Small Cap Value Report (Fri 25 Nov 2022) - MOTR, SCE, VID, De-listings, SCS, DVO, FCAP, LSL

25th Nov '22 by Paul Scott

94 comments 7611 reads

Good morning! It's just Paul here today, as it's Friday. I prepared some stuff last night, so we're off to a flying start! Today's report is now finished. Have a smashing weekend! I'll be podcasting as usual tomorrow, with my weekly summary.

Agenda

Paul’s Section:

Motorpoint (LON:MOTR) [quick comment] - H1 results (to 9/2022) came out yesterday. Revenues rose a lot, but volumes (vehicles sold) were actually down. Profit has dropped, so it’s trading barely above breakeven now. Conventional car dealership chains have been making a fortune during this period of restricted supply (hence much higher prices), whereas MOTR has barely scraped into a tiny profit for H1. That does call into question its business model. Maybe people prefer buying from a conventional dealer? I’m less convinced by MOTR shares than I was in the past, due to this collapse in profitability. It dangles the prospect of future profits in front of us, on higher revenues & market share, but there's not much to go on in terms of valuation now. So it's become a bit more speculative than in the past.

Surface Transforms (LON:SCE) [quick comment] - rose 10% yesterday, on a big contract win (£100m over 6 years). I particularly like that it says this order replaces the incumbent, its main competitor. There are also delays in ramping up production. It now has a remarkable £290m of orders, average 5 year contract length. So this share is now all about execution, getting new production facilities up to scale, which will obviously come with challenges. Overall, it looks very interesting in my view. A very rare jam tomorrow share that actually seems to have received a lot of genuine orders for its jam! (ceramic brake discs actually)

Videndum (LON:VID) [quick comment] - this is the new name for Vitec. The shares have held up well in this bear market so far. It issued an in line with expectations update yesterday, for FY 12/2022. It claims to have a “robust” balance sheet, so I had to check, and I disagree. It’s been acquiring other companies, so the balance sheet shows rapidly increasing intangible assets, and debt. I’m not keen on companies racking up debt at this stage in the economic cycle. So the valuation, taking into account increased debt, looks up with events. [no section below]

SCS (LON:SCS) -…

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Berksbee

25th Nov '22

Hi Sharw, thanks very much for your response. I hope it also helps any other Stocko subs in mine or a similar position.

Silver Moon

Abcam (LON:ABC), so volatile over the years, one could almost think one could buy low and sell high ad-finitum, so it's a shame to see the dream come to an end. I don't hold, having sold out not wanting to be a part of this but I do have some EMIS (LON:EMIS) and will wait to see it out when the much-vaunted recession will present a bargain or two to invest the cash in.

Roger Lawson

The delisting of Abcam (LON:ABC) from Aim stinks and I suggest the Chairman is a fool. It is very damaging for small investors. Us old holders supported the company and new management have wasted enormous amounts of money on IT projects (all capitalised of course!).

davidjhill

You can't just pick and choose which bits you want to include from current assets and liabilities to suit a narrative abtan! :)

At year end it is reasonable to say that they had cash £71m + inventory and receivables offset against the AP balance + tax + provisions though.

That is £96.6m - £58m = £38.6m of cash that is actually theirs.

Looks like cash held has gone up £18m but can't see how much of that is customer deposits unfortunately.

Nonetheless let's assume the vast majority is customer deposits so a round number of £40m net cash/current assets of the company. Thats 80% of the market cap.

NewInvestor1972

£eaas Hi Paul, I'm not in but could you have a look at Eaas finance package and results if you get chance?

alarm bells are ringing when they come out after the markets closed on a Friday ..

SaarfLondon

Well batted to all Devro holders. Ive just re joined Stocko after a break. Is there any new research/articles on here that highlight takeover targets

laurie

Abcam (LON:ABC)

The problem with this is that these ADSs cannot be held in an ISA.

Is that true? I thought that ADSs could be held in an ISA. Ref: https://www.gov.uk/guidance/stocks-and-shares-investments-for-isa-managers#deprecAmer

Is there some reason that these don't qualify for an ISA or is it a broker-specific problem?-- (i.e. moving the shares to another broker would mean that you could hold these in an ISA)

shopping365

Yes it is true, the reason for these ADSs not being held in an ISA is because they are OTCs. Moving to another broker won’t help.

Harry Hindsight

SCS (LON:SCS) - not an accountant but use stock for a quick squizz on a company.

The gearing ratio shows how encumbered a company is with debt. Depending on the industry, a gearing ratio of 15% might be considered prudent, while anything over 100% would certainly be considered risky or 'highly geared'. As a general rule, net gearing of 50% + merits further investigation, particularly if it is mostly short-term debt.

Ok but 'intangibles' of concern and pension and cash pile deposits from customers presumably so not their money. But Stocko gives it a good thumb as does Mr Scott - but Mr Altman not so bullish.

In this risk off environment just trying to understand what's going on without the DYOR. I use technical analysis so in the tea leaves of history and what the share price is doing, and leave Stock to tell me if its a going concern with growth potential. KISS.

Paul Scott

Hi NewInvestor1972,

I'm off duty now! Also, if it's got the word "Energy" in the name, then I won't usually cover it, as no sector expertise.

The balance sheet of Eenergy (LON:EAAS) looks wobbly at a quick glance - negative NTAV.

Looks like quite late results issued tonight might have been dependent on agreeing the new (expensive) bond funding. Going concern note 2.4 seems to confirm this.

You'd need to check the terms of the Warrants too, as that can dilute the upside.

John Foley, and Hawk Investments, rings a bell. They seem to have been involved with PTSG, which turned out well for holders, despite odd-looking accounts, it was taken over at a nice premium. I remember meeting management.

EAAS looks a special situation, that would need very close scrutiny. Not something we could cover within the time constraints of the SCVRs I'm afraid.

Regards, Paul.

Hi FREng,

Thanks, yes I spotted the missing tags today, and added them all back in a few hours ago. Just double-checked, and they all seem to have hung on. Thanks for double-checking though :-)

Is this a short - just saying for a friend. He's not been very successful Superdry (LON:SDRY) the first try.

The proposed listing transfer remains subject to the approval of shareholders at the company's extraordinary general meeting on July 29 2022.

Suppose we all need to look at company agendas for their meetings. Another lesson.

Thanks for the feedback Paul, appreciated.

£xpf BBB Oxford Street opens tonight, looks like it will be a great addition to their portfolio..

https://instagram.com/stories/...

Sorry, didn't get round to finishing DLAR, there's so much else going on.

KevinS1

26th Nov '22

Thanks for the heads-up on Howard Marks. I've added it to my growing list of podcasts - I do a 2-3hr commute a couple of times a week and find that this just about fits in with my weekly list of podcast material.

I find this a brilliant way to while away the hours whilst enhancing my knowledge. For anyone interested my weekly list includes;

- Pauls weekly update

- Fortnightly "The Twin Petes"

- Weekly "Money Makers"

- Weekly "Investing Matters"

- Monthly "Behind the Balance Sheet"

and then any interesting one-offs from IC, Infinite Loops, Vox Market interviews plus anything interesting I get recommended.

Regards the spreads I often find when using my HL a/c to purchase shares that the initial indicative quote can show a large spread, but when you actually place an order in the market the live quote you get back is a much smaller spread.

If it remains too large I obviously don't buy, but its worth bearing in mind that its worth getting a live quote to really see what's going on - this doesn't commit you to buying until you pores the "purchase" button in the 15 second window you get.

BnB

The issue with small caps isn’t the spread, it’s the liquidity. On any reasonable holding period where you would describe your activity as investing rather than trading, a couple of percent lost on entry and exit should be irrelevant. The real problem is getting out at any time other than on a very good news day, when you would logically be looking to build your stake not reduce it. Otherwise it can take weeks to sell down a position, usually against a falling share price, while the name into which you aim to repurpose the funds inevitably rises away from you.

For this reason I’ve recently raised the threshold at which I’m prepared to invest in a company. And I think Paul and Graham would be doing the community a favour if they took a similar view. That’s not to say that their analysis of smaller entities doesn’t come with a well signposted warning, but it takes up bandwidth which could be applied to broader appeal up the liquidity scale.

DavidMcCabe

Much depends on your position size, which is a factor of what level of concentration an investor is willing to accept and how much their total investment pot is. Personally, I am putting no more than £10-15k into a single company, so generally would have little trouble getting in or out in a few transaction. Obviously other people will have a different perspective if they have larger pots or are more concentrated.

Hence for me, I am happy for the focus to stay on smaller companies, even with the lesser liquidity.

abtan

SCS (LON:SCS)

Hi David

"You can't just pick and choose which bits you want to include from current assets and liabilities to suit a narrative abtan! :)"

It's a fair point. As I previously noted, I am aware that I am being far too cautious. There are 2 reasons for this:

Suppliers are paid, on average, 45 days after delivery to the customer.
So after shipping it could be months before a supplier is paid for their work.
I find these payment terms far too generous and I am wary that they could change. Although if the last 2 years hasn't changed them, perhaps nothing will.
The company collapsed once before, back in 2008.
I think it's dangerous to assume that it won't happen again, despite the seemingly safe working capital arrangements.
https://www.theguardian.com/bu...

On your point about the year end cash position, I'd need to go back and check, but I believe there were additional boosts, particularly around rent deferrals. Or maybe I'm getting my financial years wrong - there have been a lot of (legitimate) adjustments in the accounts over the last few years.

---

For the avoidance of doubt, I don't think the company will go under, but I fear the share price reaction in the current market if sales don't go as well as expected in the next couple of months.

Cheers

Small Cap Value Report (Fri 25 Nov 2022) - MOTR, SCE, VID, De-listings, SCS, DVO, FCAP, LSL

Agenda

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Paul Scott

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