Small Cap Value Report (Fri 27 Dec 2019) - UVEL, NMD, SOM, BKS

Good morning, it's Paul here.

EDIT at 12:40 - today's report is now finished.

I hope all subscribers had a wonderful Christmas break. I rather like having the one day today, when we can re-engage our brains, and have a small adrenaline shot from the market, before the weekend!

There were no results or trading updates today, at 7am. Then an AIM minnow called Univision just released interims;

Univision Engineering (LON:UVEL)

Share price:  2.0p  (up 8% today, at 10:01)
No. shares:  383.7m
Market cap:  £7.7m

Interim results

UniVision (AIM: UVEL), the Hong Kong based Group whose principal activities are the supply, design, installation and maintenance of closed-circuit television and surveillance systems, and the sale of security related products, is pleased to announce its unaudited interim results for the six months ended 30 September 2019. 

As regulars know, I very rarely invest in overseas companies listed on AIM, because so many of them seem to go wrong, sooner or later.

Interim profitability is down on last year, at £178k vs £1012k in H1 LY.

Revenues have fallen from £6.4m to £5.0m in H1 vs LY H1.

Outlook - It expects a better H2 though;

For the reasons outlined below, the Company has experienced a downturn in both revenue and profit for the six months ended 30 September 2019, when compared to the same period last year

Nevertheless, the second half of the year has started better and the Board anticipates that the performance of the Group's business will be improved in the second half of the year. 

Major contract - this looks quite interesting. This tiny company had previously won the contract to replace the CCTV system on Hong Kong's railways. It mentions that orders have recently been received to replace equipment damaged in the recent riots.

This must provide a helpful backdrop, with probably numerous other organisations looking to improve their security in Hong Kong. With a big reference project in the bag, then Univision might be in the running to win more business potentially.

Balance sheet - there are 2 unusual items within non-current assets;

£922k - deposit paid for life insurance policy. I've not seen this before on a balance sheet.

£3375k - amounts due from related companies. Normally any such receivables (or creditors) would be cancelled out on consolidation of group accounts. So it's not clear to me why this (relatively large) figure appears here.

Both these items would need investigating before I would press the buy button.

My opinion - given that Hong Kong is likely to be stepping up security systems across the board, then this company might be well positioned, perhaps?

I normally lose money on nearly all overseas AIM companies that I invest in, hence am not in a hurry to try out any more.

---

NMC Health (LON:NMC)

Share price:  1754p
No. shares:  208.7m
Market cap:  £3,661m

Muddy Waters shorting attack

Hedge fund Muddy Waters has been at it again.  Its attack on Burford Capital in Aug 2019 halved the value of the company, and despite MW's dossier seeming rather weak in parts, Burford's share price has not recovered in the 5 months since the initial attack.

Actually, I don't really have anything to add on NMC, other than to say that its share price has been hit hard recently by a shorting dossier issued by Muddy Waters.

Looking at NMC's most recent balance sheet, it's pretty thread-bare. Once intangibles are written off, there's next-to-nothing in net tangible assets. Just lots of tangible assets (its hospitals), funded by debt.

---

Outlook for 2020

Rather than me scratching around for companies to write about, I'll do a section on how I see the outlook for small caps in 2020.

For me 2019 has been quite a bewildering year. I cannot see any particular logic for why some shares have plumbed new depths, even when the newsflow wasn't that bad, and why others have reached ever higher stretched valuations, despite newsflow not being that good. It just doesn't make sense to me.

Why are people cheerfully paying PERs into the high 20s for some nice, but not particularly special shares, knowing that the slightest mishap would cause them to instantly lose a third of their money?

So for me anyway, the starting point is perplexing.

Also, I've had a lousy 2018 and 2019 for my personal portfolio, so I'm clearly not well tuned in to the market right now.  I enjoy doing the analysis of companies' results statements & trading updates, but am not very good at managing my own portfolio - a bit like a mechanic who never services his own car, perhaps!?

Opportunities - however, I feel we are in a period now, where there is plenty of low hanging fruit. In particular, companies which disappointed in some way in 2019, and have remained very cheap, yet are fundamentally decent businesses.

One example which springs to mind, is Somero Enterprises Inc (LON:SOM) - it disappointed the market, due to poor weather in the USA stalling a lot of commercial construction projects (a perfectly valid reason). Yet the share price sold off from a peak of 400p, to form a base at 200p.  It was such an obviously good buy at that price. Whenever I met or talked to small caps investors in the autumn of 2019, they nearly all mentioned this stock as being one they would like to, or indeed were, buying. Sadly, I missed the boat, and it's already up to 265p.

Another example is £BKS  (in which I have a long position). This sold off for no particular reason during 2019. However, it has recently rebounded very strongly on some moderately positive news about a big contract win. That's about a 50% gain since the lows over the summer of 2019. People who got bored & sold out, have missed out on a very fast recovery.

In my view, we could see lots of similar fast & large rebounds in early 2020, for companies that put out reassuring updates.

Buyers' strike - the way I see it, 2019 was mainly characterised in small caps with investor caution due to the severe political uncertainty. This resulted in a lot of people playing it safe, moving partially into cash. Also I think it lead to a buyers' strike. I'm basing this anecdotally on what many contacts have told me, and also observing the low trading volumes in small caps. Many seemed to grind down on low volume, but protracted selling. Buyers were not interested, because they wanted to see the outcome of Brexit & the hung Parliament.

Politics - I actually think that the Tories gaining a thumping majority (hence decisive decision-making can now be done again) is a much bigger deal (positively) for shares, than the uncertainty over Brexit.

Business confidence - my view is strengthened by recent evidence of a huge increase in business confidence in Dec 2019, after the decisive general election result. A key confidence measure swung dramatically from -18 in Nov 2019, to +21 in Dec 2019;

That is the highest figure since the 2016 EU referendum, according to the Institute of Directors (IoD), which polled members in the days following the election. It added that Boris Johnson’s new majority government meant company directors, whatever their personal views, now had a framework around which they could put in place plans to invest, hire staff and expand.

[source: The Guardian]

I shall be carefully looking at the next GfK consumer confidence numbers, due out any day. I reckon we'll probably see a surge there too.

This should be very positive for shares in 2020, if sustained.

Increased Govt spending is another reason to feel more upbeat about the UK economy, as higher Govt spending stimulates overall economic activity.

On the other hand - we're probably due a surge in profit warnings in the short term. Some days here in Dec, I've been reporting on three profit warnings a day. Plenty of companies seemed to report softer trading in Q4, which of course was affected by the uncertainty over the election.

However, the interesting thing is that some profit warnings seemed to be almost swatted away by the market (a bullish sign). Take Staffline (LON:STAF) as an example - it released yet more bad news, and more accounting irregularities. Sure enough the shares dropped 30% initially, but had recovered more than half that drop in the next few days - a sign perhaps that the bad news is now in the price, and that investors are looking beyond short term bad news, to a recovery in 2020.

Profit warnings - I think we're likely to see plenty of profit warnings from the likes of software companies, unable to clinch Q4 deals due to the political uncertainty. Although I'll be looking at these for potential buying opportunities, as the economy could well rebound in Q1 of 2020.

Also, I think retail is likely to be carnage in early 2020, with lots of insolvencies from smaller players. That does create more market share for the survivors though. Although looking at some town centres these days, you do ask yourself why would people want to come here? They're over-run with beggars, drunks, rowdy/inconsiderate people, etc. It's difficult to park, and traffic is heavy. Why bother? I can see why many people now prefer to shop from home, using the internet.

It's so difficult when catching a falling knife, as very often more bad news follows. However, sometimes the market presents buying opportunities, when profit warnings happen due to temporary factors. I think we could be at that point now, very selectively of course, as always.

Brokers - I think this is a good time to look at shares in listed brokers. The stand-out one for me, is £CNKS  (in which I hold a long position). Graham wrote about this one a few days ago here, as a founder has popped up with a new 7%-ish stake.  Cenkos is struggling at the moment, but even in bad years it doesn't lose money, and in good years it pays out huge divis. Check out the track record on divis, it's remarkable. Also, its valuation is nuts (super-low), valuing the business at nothing. You only have to pay for its own working capital, which is cash or near-cash. Therefore, to me risk:reward there looks remarkable good.

A few decent deals in 2020, and the share price could respond positively.

Positive updates - with the economic outlook improving now, I think markets might reward positive updates with instant, vertical price rises. The trouble is, with small caps, if you sit on the sidelines and wait for good news, it's usually not possible to buy in any size when the positive news comes out. Blink and you miss it. Hence why personally, I prefer to just sit and wait, in the stocks where I'm most confident of the long-term outlook. Although most people in the market are actually not investors, they're traders. Does it matter though? Whatever works for you, and consistently makes money.

De-listings - I'm increasingly worried about companies de-listing from the markets. This can mean an instant 50% hit to the share price, as forced sellers exit at any price. There's an article in the Telegraph today, saying that AIM has hit a 10-year low for number of companies listed. An analyst commented that, with low liquidity, companies with a mkt cap under £150m should ask themselves if the cost & hassle of a listing is worth it? This is a big risk, for those of us who delve down into the dead plankton at the sea bed of UK small caps.

Overall then, I'm feeling more positive about the outlook for small caps now, than I have at any point previously in 2018 or 2019. Obviously if circumstances change, then I reserve the right to change my opinion.

---

Next week - I'll be here on 30 & 31st (morning), to cover any results or profit warnings which might appear. Also, I'm planning on doing a review of my investing year, mistakes made, and lessons learned. There are always the best lessons learned in a bad year, I find.

Also, I'm planning on doing a review of all my personal holdings, which will help me decide if I need to sell (or buy more) of anything - year end is always a good time for a deep think about everything in our portfolios. Publishing it online for thousands of people to look at, means there's no place for bad decisions to hide!

Best wishes, Paul.