Small Cap Value Report (Fri 27 Mar 2020) - HSW, INTU, MPAC, NXT, RMV, RDW, SUPR

Good morning, it's a gradually recovering Paul here, with Friday's SCVR.

Today's report is now finished.

I'm still catching up with what's been going on, over the past couple of weeks. Rightly or wrongly, I'm increasingly coming round to the view that the actions being taken by Governments, in shutting down large parts of the economy, could well turn out to be counter-productive. Hundreds of £billions in economic activity is being killed off, with ruinously expensive compensation schemes being dreamed up. For what benefit? We're likely to end up with millions of unemployed, many thousands of destroyed businesses, all of which might have slowed down the spread of the virus a little.

Seeing police being asked to stop traffic, and accost people in parks, to enforce inconsistent & illogical policies on social distancing, again just strikes me of authorities feeling the need to be seen to be doing something. Meanwhile millions of people are crammed into buses & trains, going in to work as normal. So which is it? Are we isolating, or not? To my mind, we should be rigorously isolating anyone who is vulnerable, and everyone else should be getting on with life and trying to keep the economy going.

In terms of shares, we really haven't even begun to count the cost of the economic mayhem which is unfolding. Forecasts have gone out of the window - we haven't got any sensible guidance yet on how companies might perform. Lots of companies are likely to be reporting huge losses this year, and may or may not survive.

For this reason, I'm losing confidence in the recent big bounce in oversold shares, and have decided to bank more profits.

We're in completely uncharted territory, there's never been anything like this happen before - with an extended shutdown of whole sectors. The losses are likely to be ruinously high, I reckon. On the flipside, Govts seem to be prepared to throw vast amounts of stimulus at the problem. A world that was already unreal, in terms of zero interest rates & mountains of debt, is getting more distorted by the day.

How bad is this recession going to be? Nobody knows. But it's already rippling out. Newspapers are reporting that banks are pulling mortgage deals, so the window to remortgage at historically low rates has probably slammed shut for now.

As regards individual shares, I'm not going to be spending much time analysing historical results being announced now, as there's no point. Profitability is likely to fall off a cliff in many/most sectors, hence if we value shares on a multiple of historic profits, we're likely to over-value them.

But I will be rooting around in trading updates, trying to find any bargains amongst the wreckage. My default position may well end up being "don't know" on most shares we look at.

Let's start off with a few stragglers from yesterday...

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Hostelworld (LON:HSW)

Share price: 58p
No. shares: 95.6m
Market cap: £55.4m

Trading statement & covid-19 update

I last looked at this online travel portal here on 5 Mar 2020. That was when coronavirus was starting to affect business, and it looked like HSW was operating at around breakeven run rate. It has a big advantage, in that marketing & staffing costs can be flexed up & down quite easily.

As you would expect, things have got worse;

On 4 March 2020 at the time of the Group's preliminary results, Hostelworld estimated that the impact of COVID-19 would be a reduction in Q1 2020 EBITDA in the range of €3 to €4 million. Since early March booking trends have continued to deteriorate as the outbreak expanded, and while the Group took immediate steps to mitigate the financial impact, we now expect the overall EBITDA reduction in Q1 2020 to be c. €5.0 million.

Cash position - looks fine to me, so I don't see any issue here with solvency, due to its flexible cost model;

As at 24 March 2020, the Group's net cash position remains strong, with in excess of €20 million of immediately available cash on hand (as at 31 December 2019: €19.4 million). The Group confirms it has no debt obligations. As at 24 March 2020, Deferred Revenue, reflecting customer deposits made under the free cancellation booking product, amounted to €2.5 million. While the rate of cancellation under this booking option has increased due to changes in travel patterns in response to COVID-19 outbreak, we are working to minimise any negative cashflow impacts to the business, by offering credits in lieu of cash refunds.

Dividend - cancelled

Cost-cutting being done, and preserving cash, all as expected

Guidance - none given

My opinion - unlike many traditional travel companies, this one looks likely to survive, as it can slash marketing spending to conserve cash.

The trouble is that the business was struggling for growth, due to competitive pressures, before coronavirus started. For that reason, I'm not convinced it's a very good business, even once recovery does start. I'd probably be more interested in looking at US behemoth Booking.com rather than a minnow UK also-ran.

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Intu Properties (LON:INTU)

Many thanks to the reader who flagged up the statement from this struggling (bust, basically) shopping centre owner.

The most striking point it made (yesterday) was the extent to which tenants are withholding rent payments;

Rent for the second quarter of the year in the UK was due on 25 March (the quarter day) and we have received 29 per cent of this. We are in discussions with our customers on the outstanding rents. For the same period last year, we had received 77 per cent on the quarter day.

That's a staggering shortfall. Admittedly, the figure is likely to rise from 29% to considerably more, in the coming days. It's fairly normal for tenants to take up to a week to process rent payments, and in my experience landlords are usually fairly relaxed about that timescale.

In these unprecedented times, when tenants have been forced to close their shops by Govt edict, then it's not unreasonable for the tenants to seek some cashflow assistance from landlords.

I've been buying shares in Newriver Reit (LON:NRR) recently, which has a more value-focused tenant profile. Also, its debts are unsecured. Nevertheless, I am worried that NRR is not going to be immune from this. Its pubs division (about 20% of the business) is obviously also going to suffer, at least temporarily.

The big question is whether banking covenants are likely to be breached. NRR has quite a low LTV, and value-orientated assets, therefore I hope it might be able to navigate through this difficult patch. Divis have been paused. If it survives, which it should do, then this could end up being a very attractive entry point - even though asset values are likely to be written-down a fair bit.

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Mpac (LON:MPAC)

Share price: 220p
No. shares: 19.8m
Market cap: £43.6m

Trading update & Covid-19

This is an interesting company, which was trading very well until recently. I've been meaning to look more closely at it, to try to better understand what caused its packaging machinery to sell very well (forecasts were repeatedly upgraded in 2019).

The share price has come back down again, because investors must now be worried about business declining due to recessionary conditions. Look at the number of companies which are reporting cash conservation measures, including capex halts. That's bound to impact MPAC, I imagine. I recall in 2008-9, lots of companies initially looked to be riding out the recession, with strong order books. However, what happened then, was that over time those order books ran down, and were not replenished. Therefore profitability ultimately collapsed, after a time lag.

This is what MPAC said yesterday;

The latest government travel restrictions in the regions of our main sites, UK, Netherlands and Canada, and measures implemented are being evaluated and are having an immediate impact, restricting customer interaction and site-based work. However, Mpac remains dedicated to the provision of equipment, spares and services for customers in the critical sectors of Healthcare and Food and Beverage and we are utilising increased remote working wherever practical and possible.

As a result order intake is expected to be lower. Note that MPAC's sector specialisms look to be in good areas.

It is looking at cost reductions.

Cash position - this is a strong message, and certainly reassures;

Mpac has a strong balance sheet, is well financed and remains debt free and is therefore very well positioned to navigate the COVID-19 pandemic. The Group has c.£19m of cash and cash generation in the first two months of the year was in line with management's expectations. Additionally, the Group has access to a £10m secured committed revolving facility which is currently fully undrawn.

Even in cautious downside scenarios which we have modelled, and stress tested, we expect to have sufficient liquidity from existing resources to meet our needs throughout 2020.

That's very good indeed. Companies really must make it abundantly clear that they have enough liquidity, as in this case.

Dividend - is being pulled, which makes complete sense.

My opinion - an admirably clear update.

I like the company, but am not interested in buying any shares in it, since we have little to no visibility on profits or outlook for the time being.

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Next (LON:NXT)

Temporary closure of online operations

This is a bombshell announcement. I had assumed that Next would likely continue with its online operations, but today it says;

NEXT has listened very carefully to its colleagues working in Warehousing and Distribution Operations to fulfil Online orders. It is clear that many increasingly feel they should be at home in the current climate. NEXT has therefore taken the difficult decision to temporarily close its Online, Warehousing and Distribution Operations from this evening, Thursday 26 March 2020. NEXT will not be taking any more Online orders after this time until further notice.

I can understand why staff (especially those with children) might want to be at home. However, it does beg the question, will there be jobs to come back to, once the crisis has passed? Would it be better to keep operations running at a lower level, instead of closure?

We'll have to see what happens, but this seems to remove the chance of the share price factoring in recovery for the time being.

Fashion retailers are going to be facing horrendous problems with inventories. Warehouses & shop units are full of stock that needs to be sold between now and August. If this crisis drags on longer than that, then summer stock would be virtually unsaleable. How on earth are they managing stock intake? All orders must be cancelled, so how are they going to stock up again with the right products in the autumn?

This is looking increasingly disastrous. I'm minded to avoid retail shares at pretty much any price, unless they're so cheap that it's a binary bet on them going bust or being a multibagger.

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Rightmove (LON:RMV)

Suspending its divi - this is becoming the norm from many companies.

Conserving cash.

Profit guidance suspended.

Says it has financial capacity to withstand this challenging period.

My view - the balance sheet is quite modest, but that's because it's a capital-light business model, that in normal circumstances generates huge cashflows. The profit margins are so high, that even if RMV greatly reduces its fees to estate agents, it's likely to remain strongly profitable & cash generative.

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Redrow (LON:RDW)

Is shutting down its operations. That's going to mean all the suppliers are likely to come under pressure & may now fold too.

This is going from bad to worse.

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Supermarket Income Reit (LON:SUPR)

Announces it has received 100% of expected March quarter day rents.

Q3 dividend will be paid as normal.

With restaurants/cafe/bars closed, the supermarkets are clearly doing well, winning more business.

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I'm taking a nap now, and will be back later to do some more updates.

Edit: apologies, I had to spend the rest of the day in bed, so couldn't do any more.

Wishing all readers a peaceful weekend. Those of you that do succumb to the coronavirus, just get plenty of rest, and keep hydrated.

Best wishes, Paul.