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

24th May '19 by Graham Neary

31 comments 10591 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…

Unlock with Email

Unlock with Google

Already have an account?
Login here

Paul Scott

24th May '19

Morning!

Anyone tempted to bottom-fish on Mothercare (LON:MTC) should read the going concern note in today's accounts.

It says that in a reasonable worst case scenario, the business would not be able to continue trading.

Sounds like current trading is OK, but it's very high risk I think.

Balance sheet is very weak - negative NAV of -£49.4m, less £16.3m of intangibles, gives NTAV of -£65.7m.

Note also the substantial provisions on the balance sheet - £21.8m in current liabilities, and £31.6m in long-term liabilities - where is the cash going to come from, to settle these liabilities?

Overall, I'd be very surprised if this company is still going in 1-2 years' time. Looks like the bank(s) is/are managing down their exposure - with the disposal of ELC, and sale & leaseback of its HQ. That's last chance saloon type of stuff.

Best to steer well clear, in my view, as too risky. Although the international operations still seem to be decently profitable.

Regards, Paul.

MrContrarian

My morning smallcap tweet: Juice for LUCE holders

Tarsus (LON:TRS), Hargreaves Services (LON:HSP), Luceco (LON:LUCE), IQE (LON:IQE), Westminster (LON:WSG), Mothercare (LON:MTC)

Tarsus Group (TRS) rec offer of 425p, a 36% premium.
Hargreaves Services (HSP) conditional sale of land valued at over £9m in proceeds to Hargreaves, principally dependent on detailed planning permission and statutory approvals. Guides H2 2020.
Luceco (LUCE) AGM stmt: guides FY adj op profit materially ahead of current market expectations.
IQE (IQE) Hauwei ban may cause "some delay to orders and the potential for adjustment of supplier managed inventory levels, predominantly in its Wireless Business Unit." Estimates max risk exposure to this matter <5% of FY rev.
Westminster Group (WSG) FY rev up 24%. Pretax-cont -£1.5m (-£2.1m restated). I have no F/C. Current order intake and rev ahead of budget.
Mothercare (MTC) FY rev £566m down 14%. Reuters F/C £600m but yesterday said results would be in-line. Pretax-adj -£8.6m (-£6.8m). Going concern stmt. Current trading in line.

AnonymousUser226237

Luceco (LON:LUCE)

Revenues up, margins up, net debt down, cash up.

Materially ahead, which means margins are now back again in double-digit territory so the market must have vastly underestimated how much pbt they'll make this year.

Market expects them to do £9m PBT this year but if revenues improve a bit and go back to 2018 numbers of 167m and margin improving means going back to 12% then they're looking at £20m. That's 2.2x what the market expects, hence the materially ahead.

Share price would need to double to adjust to it.

P.S Lower copper prices for them must also helped bring down raw material costs in last 6 months.

Yusuf Samad

Urban Logistics showed the resilient parts of the property market. Any thoughts?

john652

Tarsus (LON:TRS) , this looks like a fairly done deal with what looks like 33% irrevocable undertakings, at roughly 40% premium to a price close to recent highs.

It’s never that clear to me but does this mean those who have provided the irrevocable undertaking cannot change their mind to sell, or is there usually a clause that they can choose to sell only at a higher price if they want, should another bid come in?

Any clarification welcome please.

jwebster

Urban Logistics Reit (LON:SHED)

REIT in the only popular property area right now, i.e. e-commerce logistics. Seems fairly priced with a 5.5% yield and about 100% cover. NAV 138p price 127p LTV 34%. I would say a fairly safe place to park money in the scheme of things.

Interesting to compare to Newriver Reit (LON:NRR) which is a REIT in the hated small retail area. Has a NAV 261p price 217p and yield 10% with about 80% cover LTV 37%, last results listed a 6.4% write down on asset values. Just announced a JV with three cheap retail purchases with around 9% yields. So they are bottom fishing.

Me, I'm watching NRR as cheap but want to see the market reaction to the appointment of the next PM first, as could be negative for UK economy stocks and also UK retail might have more bad news to come out yet.

rhomboid1

Morning Graham. Volvere (LON:VLE) issued an RNS last night https://www.investegate.co.uk/volvere-plc--vle-/rns/disposal-of-sira-defence-and-security-limited/201905231637410476A/

It’s interesting in that this was widely believed to be worth nothing bumbling along around break even for 13 years...but they’ve sold it for 500 times its cost which demonstrates they do the acquire/improve/divest model exceptionally well,

I hold a 7% of portfolio position here & have done so for years so my bias is complete...it’s also trading well below NAV with Shire Foods in profitable expansion mode as the one remaining business whilst mgt look for their next target

wildshot

Positive AGM statement from Headlam (LON:HEAD) this morning. Revenue is finally picking up after a difficult few months of trading, maybe this has turned a corner? HEAD has been featured before in these reports.

brucepackard

Well done to buyers of Luceco (LON:LUCE) 6 months ago. I looked at it, and thought it made sense on a risk/reward perspective BUT just couldn't quite pull the trigger.

Effortless Cool

A surprisingly positive AGM update from Headlam (LON:HEAD) this morning.

"Like-for-like revenue* increased by 3.1% and 5.8% in the UK and Continental Europe respectively against the same period in the prior year, resulting in an overall like-for-like revenue* increase of 3.5% in the Period against the soft comparatives of the prior year. In absolute terms, total revenue increased by 5.5% in the Period".

Although they just hold management expectations for the year, with broker consensus forecasting a 0.6% drop in revenue, it is likely in my view that upgrades will be in the pipeline.

Up 26p (5.7%) at time of writing.

https://www.investegate.co.uk/headlam-group-plc--head-/rns/agm-trading-update/201905240700030485A/

Thankyou for your very helpful comments on both Urban Logistics and NRR. I hold NRR and was at the Results meeting yesterday. NRR is exposed to the Retail sector news flow and this is reflected in the valuatoons but they operate in a more protected area (affordable rents, convenience and community) as evidenced by the low level of CVAs and almost no exposure to department stores, fashion or casual dining. That and the Brexit discount makes the stock cheap. It pays to hold as long as management delivers on attaining full FFO cover for the dividend.

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

Politics

Volvere (LON:VLE)

Unlock the rest of this article with a 14 day trial

About the Author

Graham Neary

31 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...