Small Cap Value Report (Fri 27 Jan 2023) - WJG, STRX, PFG, RNK, OTB, HSP, SDRY, TET, MOTR,SRAD, AVON

27th Jan '23 by Paul Scott

55 comments 9950 reads

Good morning! I'm joined by Roland today, who's come in to help with some backlog items from yesterday, thanks Roland!

Today's report is now finished. Have a lovely weekend!

Explanatory notes -

A quick reminder that we don’t recommend any stocks. We aim to review trading updates & results of the day and offer our opinions on them as possible candidates for further research if they interest you. Our opinions will sometimes turn out to be right, and sometimes wrong, because it's anybody's guess what direction market sentiment will take & nobody can predict the future with certainty. We are analysing the company fundamentals, not trying to predict market sentiment.

We stick to companies that have issued news on the day, with market caps up to about £700m. We avoid the smallest, and most speculative companies, and also avoid a few specialist sectors (e.g. natural resources, pharma/biotech).

A key assumption is that readers DYOR (do your own research), and make your own investment decisions. Reader comments are welcomed - please be civil, rational, and include the company name/ticker, otherwise people won't necessarily know what company you are referring to.

Agenda/Summaries

We managed to cover everything today!

Paul’s Section:

Watkin Jones (LON:WJG) (I hold)

110p (last night)

Market cap £281m

Graham reviewed the nasty profit warning here in Oct 2022, which clobbered the share price to an all-time low of 82p. It’s since bounced to c.110p, but remains well below the pandemic 2020 low point of 134p (in Nov 2020). Note that WJG has not diluted shareholders, with a share count almost static at c.256m shares, since it floated in 2016 - a common trait of family-owned/controlled companies, which tend to jealously guard themselves against dilution, and tend to also operate with a long-term focus, and sound balance sheets - which are good reasons as to why many value investors congregate in family/founder-run companies. They often out-perform, although that’s subjective, I don’t have any data to prove it (maybe we should do a study of this, if anyone has a few hundred hours of spare time?!)

Share price since it listed on AIM, plus there have been decent divis on top -

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Anyway, I scraped up some cash, and bought…

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eParo

27th Jan '23

Who sold them the block I wonder?

JSLDUK

28th Jan '23

Interesting news, given the Alliance family own so much of the company Frasers would need them on board if they were looking to takeover the company.

muckshifter

What Hargreaves Services (LON:HSP) have done with Blackwells, after a lot of pain over several years which I'm sure that they didn't anticipate when buying them, looks about right to me, as someone who knew Blackwells for many years. Blackwells used to act as a subcontractor to the big contractors on motorways etc and as a main contractor to local authorities on pure muckshift jobs such as regrading old colliery waste mountains. But the ethos of the organisation was originally formed when Chris Blackwell took on the main claims QS from I think it was Laing after the original M1 contract. They became infamous for their claims culture and ability to take advantage of clients with poor understanding of the various "Methods of Measurement" applied to contracts, and believe me there are many such clients.

Eventually they found many local authority clients preferred to exclude them from tender processes and main contractors, apart from those such as BB who were just as contractual as Blackwell, preferred other subbies. Gradually they then moved into becoming a main contractor on jobs which were much more than muckshift, which was their downfall, imo, despite having good claims people. Enter HSP, buying a company with a huge "work in progress" book, ie lots of outstanding claims which Blackwell had confidently put into their books, and then came the pain.

But what HSP have done is stop all the "main contracting" rubbish and restrict Blackwell to subbie roles in the major civils contracts, which are all awarded on ideal forms of contract for Blackwell. These contracts are based on one of the Civil Engineering forms of contract, which although their are about half a dozen varieties, are more than fair to the contractor and usually guarantee cost plus for most of the contract period. This usually leaves the risk of breaching a target cost late in the project, after which things become painful for the contractor, but along the way the Blackwell contractual expertise, assuming they have saved most of it, allows them to identify contract changes that enable them to negotiate increases in the target figure, so I personally would expect them to never have a problem in that respect. In fact that form of contract can end up with a bonus at the end if you can keep raising the target and end up below it on completion. So well done HSP for steering Blackwell into the correct niche, now all they need is continuity of major projects.

Boon

Earning interest on cash balances in ISAs and SIPPs.

I currently have my ISA with IG and my SIPP with AJ Bell. Neither offer interest on the cash balances (that I know of). I am planning to keep a substantial float of cash that I'm not sure I will deploy over the next few months.

Are there any "safe" type of cash/money-market funds that I can buy, on either platform? Any recommendations, and is it worth it if I only hold for a few months, given the trading fees and any other fund fees? (I am aiming to put in high 5-figures, maybe low-6 figures).

I'm aware its not going to be as safe as FSCS protection on savings. But I don't want to withdraw my ISA, and I can't withdraw from my SIPP.

Alternatively, is there an ISA or SIPP provider that pays market competitive interest on cash balances (say 2.5%+ currently) that I should consider moving to?

Caduceus

Hi Paul. I was wondering if I could provide a suggestion after listening to your podcast. Would it be possible if you could have your mystery share highlighted as a different colour or border in your SCVR spreadsheet so we can easily identify it? No worries if not. Hope you're well.

DWit199

AJ Bell pay 1% on cash balances above £10k and 0.5% under that amount in an ISA and 1.75%/1% on a SIPP

https://www.ajbell.co.uk/isa/c...

ii pay 0.4% on the first £10k and 1.25% above £10k

https://www.ii.co.uk/our-charg...

Snowbum

29th Jan '23

Could Lyxor Smart Overnight Return - IE (LON:CSH2) be something to look at for this purpose?

Also, if you have a view on FX relative performance, some of the wisdom tree currency funds may also be of interest such as: Wisdomtree Foreign Exchange (LON:SJPY) , Wisdomtree Foreign Exchange (LON:SGBP) , Wisdomtree Foreign Exchange (LON:SEUR) . I used these at periods in 2022 when I had excess cash on account. These ones are x1 so fairly calm in terms of volatility, there are also instruments available offering x3 leverage but of course these are riskier!

Paul Scott

Hi Caduceus - it's probably easier if I just put the mystery shares here in the comments to each Firday's SCVR.

This week's podcast mystery shares are -

Best Of The Best (LON:BOTB) (I hold) - see Thursday's report here. I think risk:reward still looks good, even after a sharp rise in price this week, on a reassuring update. I think future upside could come from a deal (if agreed) with GIL, the 30% shareholder owned by Tedi Sagi. Sagi wants to expand BOTB internationally, but mgt is being cautious about the pace of change (as always), and doesn't want to rush into anything (something I gleaned from a call with mgt). So it's slow & steady under existing mgt (with good divis, specials, and buybacks) at a modest valuation now. The upside is a re-rating to international expansion, if GIL gets its way. Also upside from GIL deciding to bid for the whole thing, although mgt still have significant shareholdings.

hVIVO (LON:HVO) - I'm a recent convert here, but think it looks very interesting - see Wednesday's SCVR here. Mainly due to a series of big contract wins, having a breakthrough year into profit in 2022, strong pipeline so 2023 looks already in the bag & should beat forecasts, plus amply cash and maiden divi on the way. Good upside on this one I think, providing nothing goes wrong. So I've picked up an opening position in it myself, and will continue researching & monitoring.

As always, these are just my views, some of which will turn out to be wrong, and some right. So always vital to do your own proper, more detailed research.

Thanks, Paul.

Thank you buddy, replied on a sunday as well! BZ You clearly love it!. Very much appreciated. It helps to narrow down my left and right of arc of focus/prioritisation to look at things you talk about. Hope you're well and having an enjoyable weekend.

Ah wow, thanks! I didn't realise AJ Bell paid interest on cash balances! That's awesome.

And... I'm with IG, not II. Looks like IG doesn't pay interest on cash balances. Maybe I should move ISAs...

Yes, thank you Forbsy! The Lyxor Smart Overnight Return looks like what I'm looking for. Money market fund, super low risk (I think?) but earning some decent amount of interest, similar to what I could get in a cash savings account. Looks like about 3-4% annualised, so not too shabby?

But guessing there is the black swan counterparty risk, in that they are lending to large corporates, and if one of them suddenly went....

However, the Lyxor fund you suggested is in USD. Are there any money market funds in GBP, and also no currency risk?

Thanks for the suggestion of currency funds too, but at the moment just sticking to UK exposure for now (except for my S&P500 short!)

Just found this: Xtrackers Sterling Cash Swap UCITS ETF 1D

Looks like fairly accurate tracking over the last few years, tracking the SONIA rate. Which is close enough to what I am looking for. 0.15% TER, which sucks on a 3%+ return, but ah well, no choice, there doesn't looks like there are other ETFs out there that are similar?

The problem though is that it is all synthetic - it is just a derivative with Deutsche Bank. So 100% counterparty risk to DB. Not really doing any underlying SONIA lending itself. So somewhat of a risk?

Rusty2

The Lyxor seems to be in £ but I can't buy on IG within an ISA. Can buy on HL I think, seems to about 2% but maybe more in the next year with rising interest rates?

Interactive Brokers (IBKR) pay interest about 2-3% depending on currency and amount but not sure if that is within an ISA.

Preference shares maybe worth considering but capital can fall, I do have a few.

abtan

Hi Boon

HL also offer decent interest on ISA/SIPP cash balances, including on balances <£10,000.

https://www.hl.co.uk/charges-a...

whatmore1951

30th Jan '23

Hi Paul, Great work. Just flagging up the mystery shares like this is a good option. Thanks

Interesting, I wonder when they pay this interest, can't find any payment on my ISA. Have monthly fees.

If HL do pay 1.5% on cash over £50k, then not much point in some of these low paying funds, which carry more risk?

I have sent HL an email about where my interest is. Will update.

Hi Rusty2

I've seen interest from HL in an ISA and a SIPP for quite some time now, usually around the 9th of the month.

Hi Abtan, I have checked again and there are some payments, I was looking under income as that is where other payments and fees are but they are under transactions. But they don't seem tie up with the interest rates, unless they have got up nearly x3. Do you know what the rates were last December?

HL bumped their rates up in the first week of January I believe.

The December rates were much lower but I'm afraid I can't remember what they were.

31st Jan '23

Thanks! Looks like I might have to give in to expensive fees, now that the interest earned balances it out...

Small Cap Value Report (Fri 27 Jan 2023) - WJG, STRX, PFG, RNK, OTB, HSP, SDRY, TET, MOTR,SRAD, AVON

Agenda/Summaries

Paul’s Section:

Watkin Jones (LON:WJG) (I hold)

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Paul Scott

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