Small Cap Value Report (Fri 26 Feb 2021) - SLP, AVAP, VARE, JUP, DOTD

26th Feb '21 by Jack Brumby

100 comments 12855 reads

Morning, it's Jack here with the SCVR for Friday. Paul's a little busy today but might be able to pop on later. If you have any suggestions on what to cover please do leave a comment.

There were some intriguing companies pitched at this week’s Mello Bash. Stephen English did a great job with Intercede, which Paul also owns, and Bruce Packard pitched Sylvania Platinum (LON:SLP) , which I hold. Simon Thompson has covered this PGM producer recently, raising his target price to closer to 200p. It’s also been tipped in the Momentum Investor newsletter.

At this rate, if you stopped your postman in the morning for a chat (socially distanced, of course), he or she would probably end up tipping SLP as well before wishing you good morning.

The stock has had a remarkable run of late, pushed ever higher by surging Rhodium spot prices. SLP said in its recent corporate presentation that increases to its basket price are being driven by Rhodium and Palladium. While Rhodium makes up just 12.7% of SLP’s prill split, it is currently responsible for generating some 60% of revenue.

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Source: Interim Results FY21 Corporate Presentation

With autocatalyst industrial demand set to recover, minimal price elastic supply, and a lagging demand response, prices can go higher still. Rhodium was below $3,000 in January 2019 but hit a new record of $17,000 at the end of December 2020. Today, the spot price is closer to $24,000.

It’s worth remembering that Stephen English had some timely words of caution at Mello around the sustainability of these prices. There are always two sides to the argument.

But more and more we are seeing this narrative of a ‘commodities supercycle’ beginning to take root. Is there something to this, or is it just noise? It doesn’t mean you should go mining mad if that’s never been your strategy, but for more sector agnostic investors it presents an interesting portfolio allocation question.

It would be great to get people’s thoughts on this part of the market, and commodities in general - even if that view is you continue to stay away and focus on areas you know better.

Agenda:

Avation (LON:AVAP) - half year results from this commercial passenger aircraft leasing company

Jupiter Fund Management (LON:JUP) - net outflows…

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rmillaree

26th Feb '21

Card Factory (LON:CARD)
Ok card have left the update today right to the wire - with the problem simply being kicked down the street for a month AGAIN - the bods over on the other place all seem to have gone into full on paranoia mode over the use of the word "stakeholders" in the following sentance - rather than shareholders. The other place is the wild west so i would take what they say with a pinch of salt - i have no idea whether the news is good/bad or indifferent. I guess we will find out sometimes next month unless the same happens again. I would say the lack of a solution to the problem seems to be bad news rather than good news - but if they need extra time to get a good solution (external funding at less dilution than the current lenders are proposing?) it could turn out ok in the end perhaps ?.

the Board is confident the business is well placed to deliver for the benefit of all stakeholders.

Harry Hindsight

Why would PIs want to invest in any company that doesn’t engage with us?

Perhaps with so many newbies they should show us the wood without the trees in the way. The small person will trade in-out etc but over time build a more long term relationship with a company - maybe even put it in a SIPP.

I would not trust me to run my SIPP, but that time will come, and working hard for it.

Mr Postman to you. He told me "dig a big hole and throw money in it - and maybe a tree will grow", meantime 'I'm just a simple Post Facilitator.

Pain in the UK and the USA for me as well. Trading now on going 'long' and suck it up. I suppose the press did give some 'tech is over-valued' hints since time began when dinosaurs ruled the earth.

Diversification 99

I think it would be a mistake to not have some exposure to the battery type metals or those needed for renewable energy generally.

Fellow members may have come across these articles already but they make a very good case for the growth to come in this area:

https://www.theguardian.com/bu...

https://www.telegraph.co.uk/bu...

A lot of these miners are still very good value - I have Atalaya mining for copper which is going to be needed in just about everything I reckon, Bushveld which is popular with members and one of my favourites is Afritin mining a tin and soon to be lithium and tantalum producer.

There will be other good miners as well but these will do for now I don't want to overdo it.

GloucesterBob

I would prefer they said, its your choice not to have the jab, but all decisions have consequences, and no you cannot go into a social environment, and that summer holiday, forget it, without one.

If my local didn't make it mandatory, then I would find somewhere that did.

shanklin100

I suspect it will be either two jabs or a very recent reputable -ve test to gain admission to many places.

OldSchool05

The dilution has been known since 22 October 2020, when the merger with Longevity was made public. So I don't think this is the prime mover behind the drift in price today. It is more likely linked with the timing of a listing on the NASDAQ as it had been hit hard this week.

eltorero

27th Feb '21

£slp

Hi
where can I find the Prill split in the results per the following?

”While Rhodium makes up just 12.7% of SLP’s prill split,”

cheers

Momoko Miyamoto

Macron is a moron who has shot himself and his country in the foot with his pathetic and desperate comments on the AZ vaccine. His actions will likely result in hundreds if not thousands of avoidable deaths in France.

peterg

Indeed. Pubs are used to asking for IDs to prove age, it's standard practice. So it's no big step for them to ask for proof of vaccination, and it would likely improve their trade. One big local spike of infections traceable to a pub or club will do exactly the opposite.

davidjhill

Paul

Ive looked at Various Eateries (LON:VARE) and I think you've missing the point in terms of the valuation in this instance.

From memory the debt was paid off at time of IPO by the way so the cash is around £25m.

There was an in-depth presentation (link below) which included how the existing sites were performing both pre pandemic and when lockdown was half lifted in the summer. If you add up the profitability then on a normalised basis they weren't that expensive. Probably far better value than Fulham Shore (LON:FUL) frankly.

https://www.investormeetcompan...

Management has a very strong track record of making shareholders money. Disagree on the distinctive offering. Coppa is nicely distinctive and a good brand. Jury is out on Tavalino as it hasn't really started yet.

I don't own any so not talking my own book. Looked at them at 65p and had decided to buy but waited and since the reopening timetable they've shot up to 85p so kicking myself a bit. I consider them up with events here but I would buy if they dip back into the 70ps.

best

David

Paul Scott

Hi David,

Please could you check your figures? The £23.5m IPO proceeds are in receivables in the recent accounts. There is about half that in shareholder debt. Therefore, if the debt has since been paid off, then cash would be roughly halved. I'm working off the latest accounts.

I'm aware of all the other stuff you mention, so I'm not missing the point at all.

Is it really worth the high market cap? That's my main criticism - valuation. Also that it's me-too pizza/pasta people just regurgitating the same format, with a few twists. Lots of people did well with these formats, rinse & repeat previously (e.g. The Kayes), over the last 30 years, but there are so many similar formats now, they're having to do CVAs to get out of over-rented sites.

I don't believe that Various Eateries (LON:VARE) has invented some new magic formula at all. You clearly do!

Let's wait and see. Why pay such a rich valuation for a few sites, which may or may not work? Fulham Shore (LON:FUL) is far better in terms of risk:reward, in my view.

Good luck with it! No skin off my nose either way. We're in a bull market, and lots of new floats are running to nice premiums. History shows these top of the market things often fail to maintain a premium valuation. Good as trades maybe?

Regards, Paul.

Investors seem very slow to realise that Boohoo (LON:BOO) (I hold) is one of a few rapidly growing "marketplace" type internet shares. Give it a few years, and I think people are going to be kicking themselves for not buying BOO at a PER of 30-ish (and it usually thrashes forecasts). Brokers aren't factoring in the step change in revenues from buying in the existing internet revenues from DEB marketplace, plus others. We just need to be patient here, it's likely to be a major global business in a few years' time I reckon. Very much a "coffee can" share - buy & forget for 10 years, and wake up a lot richer. Just my opinion of course.

Gostevie

28th Feb '21

Hi Paul,

The reason I rarely post on social media or bulletin boards these days is because there are so many fraudsters and scammers around. For example, one coward who calls himself 'Rocky' @ROCE1900 on Twitter and hides behind a photo of Sylvester Stallone and who continually attempts to extract money from me and others. I am old enough and ugly enough to see through his tricks but others might not be.

Let's hope we can meet again again and enjoy a few beers together soon.

Steve

HHR

£dotd - I've posted elsewhere with this point but it doesn't seem to be covered in this article.

By my analysis organic revenue is up only 9.9% - a long way short of the 22% reported.

If you search the interims for 'Geographical Revenue and Results' you will see that Group revenue is £29.8m (that's 9.9% up on last years £27.1m).

This discrepancy can't be explained away as the difference between 'discontinued' and 'continuing' operations. In fact the opposite is true - that extra 12.1% of growth has been achieved by simply moving £1.55m of last years discontinuing revenue across to the continuing bucket.

That movement of £1.55m of revenue isn't organic growth - in fact it's not any kind of growth, it's just moving existing revenue from one bucket to another.

You may wonder if maybe I'm misinterpreting the situation and perhaps dotd has grown the core continuing operations at the same time as it is winding down the discontinuing? I'm pretty sure that is not the case because dotd itself admits that the revenue boost is derived from 'a strong pick-up in UK SMS volumes' - precisely the area that Comapi (the discontinued business) specialised in.

It's not just these interims that have been enhanced by this paper based movement of existing revenue - last year's finals reported growth of 12% when the actual figure was only 7%.

I hold dotd and I have made a good return over the years but a forward PE of 42 for a company growing at mid-single digits on deteriorating margins looks expensive to me especially when you throw in the track record of failed acquisitions and patchy success in expanding overseas.

Note, Stocko's figures for dotd exclude the Comapi 'discontinued' revenue.

I think you're right on the debt - there is a £10m bond that was issued at time of IPO rather than a full repayment of borrowings, so that adds up,

Existing sites based on trading post lockdown (ie summer 2020) were generating EBITDA in excess of £5.3m p/a and EV is £76m (if you ignore IFRS16 - which I do here because including it should also raise EBITDA to £8m+)

So we are talking an EV/EBITDA of 14 at current prices. I don't consider that wildly over valued though as I said I do consider it up with events and I'm reluctant to buy here so prefer to wait for 11 or 12*

Is Fulham Shore (LON:FUL) really a better risk/reward? It has net debt of £3.3m (also excluding IFRS lease liabilities) vs Various Eateries (LON:VARE) net cash and contributed ebitda in the period of £3.3m and had the benefit of being open for takeaways.

I don't think Various Eateries (LON:VARE) has invented a new magic formula but it does seem to have captured the "members club" trend in Coppa and I suspect this will continue to perform. Look at the sites when they were open, they were performing very well indeed.

Tavalino is different. It's supposed to be the equivalent of what Cote was to French food but in Italian. The flagship restaurant was very well received and the menu's look appealing - black truffles from Italy, Lobster, Scallop etc.

The benefit of Various Eateries (LON:VARE) over Fulham Shore (LON:FUL) is that the former now has the pick of the best locations with revenue based leases (rather than fixed/upward), no upfront payments and can often benefit from previous kit outs much reducing opening costs. It has cash to do so and these sites could trade very profitably indeed once open.

Fulham Shore (LON:FUL) doesn't have this advantage. It is on old lease terms which will be much more expensive and was already a long way into its roll out pre covid. Thus it can't just pick new sites that will cannibalise its own offering. It will only get that benefit in new locations that can support it.

Thus I see Various Eateries (LON:VARE) as having an advantage. It also has a management team that are very skilled at this. They rolled out The Ivy chain from a couple of London restaurants and did this very successfully and very quickly when the environment made it quite hard to do so. That gives a level of credibility/comfort in ability to execute.

Don't get me wrong I quite like Fulham Shore (LON:FUL) as well. I just don't think Various Eateries (LON:VARE) is wildly over valued as you conclude and my take is that they will roll out quicker, faster and more profitably per site than Fulham Shore (LON:FUL) will do with their estate. Thus they are my pick. Clearly a different view to your good self so will be interesting to see what plays out and probably a good learning case study.

jules2k6

Hi Captain, if you have a stop order in place and then try to close the position you get this mesage from IG. You have to cancel the stop order before you close the position.

turbo

Precious/rare earth metals is undoubtedly a commodity area to be invested in right now. Interesting MoneyWeek podcast by Dr Paul Jourdan, CEO of Amati Global Investors on this topic:

Dr Paul Jourdan: strategic metals, the commodities supercycle and the electrified future

The Amati Strategic Metals Fund seems like a decent way to get exposure - any thoughts and comments appreciated (I still haven't got around to buying SLP - is it too late?).

grandmA

23rd Aug '21

I bought 23,000 Dotdigital (LON:DOTD) 18th January this year. I've sold two tranches. 7,000 in July and 8,000 in August., which means I've taken my original stake out. I now have 8,000 shares which cost nothing showing a profit of £22,000. I wish all my shares were like DOTD.

Small Cap Value Report (Fri 26 Feb 2021) - SLP, AVAP, VARE, JUP, DOTD

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Jack Brumby

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