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

Friday, May 25 2018 by
62

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)

  • 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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Disclaimer:  

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. Its segments include Automotive Consulting, Security Solutions, Investing and Management Services, and Food Manufacturing. Its Automotive Consulting segment consists of the Company's subsidiary, Impetus Automotive Limited, which is engaged in the provision of consulting services to the automotive sector, including vehicle manufacturers, dealerships and national sales companies. 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. Its security solutions segment consists of the Company's subsidiary, Sira Defence & Security Limited, which is engaged in digital closed-circuit television (CCTV) viewing software business. more »

LSE Price
890p
Change
 
Mkt Cap (£m)
32.6
P/E (fwd)
n/a
Yield (fwd)
n/a

The Local Shopping REIT plc is a United Kingdom-based real estate investment trust (REIT). The Company's investment objective is to maximize value for its shareholders from its existing portfolio of local real estate assets, comprising local shops in urban and suburban areas, as well as neighborhood and convenience properties throughout the United Kingdom. The Company seeks to achieve its objective through realizing its assets in accordance with prevailing market conditions with a view to repaying its existing debt facilities; exploiting the potential of its remaining property portfolio through active asset management, and making further investments in properties, in consultation with Internos Global Investors Limited (INTERNOS), to protect the realizable value of an existing property asset. The Company's directly owned portfolio consists of approximately 330 properties, with over 1,000 letting units. more »

LSE Price
30.5p
Change
-1.9%
Mkt Cap (£m)
25.2
P/E (fwd)
n/a
Yield (fwd)
n/a

Westminster Group PLC is a security and services company. The Company's principal activity is the design, supply and ongoing support of technology security solutions and the provision of long term managed services, consultancy and training services. It operates through two divisions, which include Managed Services and Technology. Its Managed Services division is focused on long term recurring revenue managed services contracts, such as the management and running of complete security solutions in airports, ports and other such facilities, together with the provision of ferry services, manpower, consultancy and training services. Its Technology division is focused on providing technology led security solutions encompassing a range of surveillance, detection, tracking, screening and interception technologies to governments and organizations across the world. The Company's subsidiaries include Westminster International Limited and Longmoor Security Limited. more »

LSE Price
13.5p
Change
-1.8%
Mkt Cap (£m)
16.9
P/E (fwd)
n/a
Yield (fwd)
n/a



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


28 Comments on this Article show/hide all

danyou 25th May 9 of 28
1

Graham, I am having trouble understanding the bull case for Volvere. Only one of its 3 businesses is actually performing, the other 2 being underwhelming....love to understand how you value it.
Thanks

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FREng 25th May 10 of 28
3

Graham
Please could you share your thoughts on PCF (LON:PCF) with us?

Martyn

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Will Travel 25th May 11 of 28
2

Centamin (LON:CEY) please

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Paul18 25th May 12 of 28
4

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

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Trident 25th May 13 of 28
1

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

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Lgarvey 25th May 14 of 28
1

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?

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Trident 25th May 15 of 28
3

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.

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Graham Neary 25th May 16 of 28
3

In reply to post #367384

re: Centamin (LON:CEY)

Apologies, I do not do Egyptian gold mines.

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Graham Neary 25th May 17 of 28
2

In reply to post #367374

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

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Graham Neary 25th May 18 of 28
2

In reply to post #367339

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

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ken mitchell 25th May 19 of 28
1

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.

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Graham Neary 25th May 20 of 28
3

In reply to post #367379

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

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timarr 25th May 21 of 28
5

In reply to post #367519

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.

timarr

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ken mitchell 25th May 22 of 28

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 25th May 23 of 28
5

In reply to post #367474

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.

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timarr 26th May 24 of 28
2

In reply to post #367564

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 :)

timarr

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ken mitchell 26th May 25 of 28

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?

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danyou 27th May 26 of 28

In reply to post #367499

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

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Graham Neary 27th May 27 of 28
1

In reply to post #367709

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.

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Trident 29th May 28 of 28

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?

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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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