, and one macro. The mystery share for this week is Spectra Systems (LON:SPSY) (see Monday's report).

Explanatory notes -

A quick reminder that we don’t recommend any stocks. We aim to review trading updates & results of the day and offer our opinions on them as possible candidates for further research if they interest you. Our opinions will sometimes turn out to be right, and sometimes wrong, because it's anybody's guess what direction market sentiment will take & nobody can predict the future with certainty. We are analysing the company fundamentals, not trying to predict market sentiment.

We stick to companies that have issued news on the day, with market caps up to about £700m. We avoid the smallest, and most speculative companies, and also avoid a few specialist sectors (e.g. natural resources, pharma/biotech).

A key assumption is that readers DYOR (do your own research), and make your own investment decisions. Reader comments are welcomed - please be civil, rational, and include the company name/ticker, otherwise people won't necessarily know what company you are referring to.

Agenda

Lots of catch up items today, further down. Here's today's to do list of fresh announcements, in the usual format -

Main Sections

Summaries here, main sections further down -

Luceco (LON:LUCE)

FY 12/2022 Results - 110p (£176m) - Paul - GREEN

Owner-managed electrical equipment group. Did very well in the pandemic, now dealing with the hangover. Share price down a lot from recent rally - is this a negative market reaction to LUCE's in line results (and outlook) this week, or just a general market downdraught? A gentle thumbs up from me, I review results…

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Paul Hill

24th Mar '23

Looks like the #banks are getting hammered again today. What's the reason?

Contagion/concerns with their balance sheets as indicated by the spike in #CDS rates (eg COMMERZBANK AG (FRA:CBK) & @DeutscheBank )?

Lucky dip

Averaging down has rarely been a helpful investment to me. The market is in the down mood and has much further to go. In three to six months time many wished they had sold now to buy it back later in the year. That in itself is not a profitable trade either. Doing nothing maybe is the hardest investment strategy but sometimes the most profitable one. You collect the dividend if nothing else!

BnB

Games Workshop (LON:GAW)

Reckons the license revenues will match miniatures in 3/5 years.

If this transpires, at those margins the operating profits would quadruple (I think).

I really liked the comments Paul made regarding the Inchcape. I am a subscriber but not a small cap investor. I enjoy comments on mid and large caps from Paul, Graham, Megan, ESs and the very helpful community here much more than on the small caps. Maybe I am on the wrong community here but for the time being I stay.

DanTE

If you're 100% all the companies in your portfolio have brokers coverage the easiest way would be to get in touch with Research Tree and see why they don't show coverage and if they would in the future. It might be something related to costs of acquiring all those coverages which doesn't really seem feasible, but that's just me

Funnymoney

J D Wetherspoon (LON:JDW) I'd be interested to know from Paul what he thinks of this"Remaining in the hedging reserve, is.... and -£40,674k". I know there was a ~£160m-ish gain floating around, but the -ve £40m doesn't hit the accounts yet? Obviously it's very good they made all the money from hedging, but these are quite big numbers that are floating around and appear quite significant when compared to actual trading profits etc. I'm a holder and was happy to follow Tim Martin when he bought shares to the value of £11m.

HarishMPatel

I agree this is just the tip of the iceberg (banking crisis) and there is more downside pain to come. I did sell my banks as it hit my stop-loss to protect my capital. I am not certain that doing nothing is sometimes more profitable, it just brings more pain.

AnonymousUser1822519

Thanks for the banking updates Paul H. I banked 5 percent profit on Barclays on the recent bounce(now a dead cat one). It was meant to be a swing trade, but turned into a day trade(or two) when I saw the bounce reversing suddenly.

I'll look for another reentry when the calm returns.

Roger Baron

Me too. Thanks Paul for originally bringing it to our attention.

rmillaree

Somero Enterprises (LON:SOM)

"I was under the impression (from general commentary) that the management of Somero had a decent stake in the company but, after a quick investigation prompted by the small Director purchase this morning, it appears that I was wrong."

specifically what general commentary ?

not sure why anyone would not simply check the list if they wanted to know rather than relying on general commentary. Note Jack Cooney cashed in alot of his shares a few years back - he is at the age where it makes complete sense to be moving away from having all his eggs in one basket - from memory he is not the only director closer to 100 than 50!! I would guess the average age of the board is pretty close to the uk retirement age - i cant blaming them for having cashed in any chips they had and enjoying the spoils !!

Despite lack of large shareholdings i have always found this board to be honourable in their dealings with regard to doing the best they can for shareholders (rather than themselves).

Bouden54

Not all the brokers are on Research Tree - it's generally only small caps and small brokers. Mid and large caps generally use the big investment banks (eg JP Morgan, Barclays, UBS, etc) and they only provide their research to their institutional clients - so sadly not available to private investors, which I think is very bad as we're clearly missing a lot of important information.

J D Wetherspoon (LON:JDW)

Generally i am minded to disregard any hedge gains unless its 100% clear that its big windfall with no down side. If they have hedged and made profits the bad news flip side with higher interest rates is that any loans they renew near term are likley to "cost more" - so practicably speaking its probably avoiding extra costs rather than making sheloads of profit - albeit they may have been lucky enough with timing to have tehn option to book some useful profits - i would have thought its unlikley to be mucha free lunch overall though if interest rates stay where they are.

Rusty2

But did they buy the shares? Can't see any director buying in the last 7 years.

All the shares the directors have acquired in the last 7 years have been free.

Phillip Arghebant

Dear Snazzytime

I am also a subscriber to ResearchTree and have experienced similar issues to you. I recently asked a question about a particular company and I was informed that Liberum (broker to the company in question) only provides free research in companies to which it is not a corporate broker. As you have stated, you can upgrade and that will hopefully provide you with additional coverage.

You raise a very important point about the paucity of research coverage generally in smaller companies. I have tried on many occasions to talk to the PR companies about widening availability of research whilst also enabling retail investors to attend half year and annual presentations. I have found that they are, for the most part, unhelpful and so I have turned to emailing the Chief Executives of the companies in which I have an investment. This has elicited a positive response, including seeing an increase in the number of companies now including broker forecasts on their research websites. Not ideal, I know, as there is no detail but, as is so often mentioned here, this will eventually have to change and the more retail investors engage with a company direct, the more likelihood there is of delivering change.

Kind regards

Phillip

dodge1664

rising interest rates are straining the system

FeatheredCapital

Quartix Technologies (LON:QTX)

Hi Paul,

I believe that Quartix’s valuation is being misunderstood. What they are building is a cash volcano which is suddenly going to erupt in a few years’ time. That is why the adjusted EPS forecast is suddenly rising in Finncap’s 2024 forecast. The reason that this hasn’t been more obvious in the past is to do with three factors: the insurance business, price erosion and the accounting policies regarding new unit installations.

Insurance Business – this is now completely gone so we can just focus on the fleet business. Last year included some small amount of revenue that had a very high profit margin, which will not reoccur in 2023.

Price Erosion – Pricing for new contracts has been fairly stable since the start of 2019. Here is a link to their presentation. https://www.quartix.com/conten... This can be seen on page 14.

The gradual price erosion seen in recent years is to do with legacy/ higher priced business moving on to the new pricing. Over the next two years, this price erosion will slow down significantly and this will be supported by the introduction of two new modules EVolve and Quartix Check. I won’t go into detail but these modules will charge the customer a little more for additional services and the take up of these services should lead to Average Revenue Per User completely stabilising.

If prices stabilise then this dramatically changes the discounted cash flow model that one can use for valuing Quartix.

Accounting Policies - The main reason why the underlying growth of Quartix is not being seen is to do with the accounting treatment of new telematic unit installations. Historically, (before this year) Quartix would expense all of the associated cost with installing a new unit upfront!!!! So, they would take the marketing cost of acquiring a customer, the cost of a new telematics unit and the cost of installing (although about 50% of fleet are now self-install) upfront. The exact figure is hard to ascertain but this cost was c. £8.4m in 2021. 2021 Adjusted PBT was £5.4m btw…...

These accounting policies changed in 2022 and will be different going forward. The cost of a new unit customer will now be spread over the life of the initial contract (usually 20 months). This means that profits will immediately benefit compared with 2021; however, it still feels extremely conservative as the customer churn rate is c.12.5% i.e an average unit life is 8 years on average. If a customer changes vans, they charge them if new installation required.

This conservative accounting has meant that as new unit installs accelerate, which benefits the long term, it hurts the short-term profit as this cost is taken almost (2022 on, previously it was) upfront. The best way to show the profitability would actually be to slow down new installations as much as possible!!

With prices approaching stability it creates a very interesting new formula:

2022

60,000 new subscriptions x £10 (rev per month) x 12 months x 8 years (assuming attrition of 12.5% on average) = £57.6m revenue generated on c£10m+ (?) of upfront costs

Management say that once a unit is installed there is very little cost to them and therefore we can assume an 80% margin. £57.6m x 80% = c. £46m

A £46m return on £10m of investment looks pretty good to me, even if we assume higher interest/discount rates!!

Let's hope their pace of installs slow down so we can see it all hit the profit line faster.... ;P

p.s I am biased as I am a very large holder.

Boon

I have been hit hard on this. My stake in Metro Bank (LON:MTRO) down 30% from peak just a few weeks ago (albeit not all down to this, also down to a lacklustre results outlook). My recent jumping in with Invesco STOXX Europe 600 Optimised Banks ETF Acc (LON:X7PP) of the biggest European banks, also down about -8% since purchase.

Since 2020, I've stopped being influenced by the size of changes, as intraday volatility has gone through the roof for some reason - probably due to more HFT, ETFs, zero day options. Its sickening of course to see declines of like -3%, -4% in a day. But equally, it might be a 3%, 4% gain on Monday. The markets are a casino day to day.

But its right that people are running scared. There is ambiguity of what will happen next. And human instinct is to hate ambiguity. I take a more sanguine view - that it is very certain what will happen next. There will be another bank or two that runs into trouble, another bank run. This for me is inevitable; after 10+ years of benign banking environment, there are some weak companies out there.

However, it is also certain that governments will step in and bail out the next 1 or 2 or 3 banks that fail. Because it is the playbook. And they have the financial power to (well, they have the power to make future generations pay for it, but that's another story).

Once markets go through the next few (1) bank trouble (2) bank run (3) govt steps in (4) rescue sorted, depositors still whole.

Then markets will feel confident that the system is robust enough.

The hairy bit will come if there are more than just a few bank failures.... governments can't bail out every bank... but if that is where you think we might end up in, then surely the right call would be to sell ALL equities now and hold bitcoin or physical gold? For if there's a cascade of bank failures, our entire financial system goes into uncharted territory.

(I hold both shares mentioned in the Boon Fund)

catalogue

Thank you Paul for the SCVR summary, very useful, particularly the notes.

Harry Hindsight

Tea leaf watcher says will sit around 350 for a while until some catalyst. There be the question.

Just realised for some reason my reply was posted as a standalone post, instead of nested as a reply to Paul Hill's post about banks! My apologies.

Small Cap Value Report (Fri 24 Mar 2023) - LUCE, MFX, STAF, SAG, BOOM, INCH, CRST, AMGO, IDOX, SFE, CARR, W7L, QTX, JDW, PTD

Agenda

Main Sections

Summaries here, main sections further down -

Luceco (LON:LUCE)

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About the Author

Paul Scott

44 comments

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