Small Cap Value Report (Fri 24 Sept 2021) - BUMP, SFE, ITS, JDG, TMG

24th Sep '21 by Paul Scott

37 comments 8650 reads

Good morning, it's Paul and Roland here, with the SCVR for Friday. Today's report is now finished, have a lovely weekend!

Agenda -

Paul's Section:

Seraphine (LON:BUMP) - (from y'day) - a profit warning just after 2 months of listing - is this a record? I have a rummage through its prospectus, and conclude this is actually quite an interesting business - supplying niche maternity clothing. Supply chain delays from China caused a shortage of stock in July & August. That's since been fixed. A buying opportunity maybe?

Safestyle Uk (LON:SFE) - (from y'day) - excellent interim results from this double glazing company. Not a sector I would consider, but for people who do, then this share could be worth a closer look.

In Style (LON:ITS) - Trading update that starts well, and gradually turns into a profit warning! Supply chain problems (not a surprise) and much higher customer returns are given as reasons. Underlying demand looks strong though. Impossible to value, given the absence of proper guidance.

Roland's Section:

Judges Scientific (LON:JDG) - Excellent results from this scientific instrument firm, showing a decent recovery. But the shares are trading at a historically strong valuation, suggesting to me that the shares may be up with events.

Mission (LON:TMG) - This marketing group has delivered a solid set of half-year results, suggesting the business is getting back on track. Although profits are normally weighted to the second half of the year, I think this stock could offer value at current levels.

Explanatory notes -

A quick reminder that we don’t recommend any stocks. We aim to cover 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 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,…

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nanotrader

24th Sep '21

I need to come around to this sort of thinking "I wouldn’t sell Judges Scientific (LON:JDG) shares if I held them, but I would want to wait for a better buying opportunity." Having sold at £45 (repurchased at £60 for family portfolio mind you).

The problem I have is with this thinking is that if as a holder I'm not buying more who is to drive the price further? New buyers will say it's too expensive...

gus 1065

There is a thread on Oxford Nanopore in the context of the possible impact of the IPO on Ip (LON:IPO) and Schroder Uk Public Private Trust (LON:SUPP) which are both substantial holders and which might be one of the few ways for ON bulls to stag the game ahead of the launch in the next week or so.

https://www.stockopedia.com/co...

Gus.

Fair comment BnB about the relative value of Judges Scientific (LON:JDG) against some of its peers. With an initial holding from September 2016 at 1280p a share, however, the current 7000p+ looks vertiginous and the temptation to top slice is there but the company does keep growing into progressively higher valuations so I should probably just stick it in the coffee can and leave well alone.

Rusty2

You could say that about most high flyers, yet the prices often go up further. Value stocks often stay value stocks. If you compare momentum v value, momentum will win. Quality will usually also beat value. Value there is often a reason for, such as high debt. I have made the mistake in the past of not buying shares because they look too expensive. A few PIs will not affect the share price anyway. Institutions may want to buy.

If the company keeps beating the forecasts then the share price should continue to rise but not always as we have seen lately in this market, but if they miss a forecast then the shares will plummet.

Plummet indeed. That’s pretty much exactly what happened with Avon Protection (LON:AVON) which was the other former high growth/high momentum star in my original post with news out today that warned on a delay in orders at the back end of last year and saw its share price halve.

Boon

Not small cap shares related, but I'd advise to keep an eye out on 10 year gilt prices.

Yields were only 0.5% a month ago but now approaching 1% after a huge rise yesterday and today.

This, of course, will put pressure on shares on a high PE rating where expectations are big profits in medium/long term horizon like tech stocks...

BnB

Very good advice indeed. I have large holdings of US growth stocks and the first macro datapoint I look at every morning and whenever the market lurches is the US 10yr Treasury yield. I recently trimmed every single one of my >100 growth stocks by 10% across the board for exactly the reason you've given. I'm not trying to time the market - I'm still >85% in equities - and I have a discipline of buying back into any top-sliced name that has dropped by a pre-determined level.

davidjhill

Quiz (LON:QUIZ) also noticed that the online presence appears to have been enhanced with cleaner/better website.

Netscientific (LON:NSCI) does look interesting but what I would say is that investments held are never marked to market by investors, even if they are listed. There is generally quite a high liquidity discount applied so you should factor that in.

The question for me would be what EMV, ProAxsis and Glycotest are valued at and where/when a crystallisation event for any of these might occur. Plus of course and share price movement in PDSB.

Thanks for flagging - I will add to the watchlist and be interested to get more colour in the interims hopefully.

I have no position in Seraphine (LON:BUMP) but I don't quite agree with that assessment.

Firstly the average household is 2 children and usually 2-3 years in-between so an average customer may frequent a baby/toddler outlet (digitally or otherwise) for the best part of 5 to 6 years in all if they have a good experience. Granted they may not be all big ticket items but parents propensity for "new" is high. If incomes get squeezed (and that may happen in the not too distant future) then I do agree this type of retailer could suffer worse than average, so geographic diversification is probably important.

In the baby universe word of mouth and reputation is probably more important than the marketing itself. So clever marketing will get Mums to talk to each other and build brand that way rather than direct advertising to each individual. Thus marketing costs do not need to be immense at all but they do need to be well executed.

Presumably they are a direct replica of Mothercare (LON:MTC) new strategy (small number of retail outlets, franchises and digital sales). Be interesting at some point to compare the two. I wouldn't want to own both, and actually, I probably want to own neither given the chequered history of this segment but I might do a bit more analysis.

Roland Head

Hi BnB,

Thanks for your comment. I agree that Judges Scientific (LON:JDG) is a high quality business that might turn out to be a profitable long-term hold from the current valuation.

But while it's true that some comparable businesses are more expensive than Judges, I don't agree that a stock is good value simply because another stock is more expensive.

Similarly, just because the whole sector has seen multiple expansion does not necessarily mean that it's safe to ignore this.

If Judges Scientific was re-rated onto a P/E of 25, the shares would fall by 30% (£75 -> £52) based on the latest earnings forecasts.

This is why I think it's important to consider absolute valuation (e.g. FCF yield) as well. My question is would I be happy with the returns implied by the current valuation. In this case, I'm not sure I would.

A fund manager holding stocks might have to keep buying at any price to deploy client inflows. But fortunately as private investors we can be more choosy and wait for opportune moments to buy.

Regards,

Roland

News on former FTSE 250 “golden boy” Petrofac (LON:PFC) since fallen on hard times (and into the SCVR market cap remit) due to a long running SFO fraud enquiry (do they ever have any other duration?!) into alleged bribery by now departed senior management to secure contracts in the Middle East. (Do bears really s**t in the woods?). Basically the company has agreed a resolution with the SFO with a financial penalty yet to be determined over the next few weeks. The statement suggests the SFO acknowledges the company has changed substantially (better compliance, guilty parties all gone, serious helpings of mea culpa humble pie etc.) so hopefully the penalty will take this favourably into account.

https://www.investegate.co.uk/....

Historically this was a quality company (or at least had good earnings from high value long term contracts with leading players in the sector albeit secured on questionable terms) so it could be an interesting special situation recovery play. For my sins I hold (and have held for a while). Shares at about 106p when the news broke.

Helvellyn

It seems unusually quiet on here today.

Maybe everyone is out queueing for Petrol or Diesel .

I completely agree, Roland. Shares have to make sense as a proposition in isolation of their peers and with reference to the investors own benchmarks. For example, Judges FCF yield is unlikely ever to rival that of another of my quality UK mid caps , K3 Capital, in a different sector, so would be off the menu for many.

My point was that for those seeking exposure to a picks and shovels play on life sciences growth, Judges is relatively cheap amongst the higher quality names globally.

I think this discussion ably highlights how different investors have very different approaches. Many here (at least judging by the thread name) are looking for value as a guiding principle and that very often means identifying a company in some stage or other of recovery, where a mis-pricing of risk and reward has potentially developed. My approach is to invest in companies exclusively within secular growth sectors (the usual themes: digital transformation, cybersecurity, genomics, life science, e-commerce, energy transition etc) and I'm more interested in excluding candidates on the basis of low quality than including them on the basis of low valuation. To many, high valuation is a risk, when, to my perspective, the risk is in going down the quality scale.

Of course there is a goldilocks zone where we can all meet and hopefully find quality businesses on reasonable valuations, Kainos, Games Workshop, Strix and Somero would be good recent examples. But with the bubble of everything that's not getting any easier!

rogerh

There is an article in the October edition of Which? magazine on 'Best place to buy your next sofa'. Scs (LON:SCS) (I hold), much favoured in the SCVR, was in bottom place out of 9 with a rating of 64%. Top with 83% was John Lewis, closely followed by IKEA (79%). SCS 'was the only store to get just three stars for value.

The survey was conducted amongst 2932 Which members. The readership (subscribers to the magazine) is 573000.

DFS, out of interest, was in 7th place with 68%

sevenccc

I wonder what the correlation of John Lewis shoppers and Which members is. Much higher than with the ScS demographic I suspect. Could be wrong

john2

I doubt that Carrie Symonds subscribes to Which.

Paul Scott

If I'd told you 5-8 years ago, that French Connection (LON:FCCN) (I hold) would still be going in 2021, whilst Arcadia would have gone bust, you'd have carted me off to the nearest funny farm.

davidsmyly

26th Sep '21

Re: SCS (LON:SCS) I understand the demographic argument but I wonder how long a company that, even its supporters agree, sells sofas etc. which quality wise are inferior to those sold by rivals, can prosper.

5th Oct '21

I flagged on this original report that Petrofac (LON:PFC) had reached an in principle settlement with the SFO about historic bribery actions. Terms of the settlement were announced yesterday, including an aggregate fine of about £77m. This should be seen in the context of a market cap of about £600m so not peanuts but substantially less of a sanction than was once feared.

https://www.investegate.co.uk/....

In addition there will have been considerable associated costs and a huge amount of management time devoted to dealing with the enquiry as well as damage to reputation and turnover of senior management. All told the shares are now about 1/5 of where they were before news of the scandal first broke (above £9) but at today’s 182p considerably more (about 70%) than the 106p mentioned above in my original post a couple of weeks ago*. Possibly more to come from what historically was a well connected (hopefully for the right reasons!) quality service provider to the O&G sector now that this enquiry/ restitution is behind them.

(Bear in mind, there’s been no new share issuance during the period so the total share count is more or less as it was five years ago).

Small Cap Value Report (Fri 24 Sept 2021) - BUMP, SFE, ITS, JDG, TMG

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Paul Scott

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