Small Cap Value Report (Fri 28 Feb 2020) - Carnage, VRS, FOXT, NCYT, AVAP, VTC

Err, that's fine.

There was recent comment here about the financial problems at the family-run Cordant Group, and comparison was made with Staffline (LON:STAF) . I have received an e-mail telling me Cordant has just been taken over by Twenty20 Capital, a private equity crowd. Read into that what you will.

I think you can take some notice of director buying at Vitec (LON:VTC), Graham. The Chief Exec has just spent £128,000 on shares. I would hope that this is rather more than one month's salary, or else he is being overpaid for a company with a £380m market cap!

Hi Graham,

Can i ask why you do a spread on an option on an index (i think thats what you are doing) rather than a cfd/spread against the index?

Both show real-time P&L so i just would like to know your thinking?

Thankyou
J

No need for any additional superlatives on selling .... In looking for "bargains" it is often wise to buy strength rather than bottom fishing the weakest. I've written a short note on my site with an interactive data report of indices, commodities and sectors/shares YTD.

Some notes below

only 89 Mid/Large Caps still in the Green in 2020 YTD.

• 14 winners are in Equity Investments with £SYNC up 11% and Pollen Street Secured Lending (LON:PSSL) up 5%
• 8 of the winners sit in Household/Home Construction and include the home builders with £PSN and £TW still up 6-75 YTD as of today
• 8 are in software with £PRSM up 31%, £TM17 up 25% while the rest are up more modestly in the 2-4% having suffered significant pullbacks over the past week
• 

There are 412 small caps still in the green YTD with the likes of Citigroup Q Ord (LON:CGP) (+160%), £EUA (+92%) £GFRD (+153%) and £SLP (+57%): the below are small caps over £100m

in terms of red, here's an overview YTD ....

I've posted an interactive report on my site which gives breakdowns by cap and individual sectors allowing customisable research

https://runprofits.com

Graham - based on the below - how much have you got invested on the stock market to the nearest 100K pls?

It is true that since December, I disposed of around 1/4 of my entire portfolio, to help fund a house purchase. Yesterday, I got rid of my tiny stake in Property Franchise (LON:TPFG), to help fund this purchase.

The rest of the sales took place in mid-January, long before the panic over the coronavirus.

So my share portfolio has not been reacting to this news.

.......excessive trading ..... a real problem for investors, and a drag on returns.

There are some examples of investors who timed the market spectacularly well, but there are far more people who sell out, and then miss the subsequent recovery.

... if the FTSE is below 6420 in September, I intend to fill my boots with UK equities.

What's crucial about this trade is that I traded in very small size. ... taking small regular profits over a long period of time is an honourable way to make money, in my view.

Well said.

To put some perspective on the present situation. All my largest positions are index shorts. Most are ETFs without leverage. Today and yesterday are good pay days for me. Nevertheless XUKS is lower than it was in Dec 2018 when I decided to hold for a bear market. The opposite happened! A hedge fund does the leverage for me and their results last year were terrible. The Central Banks financial engineering is suspect but....

Markets only crash downwards. However at some point there will be a 'dead cat' bounce, Gold was down yesterday. So reducing some positions seems prudent.

Avation (LON:AVAP), no thoughts on the results released this morning?

Great overview Graham. Sage advice if you pardon me borrowing from Warren Buffet.

I am convinced that the virus has been in the UK for a couple of weeks but has been dealt with normal remedial treatments without being picked up on as being on Chinese/E.Asian origin.

There were approx 4m people travelling from Hubei in China and probably also in Europe. I was in Europe during the Chinese New Year, and there were plenty of E Asian tourists. It is hard to imagine that places that were visited won't have impacted on their fellow tourists, many of whom will have been in the same transit terminals.

There have been plenty of responsible health warnings, which will hopefully slowed any spread down, but we can expect as the testing criteria is changed to be anyone suspected of symptoms, and not just having been in China, that more cases will discovered.

I suspect we are in for 2 to 3 weeks of media headlines, so expect this to impact on Stock Markets.

Graham, am I reading you right on Versarien that you are "comforted ". the shares are a hazard of note to put it mildly in my opinion. Are you sure?

Avation (Avap) the aircraft leasing company issued remarkably good headline H1 results. PBT +218%. However this was the result of recognising gain on ATR options of $37m. Roughly $0.59 per share.

Stripping that out, results were pretty much in line with my expectations (and can anyone notice the two Thomas Cook aircraft repossessions? Got to look hard; something that PI's were saying would be a disaster for the company).

Previously most of the ATR options value were not included in the results as they were so far in the future that auditors disallowed them. Now, a portion of these are up for sale hence their valuation is now on the balance sheet.

The real reason/interest to be in AVAP now is the strategic review and I suspect AVAP included the ATR options valuation as part of that process and used the argument of selling 'some' of of them as an excuse to get them on the balance sheet. Nevertheless AVAP does have a history of selling the occasional option for a profit. So in summary I don't believe the inclusion of this asset is for nefarious reasons.

I would however question how they derived the actual valuation (Note 3 in the interims) as to whether they are worth that much. But that's a discussion for another day

They also outline additional hidden valuations in the company which I mentioned on TLF a few weeks ago. You may laugh at me but if a sale was to occur I see 500p or more. However the value is in the personnel so I still think a M&A is more likely. Either way best part of a 100% gain on the cards.

Have to remind yourself that aircraft leasing companies and associated financing looks long term.. Decades ahead.

As for COVID-19 I think you have to look at the type of aircraft they have etc . Basically mostly domestic flights. Small operators or government funded airlines practically speaking.

Previous shocks to the airline industry have been relatively short lived. Think 9/11 and Sara etc. However there are real survival implications for major international carriers and consolidation is likely. Does not really affect AVAP's customers though. Am not saying its impossible but I am saying the risk for Avap is low and if a few ATR's get repossed then remember a few are unencumbered and per aircraft loss of revenue is small.

Furthermore US Fed seem likely to reduce rates three times this year all of which reduces finance cost for Avation and makes an M&A even more attractive as they would have access to even cheaper finance than Avap could ever hope to get.

Potential downsides to me seem to be either credit rating agencies making life more difficult to raise fresh cash for future business or the company goes into private hands and a potential exodus of shareholders bringing the share price down as many current investors would not want to hold shares outside a trading exchange.

Undoubtedly there will be a lot more negative news regarding airlines over the rest of this year and AVAP share price very likely to be depressed as a result.

There is supposed to be a Roadshow to institutional investors about now regarding strategic review. It would therefore suggest to me that any positive corporate action will not be announced for perhaps another 4-6 weeks at the earliest. This would suggest to me that any new investors or those wanting to top up may find a better price this time next month.

Given current markets, I would prefer to be holding shares in companies with potential major corporate activities.


BTW. Web presentation later today by Avap. See their website for details.

£Avap the aircraft leasing company issued remarkably good headline H1 results. PBT +218%. However this was the result of recognising gain on ATR options of $37m. Roughly $0.59 per share.

Stripping that out, results were pretty much in line with my expectations (and can anyone notice the two Thomas Cook aircraft repossessions? Got to look hard; something that PI's were saying would be a disaster for the company).

Previously most of the ATR options value were not included in the results as they were so far in the future that auditors disallowed them. Now, a portion of these are up for sale hence their valuation is now on the balance sheet.

The real reason/interest to be in AVAP now is the strategic review and I suspect AVAP included the ATR options valuation as part of that process and used the argument of selling 'some' of of them as an excuse to get them on the balance sheet. Nevertheless AVAP does have a history of selling the occasional option for a profit. So in summary I don't believe the inclusion of this asset is for nefarious reasons.

I would however question how they derived the actual valuation (Note 3 in the interims) as to whether they are worth that much. But that's a discussion for another day

Volvere (LON:VLE)

Fairly restrained price drop this week, likely due to the large amounts of cash on the balance sheet. So I took the opportunity to top up today at this lower price. Hopefully this asset price disruption gives them something to buy.

Morning Graham. I like the idea of buying a FTSE index call option, and wondered if you could recommend a company to buy these from. (Its going to be a fairly infrequent event for me).

This is macro so look away now if you don't want it....plus perhaps a bit too crazy for some ;)


The most remarkable thing is that the dollar has weakened. Add to that I think the fall in yields for 10 treasuries (the safety asset) is predictable but unremarkable.

Obvs, we are not not rerunning 2008 and its fast systemic financial system / balance sheet crisis. But we are running a sharp panic. Simplest to call it a growth re-rating…and that is maybe an interesting thing to ponder…

US is where we have had western world growth. The rest of the world bar bits of Asia have struggled and been somewhat anaemic or choppy. US stock prices reflect this -> they are priced very high across the board as they are ‘safe’ and have sound economy.

UK and Europe much more modestly price arguably cheap. Market wisdom (of recent years particularly) says that UK and Europe catch a cold if US sneezes. Does that still hold? (beyond the grip of panic obvs). Note, that US budget deficit is out of control relative to UK/Europe…and a recession or at least short term emergency and extra counter measures are going to push it more negative.

Another US point, it is economically and politically much more dependent on its stock market. Capital gains and stock options contribute very meaningfully to tax take in US. A lack of them is widening the deficit. If the virus sustains impact the US faces a choice of 1) large tax hikes, 2) big spending cuts, or 3) very rapid increase in debt issuance to fund deficit. Obviously, 3 is what happens (both Trump and Dems will agree that).

Now normally during stress moments there’s a big safety bid for US assets and absorbing extra issuance is possible. That doesn’t seem to be the dynamic right now. Important to note that pre-COVID19 there already appeared to be a problem absorbing US debt issuance as shown by repo market stress and the Fed transacting massively in that market which effectively meant that the Fed was indirectly monetising Treasury issuance (even if this was unintentional byproduct its still important to see that this avenue is open). If US budget deficits grow and the RoW doesn’t rush to fund it (a la 2008/9) then they are going to monetise….the Fed might resist a bit but the politicians are ready to demand it.

The above means probably a systemically weak dollar in a crisis…it could be strong if Fed neglects to have funding open for global eurodollar markets but that seems unlikely as self-harm to have overseas financial collapses blowback into US through trade and balance sheets…everyone very well trained on fixing this problem given 2008-2012 (ie inc euro crisis).

Perhaps, just perhaps, the lack of extreme overvaluation in UK and Europe may begin to insulate a little bit from the US growth de-rating?

The production heart of the world is China. All the potential actions of the west will not hold back the tide and the tide will become a tsunami if China cannot re-float its production. Xi made it very clear on Sunday this week that this is no 1 priority and indications are that China is slowly normalising outside of still quarantined Hubei. Obvs this could fail if the virus establishes virulence around rest of China. However, China seems to recognise the rock and hard place of economic heart attack or epidemic and its choosing the latter risk. It could be that either fail as the regime itself falls…but its likely that people pull together in time of emergency (there is an underlying very high patriotism and sense of greater good).

Now I’m going to sound a bit crazy…what if we are seeing the end of dollar hegemony? Obviously we know that global trade and balance sheet flows need USD (or more accurately eurodollars) so we ain’t saying goodbye to the dollar as a global necessary currency. But if its weak and not a safe haven its systemic importance is very changed. What happens in its stead? Is perversely China looking strongest? Is this China’s moment? Like the 1920-40s when US and USD replaced UK and GBP through a period of much strife? There’s a problem with the Chinese Renminbi as its not open enough globally with only the linked HKD as an open window and HKD is too small. Well, thinking a bit crazy…could China make the HKD its currency? But still its not an open enough economy and faith of the world in the Party to honour HKD liabilities would be low and take a long time to build….but China does have the most gold in the world (not official holdings but across population) and is the biggest yearly producer as well. Could China have some form of gold backed RMB or HKD….a bit mad I know….but China does want to be kingpin and this may be the move. Overall, the world would welcome the leadership (with equivocations obvs)

I wont go into much detail on COVID19 itself but it seems to me that it is probably much more prevalent outside China than reported. Also, note that Hubei province where it ran amok for over a month has a population not far short of UK (and much more densely packed than us). The nos for infections and deaths are not nearly as bad as the imagined potential nos currently driving western markets down. I’m not saying don’t worry, I’m just saying that fact and feeling are not matching up yet.

Anyway, enough for now…back to watching the red

PS its quite likely that something meaningful or signalling meaningful will come out over weekend and probably quite globally coordinated.

Thank you Graham for your sage words.

I have not been through anything like this before (I have been investing for about 8 years) and it is pretty scary but so far mentally containable. I had gone to about 10% cash before COVID19 because I was uneasy about valuations in the US market and any big sell off there causing a ripple effect over here. That 10% is now 13% (I sold a bit at the beginning of the week and the falls in my holdings). 4.5% in gold.

My other supposed “hedges” were Anglo Asian Mining (LON:AAZ) and £RRE. The former gold and the latter trading at below cash. These have not worked out and not only are they my largest fallers they are my largest holdings. Still I am not interested in the price the market attributes to them today (I am as certain as one can be in this game that the market is wrong) but what I think they will be valued at one, two or three years from now. Anglo Asian Mining (LON:AAZ) has been utterly destroyed over the past week.

Finally one of the columns I have to track my portfolio is percentage increase since December 12th (the GE) 11 of my holdings are still up one marginally down and three down 11% 16% and 17% (Arcontech (LON:ARC) Anglo Asian Mining (LON:AAZ) Rockrose Energy (LON:RRE)).

This might be a form of price anchoring? But for me at least it helps put some perspective on this week’s falls. That said in the month of February I am down 14%.

Have a good weekend.

Many thanks for the Versarien (LON:VRS) comments Graham!

On the same subject I think they could perhaps learn from the marketing campaign of Stella Artois, “Reassuringly Expensive”. But in Versarien’s case the strap line would be “Graphene so good nobody buys it”.

Hi Graham i note that Record (LON:REC) is down 25% this week. Do you have any idea why? I would have thought it would benefit from uncertainty, similar to IGG. Thanks

Good to see you have Avation (LON:AVAP) on the list. Good interims out this morning even without the huge boost from from an unrealised gain of c.$37mm from their purchase rights for ATR72's. There was also a huge jump in the tax bill to $7,015 mm from $ 0.583mm the year before. Is this a result of recognising the $37mm which is as yet unrealised? Also no mention of the impact of the 2 aircraft repossessed (and now re-leased to VietJet) or did the lease continue to be paid by Thomas Cook in the interim? I am a happy holder but keen to see the outcome of the strategic review and sale process. Tempted to have another nibble but haven't.

Graham

I share you view that going long of FTSE is not going to a bad call if this carnage continues much longer. I maybe naive but at some stage you need to call this as enough. Of course my history of timing is littered with a variety of calls on macro events but all the right things to stop this virus seem to be being taken and it is a loss if confidence driving this fear. Do others share my view? I am also a fan of Avon Rubber but not sure its products are likely to benefit?

It strikes me that there are a number of popular, cash generative shares that must be considering buy backs right now. I'm thinking of the likes of Anglo Asian Mining (LON:AAZ), Sylvania Platinum (LON:SLP), Rockrose Energy (LON:RRE), all of whom have large cash piles, pay big dividends, and could spend a small amount of money to increase long term value massively. Anglo Asian Mining (LON:AAZ), for example, has around $25m in cash and 114m shares in issue, so spending $6m could buy back at least 4m shares and increase long term rewards for shareholders by 3.5%. Sylvania Platinum (LON:SLP) could do similar: instead of the 16c that Liberum forecast for this years dividend, if they spent half of that on share buybacks they could reduce their shares in issue by 10-12%, boosting future returns.

If nothing else, it shows how cheap things are looking if you assume the end of the world isn't imminent.

Alternatively, in the immortal words of Dan Ackroyd ( Trading Places the movie ) "Buy low, sell high,-Fear is the other guys problem!"

I had a look at Stockopedia's FT100 chart for 5 years. The RSI(14) is currently at 19.3. That's an extreme low (anything under 30 is considered oversold territory). It's difficult to tell exactly, but the only other time it was at this level was in 2018Q1. The market rebounded sharply after that.

Morning Graham

I would be interested in your thoughts on Vitec (LON:VTC) that released prelims this morning. The results were a little downbeat, perhaps as expected.. Like many companies there will be an impact, as yet not fully quantifiable from the Coranavirus, although credit to Vitec (LON:VTC) they have made a good go of doing so. Medium to long term I think that Vitec (LON:VTC) operates in an exciting market with good growth potential. In the short term the situation is less enticing.

I hold, albeit a smallish number of shares and will continue to do so. With few exceptions I see this as a time for buying rather than selling shares, but at present we have I think some way to go to the bottom of the market.

All the best

Rightmove (LON:RMV) results today. Hardly a smallcap but it does get covered here from time to time particularly in respect of its relation to Onthemarket (LON:OTMP) . These appear to show a marked decline in the number of agencies using their service but they are successfully squeezing the juice from those that have stayed. Revenues and underlying profit both up 8% at £289.3m & £219.7m respectively with ARPA up £83 to £1083 from a declining agency base of 16347 (this decline appears to be accelerating: 17328 last year and 17626 in 2017). Another metric that really caught my eye was the employee engagement figure which has consistently been over 90% since 2015 dropped to 81% in 2019. Still high but a worrying drop in morale for some reason. I still hold although considerably fewer than I held before my pre-emptive Covid-19 sell off.

If you're looking for a distraction from these torrid markets, piworld have just published a charming interview with The China Dolls Investing Club:

https://www.piworld.co.uk/2020/02/28/the-china-dolls-investment-club/

The China Dolls were 'discovered' by The Share Centre, for their winning performance. They'd achieved a return of over 121% from 2010 to 2018, (it's since slipped back a little ... probably even more after this week!). They are a group of retired ladies in Bournemouth. Here, they share with us their club and what it means to them. It's a thoroughly engaging 40 minutes.

St James House (LON:SJH) Renold (LON:RNO) Gulf Marine Services (LON:GMS) McColl's Retail (LON:MCLS) Avon Rubber (LON:AVON) Foxtons (LON:FOXT) Benchmark Holdings (LON:BMK) SIMEC Atlantis Energy (LON:SAE) Novacyt SA (LON:NCYT), STM (LON:STM), Surface Transforms (LON:SCE)

St James House (SJH) trading: vague. "Working capital remains constrained and an area of focus, however the Board believes the improving operating performance will alleviate the position gradually." I note SJH offers "Banking As A Service". What the hell have I been using for 40 years then?
Renold (RNO) mkt still tough in H2. Covir-19: "Chinese factory has reopened, staffing levels are not yet fully recovered due to continuing limitations on the movement of employees. In addition, the extensive disruption and the limited visibility of third party supply chains into both the Chinese factory and our Australasian Chain business, means that there remains uncertainty as to the performance of these business units over the coming months."
Gulf Marine Services (GMS) another month's covenant waiver as it talks to lenders.
McColl's (MCLS) bank facilities have been amended and extended to May 2022.
Avon Rubber (AVON) wins $21m US defense order.
Foxtons (FOXT) FY. Outlook: "early signs are that the sales market may improve during 2020. Our sales pipeline is currently ahead of last year," I'm short.
Benchmark Holdings (BMK) Q1 rev-cont down 15% but guides FY in line. Covir-19 minimal impact so far.
SIMEC Atlantis Energy (SAE) CFO stands down but remains on board. He is thanked. Internal non-board appointed as CFO. Odd.
Novacyt (NCYT) covir-19 test sales going well.

In line: STM (LON:STM) Surface Transforms (LON:SCE)