Small Cap Value Report (Fri 24 May 2019) - Politics, VLE, IQE, RHL, MTC, WSG, LUCE, HEAD

24th May '19 by Graham Neary

31 comments 9804 reads

Good morning!

Some stocks I'm looking at today:

Volvere (LON:VLE)
IQE (LON:IQE)
Redhall (LON:RHL)
Mothercare (LON:MTC)
Westminster (LON:WSG)
Luceco (LON:LUCE)
Headlam (LON:HEAD)

Politics

There has been some minor political news today regarding the Prime Minister. Markets don't seem to care - it was flagged in advance and has been on the cards for some time.

Volvere (LON:VLE)

Share price: £11.85 (+7.7%)
No. of shares: 3.1 million
Market cap: £37 million

Disposal of Sira Defence and Security Limited

(Please note that I have a long position in VLE.)

Some great news from Volvere last night.

I appreciate the fact that they released it after 6pm, so we had plenty of time to digest it last night. It would be wonderful if more companies did this, wouldn't it? I don't think there's a rule which says that announcements have to be released at 7am!

Anyway. the news is that Volvere has raised £2.55 million (£3 million before bonuses to executives and transaction costs) from the sale of Sira Defence, its small CCTV software subsidiary. The buyer is a large company called NICE.

The multiples achieved by Volvere on exit really astound me. Sira earned revenues of £300k and PBT of £60k last year. Selling it for £3 million tells me that Sira must have developed into a very high-quality business over the years, with a lot of potential, and/or that Volvere is particularly good at finding buyers for its subsidiaries.

You might remember that Volvere's previous disposal generated £31 million (gross), for a consulting company which generated PBT of £3.3 million in the prior year. The multiples for that transaction were impressive, but the Sira multiples are on another level.

The return on investment is also quite good. The RNS yesterday says that Sira was purchased for "£0.005 million". Scrolling back through the archives, the RNS from 2006 says that £30k was the purchase price for Sira and its sister company.

A couple of working capital loans have been extended over the…

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MichaelFBS

24th May '19

"I appreciate the fact that they released it after 6pm, so we had plenty of time to digest it last night. It would be wonderful if more companies did this, wouldn't it? I don't think there's a rule which says that announcements have to be released at 7am!"

Quite agree indeed I believe in the US the generally "report after the bell" giving people the 17.5 hours to digest the information. Surely this leads to a better and fairer market, when you consider many PI's have a full time job?

wildshot

There is also a lot of discussion online about the long term decline in the Newriver Reit (LON:NRR) share price being due to Neil Woodford having a large holding and being a forced seller to fund redemptions on his investment funds. Once this process clears we might be able to form a view as to what the market really sees as the value for this share.

davidjhill

Graham - re IQE (LON:IQE) : because they are not just an Apple supplier. The vast majority of their business isn't and is reducing.
Doing a relative valuation on IQE and Apple makes no sense at all in my view. The PE on IQE (LON:IQE) is predicated on Photonics industry growth exceeding 40% a year into the medium term and £IQEs potential to own a large proportion of it, with a big chunk of the capitally intensive spend already sunk. Apple isn't growing at anywhere near that and you wouldn't expect it to given they are focused on flatlining device sales whilst growing service revenue.
I understand if people don't believe the IQE (LON:IQE) story because they don't believe management can capitalise on the opportunity (juries out on that one for me), or that the opportunity isn't there, but comparing the two companies is like comparing Apples and Pears (see what I did there :) )

Laughton

Morning Graham and glad to hear that you have recovered or are recovering.

IQE (LON:IQE) - "why would you want to buy a capital-intensive manufacturer from Apple's supply chain at a multiple of 26x, when you can buy Apple itself at 14.5x?"

Welll , the believers would say that Apple is only a part (and increasingly smaller part) of their customer base.

They are making products for much more than just smartphones and more even than just for the mobile phone industry and that this is why the future looks bright.

OK so the chipmakers that they supply might not be able to supply to Huawei and that will mean that end users will not buy Huawei products but does that mean they won't buy smartphones (for instance)? No they'll buy another manufacturer's version (possibly an Apple version) and that version will also have to make use of IQE (LON:IQE) wafers so, in the medium to long term, the Huawei 'phone problem is not likely to have much if any impact on IQE (LON:IQE).

Disclosure - I hold IQE (LON:IQE) so, I guess, I must be a believer.

doublelutz

As you say dividend cover on NRR is only around 80%. Probably a bit less at just below 77% (dividend 21.6p and EPRA profits 16.6p). So if they restricted themselves to a fully covered dividend they would be paying 7.7% and I don't think many people would think that justified any increase in price bearing in mind the general situation regarding retail and possible further capital losses. In common with many other property companies if 100% of the profits are paid out I wonder where the money is supposed to come from to reduce the increasing debt when there is currently less chance of making capital gains on the properties. Perhaps the most important issue to me is that the shorter's have got their teeth into this one and that alone would put me off buying.

spantic

Regarding VLE; Management wish to grow Shire Foods with 'Good tasting food' and expand their vegetarian range. As Gregs the bakers reported big sales of Vegan sausage rolls, it makes good sense to me for Shire to hit this important market, time will tell.
I sold my holdings due to the fact that how many years of stagnant share price are you prepared to stand, watching paint dry comes to mind! But never the less a good company.

Graham Neary

Hi david, thanks for the feedback re: IQE (LON:IQE) and AAPL

Of course I agree that the companies are very different. Based on their many qualitative differences, I think Apple should be be much more expensive than IQE. But when you look at their earnings multiples based on near-term prospects, the complete opposite is the case. Clearly, I do not understand/appreciate the long-term prospects which IQE shareholders are betting on.

I've been banging the drum about IQE's poor financial characteristics for a long time, but I think I've shown an ability to be balanced.

In December 2016, at a share price of 38p, I was moderately bullish and said that the P/E ratio attached to the company's shares was "a bit stingy", given its growth prospects. I didn't come out as bearish on the stock until November 2017, when the share price was 162p.

Cheers

Graham

FREng

Spantick:

I sold my holdings due to the fact that how many years of stagnant share price are you prepared to stand, watching paint dry comes to mind! But never the less a good company.

It depends whether you can find a better place to invest the cash. I'm holding a lot of cash at present and I don't want to add to the cash pile at zero interest rates.

... and the takeover of Tarsus (LON:TRS) makes matters worse. Lord Lee identified a great company that looked like a long-term hold for growth. The 36% premium is excellent, but I'd rather have the shares.

Hi Graham - It's not that I think you are not being balanced or even that you are incorrect necessarily, just that they shouldn't be compared in such a way.

As others have mentioned, the jury is out on IQE (LON:IQE) managements ability to convert a massive industry opportunity into profitability, and I share some of that scepticism to be honest. Mgmt and Broker Guidance on Photonics growth is estimated at 40% p/a for at least the next 5 years and if that proves to be true my fag packet EPS shows EPS should be well in excess of 12p, so current PE isn't ridiculous. I guess it depends on your view of management and market trends in photonics.

As it happens I think Apple is undervalued given its position in the market but it can't grow at anywhere near those numbers so comparing current PE metrics just doesn't work in that scenario in my view.

Yes, of course - if you think a company has amazing growth prospects, you don't need to worry too much about the 1-year P/E ratio. I'm a value investor at heart, so I will mention it!

G

peterclothier

Hi Graham,
Re Volvere (LON:VLE)
I'm slightly puzzled by where they see their competencies, given that they have seemingly made their big returns in non-food .... Impetus Automotive and the Sira CCTV business.

From the FY release on Wednesday:
"The disposal of Impetus has once again validated our strategy of acquiring underperforming businesses and investing our resources in effecting a turnaround and an ultimate exit. We continue to look at targets in all sectors but, in particular, we believe there is an opportunity to build a larger group of food businesses, leveraging our competencies in this area."

What do you think?

rhomboid1

Hi Peter

Obviously Graham can speak for himself but it’s my belief that they have substantial deal flow coming across their desk & much of it is in deeply distressed businesses where something (often not related directly to the business but to its owners) has created an urgent need for a sale ...that urgency coupled with their cash/speedy decision making means price/opportunity can trump the perceived attraction or otherwise of the sector involved...their broad business experience as a team

http://www.volvere.co.uk/management-profiles/

...suggests they’ll consider anything they can see a route to major value accretion irrespective of sectors.

HornBlower

Hi all

I am puzzled by the Mothercare balance sheet showing £59m of onerous lease provisions at Match 2019. I don't understand how post a CVA you can still have material onerous lease provisions. Anyone able to offer a suggestion?

Thanks, Graham. Have a good (long) weekend!

ValueWise

Neil sold his holding (£42m) to Barnett running the Invesco Income Fund so that oevrhang should not be there.
https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=2ahUKEwiu2fTbtbTiAhXMyKQKHRopCqIQFjAAegQIBRAB&url=https%3A%2F%2Fwww.ft.com%2Fcontent%2Fce834db4-60e7-11e9-b285-3acd5d43599e&usg=AOvVaw3eh3iPN87mDIzn5TUyVNpQ

Interesting that teh short interest in NRR is 6.2%, about the same as Intu and yet tyhe business dynamics are vry different.

Gromley

The Huawei issue for IQE (LON:IQE) is just another setback that is outside of their control. At only 5% of revenues and in the lower margin Wireless segment it's not a big issue and indeed guidance is maintained.

However with currently year forecast eps of only 2.25p and 3.65p next year, it's clear that the bull case is dependent on earnings in 2021 and beyond. The big uplift remains credible there imho, but with these periodic mishaps it strikes me that it's not terribly likely that the market will price in earnings that far in advance for the moment.

So for my mind, I'm happy to sit and watch for now looking for either signs of momentum in sentiment and/or uplifts to next years forecasts.

andyfwwrench

I sold out of Newriver Reit (LON:NRR) yesterday and put some into Urban Logistics Reit (LON:SHED) this morning. NRR scores poorly on ROCE and ROE compared with other specialist smaller REITs and paying a dividend above FFO is simply not on. Obviously worst was the drop in NAV, which in turn will lead to a lower rent roll. SHED is going the other way.
Dividends are mirages, it is your cash whether inside or outside of the company. The tax treatment for REITs is great, and that makes dividends more attractive than they would otherwise be, but they must be accompanied by at worst a steady book value per share.

RDHOWARTH

29th May '19

Hi graham, just got round to reading all the comments re Volvere, VLE.

I would add the following, re the sale of Sira, yes the multiple looks great but actually Sira had good technology and some excellent contract prospects working with CCTV. I believe the reason the price looks good is that these prospects have been recognised and led to outside interest. The skill of J Lander is selling now whilst prospects remain good and actually my guess would be that the 1 year PE was quite low! All be it on a contracted earnings base.

With regard to their skill set, they like people businesses. It doesn't mean that's what they always do....and personally having a lot of cash would be the least of my worries at present.

regards

Thanks for the feedback re: £VLE

Small Cap Value Report (Fri 24 May 2019) - Politics, VLE, IQE, RHL, MTC, WSG, LUCE, HEAD

Politics

Volvere (LON:VLE)

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Graham Neary

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