Small Cap Value Report (Fri 25 May 2018) - VLE, LSR, WSG, HUW, GROW

25th May '18 by Graham Neary

30 comments 13716 reads

Morning!

There has been quite a lot of news from some of my portfolio's bigger holdings over the past week or two: Burberry (LON:BRBY) (final results), IG Group (LON:IGG) (trading update) PCF (LON:PCF) (half-year results) and Volvere (LON:VLE) (final results).

As some of you know, I tend to run a more concentrated than average portfolio, and I trade infrequently. This is the style which suits my personality and my (evolving) investment strategy.

To illustrate this, my top four holdings (VLE/BRBY/HAT/PCF) currently account for more than half of the value of my share portfolio. I haven't sold a share of anything at all since last August. I also haven't bought anything since March.

This should serve to give you some insight into how I handle results days. I'm very unlikely to react to the news, but I still tend to be rather nervous in advance!

The full list of stocks which caught my eye today, and are up for coverage (unlikely to get around to all of them, but we'll see):

Volvere (LON:VLE) - final results
Surgical Innovations (LON:SUN) - trading update
Helios Underwriting (LON:HUW) - final results
Local Shopping Reit (LON:LSR) - half year results
Draper Esprit (LON:GROW) - final results
Westminster (LON:WSG) - final results

Volvere (LON:VLE)

Share price: 975p (unch.)
No. of shares: 3.7 million
Market cap: £36 million

Final results

(Please note that I own shares in VLE.)

I last covered this investment company in March, at its trading update for 2017. Here's the link. It's a turnaround specialist which finds companies in need of refinancing or some other change.

At the time of the trading update, it said:

The Group expects to report record revenue of approximately £43.2 million (2016: £33.0 million) and profit before tax of £3.22 million (2016: £1.94 million).

(I think there might possibly be a small typo above - 2016 operating was £1.94 million, but 2016 PBT…

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Will Travel

25th May '18

Centamin (LON:CEY) please

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Paul18

Hi Graham

A second for your thoughts on PCF (LON:PCF). Shares had risen well from my original purchase price but now dropped back a little post these results.

Thanks

Trident

Forgot to ask Paul to flag up PayPoint (LON:PAY) when they released their preliminary results yesterday.

No shocks to cause a downgrading, and it remains hugely cash generative. According to the Stockopedia analysis the dividend is yielding above 7%. Not sure that is quite correct, as the shareprice is trending upwards, but the yield is good.

One interesting change that I think will attract certain types of shareholders is that from 2019, to make working capital less lumpy to deal with, it will divide its annual dividend into quarterly payments, rather than the two, final and interim.

Stockopedia says it has a PE of 15x, and it has a Stock Ranking of 80.

I am a holder

Lgarvey

Wondering if anyone else is thinking that the significance of GDPR on dotDigital (LON:DOTD) has been over played and the current price weakness is a chance to top up their holding?

Interesting comment in one of the newspapers that GDPR and another Govt/EU initiative may have contributed to a slower economy. I think it has been quite a large distraction for many small companies, and has probably only rewarded lawyers to date, as if we needed to encourage them any more!.

It also suffers the criticism that most people don't know what the boundaries are of being compliant, as it is bit like being told to be clear of sin.

Despite all its fine words by the Govt about small businesses being the crux of the economy, it has loaded more and more burdens on them.

Graham Neary

re: Centamin (LON:CEY)

Apologies, I do not do Egyptian gold mines.

re: Volvere (LON:VLE), I don't have a precise value for it but I think the prevailing market cap is still possibly on the cheap side, as explained in the report. Do you see my perspective now? G

Hi threeputt, re: Westminster (LON:WSG). Unfortunately it's a Bargepole rating from me. Looks like a waste of time for investors. G

ken mitchell

Graham

Just a thought re your preference for buybacks over dividends.If I could live my long investment life again I would do what you and the incredibly successful John Lee does, and look to hold quality shares for years. But unlike you but like John Lee I prefer dividends to buybacks. With dividends investors are guaranteed to get the money. That’s not the case with buybacks. E.g I held BP at the time of the Gulf of Mexico disaster but sold at a loss AFTER they had spent £20billion on buybacks.And years ago Stuart Rose rewarded me and other Marks and Spencer shareholders with a £2 billion buyback around £4. Share is lower many years later. Also shares like BOO (thanks Paul) have proved brilliant investments without the need to buyback to try, and sometimes fail, to boost the share price.

Dividends reinvested greatly increase returns in time. Indeed in time the dividend each year is a multiple of the original stake. E.g anyone who bought Next in the early 1990s at 30p or lower and still holding now has an annual dividend many times their original buying price. There is a case f for buying back if nothing better to do with the money and if share price looks good value, but dividends are guaranteed.

Hi Martyn, I'm sorry I didn't get around to PCF (LON:PCF) today. I remain a happy holder after the interim results. G

timarr

Dividends reinvested greatly increase returns in time. Indeed in time the dividend each year is a multiple of the original stake. E.g anyone who bought Next in the early 1990s at 30p or lower and still holding now has an annual dividend many times their original buying price. There is a case f for buying back if nothing better to do with the money and if share price looks good value, but dividends are guaranteed.

Hi ken

I think we've had this conversation before :)

Next (LON:NXT) is about the worst example you could have chosen as they're the arch exponents of the properly done buyback. I (nearly) quote myself from a previous thread:

Since 1999 NEXT have repurchased 227 million shares at an average price of £15.98 out of an original stock of 375 million shares. Currently all of those were bought back at a price below today's.

The net effect of the repurchases has been to lift EPS today from £1.63 per share (i.e. the EPS if shares hadn't been retired) to £4.14 per share and increase dividends from 62.3p per share to £1.58 per share. Shareholders who held their shares for the whole period have seen over twice the level of dividends they would have seen if shares hadn't been bought back. Of course, shareholders could have reinvested the dividends - but who does?

It's true that many share repurchase schemes are value destroying, especially where they're directly related to share option schemes, where management aim to boost the share price to hit the option price to benefit themselves. However, where the buyback is at levels below a company's intrinsic value they're inherently value enhancing for the shareholders that hang on, as the NEXT figures show, and they have the secondary effect of getting rid of more fickle holders.

In short: if managements are disciplined like NEXT's and only buy back shares when they're relatively cheap then buybacks are preferable to dividends. Sadly many buybacks, in my experience, are more about managers enriching themselves, but that's a different issue.

Hi timarr

I’m on holiday in France and replying after a glass or 3 of Alsace Riesling and had had no intention of posting on anything but can’t resist when it comes to buybacks!

Yes, we’ve had this conversation before and I largely agree with you especially so on Next buybacks. They are a too rare example of a Company with a sensible buyback policy and only buy back when believing the share to be good value and also only when reasonably confident about prospects. And yes again; now that they have bought back more than half their shares they can indeed afford to pay much higher dividends than otherwise would have bee the case. BUT even with Next the argument that buybacks reward those who sell at the expense of those who stay has sometimes applied.

e.g I bought Next at £38 following brilliant comment from Paul Scott here at that time. The share price is now up over 50%, BUT those who have held NEXT since they were buying back above £50 and from memory above £60 too had to suffer that big fall to £36 last year.

You asked re reinvesting dividends...who does? I do for starters, but rarely in that particular share. The income from dividends can become huge over time and over 100% a year. So even if there are big market falls and the share prices of the investments we hold fall very heavily,massive dividends provide a big cushion against those falls and in time the value of our portfolios will increase even in the worst of bear markets! I only realised this a few years ago,but already my biggest dividend payers are paying out nearly 20% a year, and if the Company can afford to keep increasing dividends then eventually the dividend yield becomes massive. E.g John Lee has Investments he’s held for years now paying more than 100% a year.

So give me the certainty of real money from dividends ahead of possible benefits from buybacks, but it’s true, Next have often done both successfully.

This link shows clearly the power of reinvesting dividends.

http://www.cityam.com/282082/reinvesting-ftse-100-dividends-has-affected-isa-returns

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purpleski

I could not, as the owner of a small business (£1.5mil turnover), agree more. Yes all business needs regulating but the contempt with which small business seems to held by government, bureaucracy and the general public is beyond belief and yet we are the companies that provide the employment and the taxes that enable a functioning economy.

26th May '18

Hi ken

Santé!

I re-invest all my dividends too, just not in the stock that pays them. As you rightly point out the compounding power of re-investment is a major driver of portfolio returns.

My broad point is that the "dividends are good, buybacks are bad" mantra is too simplistic: some buybacks are very good indeed and some dividends very bad, especially where the dividend could be better used to re-invest in the business or is unaffordable. How many times have we seen a company paying out dividends and then raising money from shareholders?

If any of my holdings starts buying back their stock I always take a hard look at whose interests it's in. Managements may be greedy, delusional or simply incompetent - BP pre the Gulf disaster was a perfect example of a management team that had all three failings, and probably a few more.

At the moment I have Burberry (LON:BRBY), M P Evans (LON:MPE) and £REL executing buybacks and I'm happy with all three as I reckon they're all undervalued at current prices. Of course, I might be wrong, I often am.

In principle if you want a simple approach then, yes, dividends are better than buybacks but at a level of detail that's often not true, it's just that the dividend payback is more tangible, more certain and more immediate. An automatic preference for dividends is fine if it's rational, but all too often I find it's not - it's just that people prefer a bird in the hand now to two in the hand later ... but it's easier to prefer buybacks if your target holding period is 20 years or more.

Enjoy your holiday, the sun, and the wine :)

Hi timarr

Thanks for further reply and good holiday wishes. Super bargain lunch today for just €12.50 with buffet starter and endless choice... prawns, cold meats, salads etc and very good and copious main course and then buffet deserts all home made and endless choice again. France and Europe sometimes more misunderstood than buybacks but I won’t go there!

Again agree with most of your friendly reply. Also I might have misunderstood what Graham meant and he was not assuming that buybacks always mean higher share price than would be the case with no buybacks.

One point not really worth debating and not really appropriate here is whether it is right for some Companies to spend SO much buying back just to reward shareholders and Management? e.g Apple looking to spend more than $100 BILLION on buybacks. It’s a lot of money that could surely be spent or invested in something more worthwhile?

danyou

27th May '18

Graham
I am still not fully convinced. For turnaround specialists, 2 out of 3 businesses are not performing...therefore, its value is questionable unless you see it as cash plus the value of Impetus only

No worries. Shire is stil a very successful investment in my book and Sira has always been a tiddler and unimportant. The compound growth rate in NAV over the years by Volvere speaks for itself IMHO.

29th May '18

On the issue of re-investing dividends, unless they are in an ISA, as far as I am aware they are still subject to tax, and therefore you are if you invest with the same money, you are topping up your own investment with new money, but paying HMRC the tax later, if applicable, when submitting your tax return etc.

So all in all its quite complex to argue the +/'s of the whole thing with variable capital/income tax rates thrown in as well from the shareholders perspective.

It has always been a mystery to me why companies are not allowed to offer the choice i.e. use the monetary sum per share to sell a portion of your shares to the company, for cancellation/Treasury etc, or just take the dividend.

Maybe its just too complex to administer, but third parties could surely offer mechanisms that could achieve such a sensible outcome?

jonesj

6th Oct '18

Quote Graham: "If good valuations could be achieved on disposal of Impetus or Shire, Volvere would see an immediate and material increase in reported NAV per share."

That call worked out exactly as you suggested.

Offloading Impetus looks like a smart piece of work, considering their contracts with a couple of car makers, who might just have a cyclical spending profile.

gbjbaanb

11th Oct '18

Nowadays even accumulation share classes are subject to tax - I noticed that my brokers send me a tax statement showing the accumulation "income" that was reinvested and the tax due on them. I never had this happen in the past, AFAIK acc shares were subject to capital gains tax, rather than income tax.

I don't know if this is a new thing, or always the case though.

Small Cap Value Report (Fri 25 May 2018) - VLE, LSR, WSG, HUW, GROW

Volvere (LON:VLE)

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Graham Neary

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