Small Cap Value Report (Fri 27 Sep 2019) - FTSE/Interest Rates, ESC, SONG, EQLS | Graham Neary

27th Sep '19 by Graham Neary

50 comments 8412 reads

Good morning!

Sorry for the late start today.

Escape Hunt (LON:ESC)
Hipgnosis Songs Fund (LON:SONG)
Equals (LON:EQLS)

Personal Note (feel free to skip)

This is irrelevant, but I think it's worth saying that this has been my busiest month, probably ever. The stream of work assignments been extraordinary. Finding a spare 10 minutes has sometimes felt impossible.

I knew that September was going to be like this, several months back, and tried to prepare for it, but it was always going to be hectic, because of the things I had agreed to do.

Thankfully, I have learned my lesson and will not allow my calendar to get so crowded ever again.

Anyway, there are still a few more days and a few more assignments to get through, so I'm still run off my feet. But from next month, I am going to have more time and am going to have to be more careful with my time, too. Thanks for your patience.

FTSE/Interest Rates

Many of you will have noticed that the FTSE is up 350 points, or about 5%, compared to a month ago.

I was thinking about doing some more FTSE trades a few days ago, but the pricing wasn't quite right. If I had pressed the button, I'd be sitting on nice profits already. It turns out that there are BOE bankers who are inclined towards loosening again:

If growth is weak for a while, below potential, spare capacity rises and down the road inflation undershoots.

"Our remit encourages us to steer against that,

His remarks bashed the pound and boosted the FTSE, as you'd expect.

As Peter Schiff would say, Western central bankers are in the monetary equivalent of a "roach motel" (a place where you can check in, but you can't check out). Large parts of our economies and especially our governments are now accustomed to low interest rates, they like low interest rates and they can't imagine suffering high interest rates. Borrowers have more clout than lenders, and going "back to normal" is not something that many people really want to do.

Indeed, low interest rates are "The New Normal". Someone who graduated from university in 2010 has never known anything but low interest rates during their…

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MrContrarian

27th Sep '19

My morning smallcap tweet: Malvern underwater

Numis (LON:NUM), Mediazest (LON:MDZ), Gulf Marine Services (LON:GMS), Hipgnosis Songs Fund (LON:SONG), Malvern International (LON:MLVN), Helios Underwriting (LON:HUW), Redt Energy (LON:RED)

Numis Corporation (NUM) FY trading - mid to high teens rev drop. Blames quiet mkt for deals. Also new office will cost extra £3m PA from FY21.
MediaZest (MDZ) AGM stmt: continued recovery from poor H1. Two large projects to complete in by Dec, "expects to build upon last year’s profit for the current financial year despite the economic environment."
Gulf Marine Services (GMS) signs formal waiver agreement with banks. talks continue on long-term solution to its capital structure.
Hipgnosis Songs Fund (SONG) to issue £300m of C shares. These can vote but only get divs from the assets their capital is used to purchase, avoiding dilution of ords. Still dilutes the earnings attributable to ords so what's the point?
Malvern (MLVN) H1 rev up 28% but EPS -0.6p (-0.29p) due to £1.1m write-down of Malasian op. Puts Malasian op for sale after very disappointing performance. I hold.
Helios Underwriting (HUW) H1 pretax £650k up 42%. "Syndicate results for the 2017 and 2018 underwriting years will exceed current mid-point forecasts published by the managing agents."
redT energy (RED) H1 pretax -£3.4m (-£5.9m). 'Free cash' £3.1m. Going concern stmt - needs more funding.

CheshireUK

Morning Graham, Your thoughts on Springfield Properties, accounts posted today, would be welcome please.

timarr

Hipgnosis Songs Fund (LON:SONG) is interesting - I have a small stake and I like the alternative asset class but the confusing share structure and the obvious need to continually raise capital somewhat put me off. Anyway, as far as I can figure it out the C shares are convertibles and will convert to ordinaries once 80% of the proceeds have been invested.

The temporary separation of C share earnings is - therefore - to avoid dilution of earnings to the ords while the funds are being allocated. The conversion ratio of C's to O's depends on the asset value of the C's at the point of conversion.

But no doubt this will all become much clearer when the prospectus is published. Or not, probably ...

TamzinPiworld

Videos!

We've been massively busy over at piworld following recent results and Capital Markets Days over the last few weeks. Watch here:

1. Judges Scientific (LON:JDG) H1 19 analyst presentation

2. XLMedia (LON:XLM) H1 19 webcast

3. Tremor International (LON:TRMR) H1 19 webcast

4. Quixant (LON:QXT) H1 19 short results overview by management

5. Everyman Media (LON:EMAN) H1 19 short results overview by management. This is to be followed by a full length investor presentation.

6. Biffa (LON:BIFF) Capital Markets Day September 19 - very interesting sector. Just a short 13 mins overview of the key messages.

7. Panoply Holdings (LON:TPX) Capital Markes Day September 19 - A tech services company that IPO'd December 18. An opportunity to see management, and three of the companies under the TPX umbrella.

Beyond this other September results presentations from Keywords Studios (LON:KWS), Beeks Financial Cloud (LON:BKS), Somero Enterprises Inc (LON:SOM), ATTRAQT (LON:ATQT), £KATE, Trinity Exploration and Production (LON:TRIN), Open Orphan (LON:ORPH), Property Franchise (LON:TPFG), Blue Whale and Wameja (LON:WJA). Find them all here.

Gostevie

Hi timarr,

I too have a small stake in Hipgnosis Songs Fund (LON:SONG) because I like the alternative asset class and also the steady quarterly dividend. Issuing C Shares (Convertible Shares) seems sensible to me, as does the clearly stated conversion timetable.

"The C Shares to be issued pursuant to the Initial Issue will convert to New Ordinary Shares within one month of the Calculation Time, being the earlier of: (i) the close of business on the date on which the Board becomes aware or is notified by the Investment Adviser that at least 80 per cent. of the Net Issue Proceeds has been invested in accordance with the Company's Investment Objective and Policy; or (ii) the close of business on 21 October 2020 (being the date that is 12 months following Initial Admission)."

Gostevie

InvestedGeordie

Morning Graham,

I wonder if you might want to comment on the warning put out by Andrews Sykes (LON:ASY) this morning? I decided to sell at £5, and feel I've got away quite lightly - but would always appreciate others views.

I put a poker related tweet out, as well this morning, around profit warnings:

"I sometimes see PWs as pre flop action in poker. As a general rule, one should never enter the pot unless you're raising. Therefore to 'stand pat' [or call pre-flop] (to hold the shares) should never be employed imo. Either fold (sell) or raise (buy)!"

Something interesting to think about. I generally found calling a raise to be unprofitable in the log run. However, there will be certain situations in which it would be correct.

Thanks,

IG

[I refer to cash game poker, as opposed to Tournaments!]

Snoo

Interested in your thoughts on Malvern International (LON:MLVN).... I've been weighing up an investment here.

Seen the interior of the Brighton branch and that is pretty impressive and potentially could achieve a very high utilisation rate with a balance between daytime and evening courses. The UK performance appears pretty good, and there are a few cities which may have a good balance between vocational domestic students and foreign students.

I do have some concerns on the loan, which effectively is at 10%. The maximum is £6.6m assuming they can find acquisitions, which I am sure they can but most firms in this sector only have value due to their current contracts (which may end up disappearing on expiry).

The language sector seems quite heavily fragmented, most teachers are freelance and have no loyalty to any particular company, and as such quite difficult to build an advantage on the product side, but I do wonder if there may be an advantage possible by having a network of real sites.

sturm

Morning InvestedGeordie - you asked for other views on Andrews Sykes (LON:ASY) - my view is it's not really a warning at all, as it seems there weren't any market expectations (unless there are broker forecasts I'm unaware of).
Clearly some holders like yourself expected more and have sold, but for a weather-dependent business like this (selling climate-control products) other holders will just collect the dividend and look forward to more business-friendly weather in the coming months and years.

Hi IG,

Re Andrews Sykes (LON:ASY) I've always been put off by the rather convoluted ownership structure. From its 2018 Annual Report:

"34 Ultimate parent company
As at 9 May 2019, EOI Sykes Sarl, which is incorporated in Luxembourg, held 86.25% of the share capital of Andrews Sykes Group plc and is therefore the immediate parent company. The ultimate holding company is the Tristar Corporation, a company incorporated in the Republic of Panama. The Tristar Corporation is held jointly, in equal proportions, by the Ariane Trust and the Eden Trust and controlled by the trustees of these trusts through a Trustees’ Committee. The directors therefore consider that the trustees of the Ariane and Eden Trusts are the ultimate controlling parties of Andrews Sykes Group plc."

From memory, although I can't immediately find a reference, I seem to recall that the Ariane and Eden Trusts are controlled respectively by two brothers who are on the Board of Directors of Andrews Sykes and are the sons of the Chairman... who is 99 years old.

JohnEustace

Merck Mercuriadis at £SONG did say in his launch pitches that their objective was to eventually raise £1bn because that would represent a significant enough share of the song rights market (20% from memory) to give them a strong negotiating position to drive returns up.

They are certainly moving aggressively and they appear to have given themselves the eventual headroom for £1bn on top of the funds already raised so if I read that correctly that did make me raise my eyebrows a bit. Although this offer is capped at £500m.

Sitting and watching with my original small stake for now but minded to increase it a bit.

Small Cap Value Report (Fri 27 Sep 2019) - FTSE/Interest Rates, ESC, SONG, EQLS

FTSE/Interest Rates

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Graham Neary

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