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

Friday, May 24 2019 by

Good morning! 

Some stocks I'm looking at today:


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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All my own views. I am not regulated by the FSA. No advice.

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Volvere plc is a holding company. The Company identifies and invests in undervalued and distressed businesses and securities, as well as businesses that are complementary to existing group companies. It operates through Food Manufacturing segment. Its food manufacturing segment consists of the Company's subsidiary, Shire Foods Limited (Shire), which is engaged in manufacturing frozen pies, pasties and other pastry products for retailers and food service customers. more »

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IQE plc is a United Kingdom-based holding company. The Company is engaged in the research, development and provision of engineering consultancy services to the compound semiconductor industry. The Company's segments include wireless, photonics, Infra Red and CMOS++. The Company is the manufacturer and supplier of Compound Semiconductor wafers or epiwafers using a process called epitaxy. Its photonics business enables a range of end applications, from data communications and advanced optical-fibers, to sensors in consumer and industrial applications. It operates through business units, including wireless, photonics, InfraRed, CPV (advanced solar), power switching, light emitting diodes (LEDs) and advanced electronics. It produces atomically engineered layers of crystalline materials containing a range of semiconductor materials, such as gallium, arsenic, aluminum, indium and phosphorous. The Company has operations in the United States, Asia and Europe. more »

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Redhall Group plc is engaged in providing manufacturing and specialist services. The Company's segments include Manufacturing and Specialist Services. Its Manufacturing segment encompasses the design, manufacture and installation of bespoke specialist plant and equipment typically in the nuclear defense, nuclear decommissioning, oil and gas, petrochemical, chemical, pharmaceutical and food sectors. It is also involved in the design and manufacture of integrity fire and blast resistant doors, window and wall systems. It serves the nuclear, oil and gas, defense, marine, industrial, pharmaceutical, architectural and water industries. Its Specialist Services segment comprises activities in installation and maintenance of the telecommunications network infrastructure, design, manufacture and installation of process lines in food and pharmaceutical markets and specialist surface finishings to Astute class submarines. Its marine business provides surface finishing. more »

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  Is LON:VLE fundamentally strong or weak? Find out More »

31 Comments on this Article show/hide all

purpleski 24th May 12 of 31

"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?

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wildshot 24th May 13 of 31

In reply to post #478401

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.

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davidjhill 24th May 14 of 31

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 :) )

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Laughton 24th May 15 of 31

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.

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doublelutz 24th May 16 of 31

In reply to post #478361

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.

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spantick 24th May 17 of 31

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.

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Graham Neary 24th May 18 of 31

In reply to post #478426

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.



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FREng 24th May 19 of 31

In reply to post #478441


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.

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davidjhill 24th May 20 of 31

In reply to post #478446

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.

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Graham Neary 24th May 21 of 31

In reply to post #478456

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!


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peterclothier 24th May 22 of 31

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?

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rhomboid1 24th May 23 of 31

In reply to post #478491

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

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

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HornBlower 24th May 24 of 31

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?

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FREng 24th May 25 of 31

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

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ValueWise 24th May 27 of 31

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

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Gromley 24th May 28 of 31

In reply to post #478456

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.

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andyfwwrench 24th May 29 of 31

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.

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RDHOWARTH 29th May 30 of 31

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.


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Graham Neary 29th May 31 of 31

In reply to post #479086

Thanks for the feedback re: £VLE

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 Are LON:VLE's fundamentals sound as an investment? Find out More »

About Graham Neary

Graham Neary

Full-time investor and independent analyst. Prior to this, I spent seven years in the financial markets as an analyst and institutional fund manager. I'm CFA-qualified, also holding the Investment Management Certificate and the STA Diploma in Technical Analysis.Away from finance, my main interests are recreational poker and everything to do with China, especially Mandarin Chinese. more »


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