Small Cap Value Report (Fri 28 Jan 2022) - DOTD, EMR, RWI, TET, CHLL, AVON

28th Jan '22 by Paul Scott

108 comments 11145 reads

Good morning! Paul & Jack here. Today's report is now finished.

End of week podcast - we've just recorded it, so should be up on Spotify shortly! Search for "The Small Cap Value Report" or use this link.

Agenda -

Paul's Section:

Dotdigital (LON:DOTD) - from yesterday. Despite an in line with exps update, the share price crashed 24%. I think the problem is - the shares ran way ahead of reality, and growth is now lacklustre. Costs are rising too. Doesn't deserve a premium rating in my view.

Empresaria (LON:EMR) (I hold) - another solid trading update from this eclectic group of staffing companies. PER of 10 looks reasonable, and an upbeat outlook.

Treatt (LON:TET) - a wordy AGM update, with no numbers. Seems reassuring. High valuation, so it could come under pressure in current sceptical markets. However, I do wonder if the broker forecasts could be set too low, given the new factory coming on stream? Nice company, but it's particularly difficult to assess whether the valuation is high, or not? Only time will tell.

Chill Brands (LON:CHLL) - a quick look at interim results, for this early-stage, heavily cash-burning startup. It needs to raise more cash, and the £26m market cap looks bonkers. So I wouldn't go near it, unless/until the business model has been proven.

Jack's section:

Renewi (LON:RWI) - another material upgrade here, supported by a strong recyclate price environment. The shares are quite modestly valued on a forecast PER of 10.4x but this depends on what a sustainable recyclate price level looks like. There are likely long term demand drivers here though, so it looks interesting.

Avon Protection (LON:AVON) - supply chain stabilising but revenues expected to be weighted to the second half of the year. Share buyback announced after a calamitous share price fall following the Body Armor acquisition and subsequent closure. Disastrous capital allocation. There is likely still a good business here, but management has very seriously blotted its copy book.

Paul's Preamble - UK Small Cap Valuations

Revolution Bars - I got sick of being stuck indoors yesterday afternoon, so took my laptop off to Bournemouth's branch of Revolution Bars (LON:RBG) (I hold) - which is a nice place to hang out after its recent refurbishment.…

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Lawrence Judd

28th Jan '22

Hi all,

Just to say that this week's SCVR roundup podcast is now live.

You can find it on Spotify, or if you'd prefer a web player then you can also listen here.

If you are on Spotify, it would. be great if you could click the 'follow' button:

That way, new episodes will automatically drop into your podcast feed.

Thanks!

cmpeckham

I don't think any of these 3 are good examples of what I was asking about. None of them can really be described as acquisitive companies in my view. Really their main common feature is that intangibles form a very small percentage of assets, which allows them to score highly on your metric.

As Edward said, £Sdi is a good example of the type of share I was discussing. Many of the most successful shares in the US and UK have been of this type and I can't see how they have a hope of qualifying under your selection. They might qualify a few years after their growth phase has passed, but the share price gains are made during the growth phase, not when they go ex-growth.

There is nothing wrong with focusing your investments on a particular type of share and excluding whole swathes of the market (in your case those that have growing inorganically) but I think you should recognise that when you try to analyse acquisitive shares with your tools, you are no longer using the tools appropriately. They just aren't designed for the job. In year 1 they ascribe full value to the immediate cost of acquisition while only recognising 1 year of tangible benefits. Not really a satisfactory way of weighing up the costs and benefits.

The world is becoming dominated by intangible rather than tangible assets so I think your universe of shares will decline over time but good luck finding the jewels within it.

David, if you are right it is a magical opportunity for us all to make easy money. Let's hope you are.

tom stokes

Paul

I also live in Bournemouth area and would be delighted to attend and also buy you a pint.

Tom

Doug2b

Judges Scientific - I don't see much share issuing at all. The acquistions seem to have been regular and relatively small, funded from cash or manageable debt. They seem to write down intangibles quite quickly it seems, always good to see. And the acquistions have fed through into net tangible equity growth, which is what is supposed to happen, you know acquistions ultimately creating tangible wealth for shareholders and all that.

Sadly the business is grossly over priced now, around 4 to 5 times even a fair price.

I have reissued the the Begbies post with the phrase removed that seemed to cause concern, I have made the same point with other words. I cannot take the original post down now, if Stockopedia could do so that would be appreciated.

Paul Scott

Sorry for the terrible audio quality my end. We'll make sure it's better in future.

yiannos1

Please do not upset Paul.

It’s gonna be a long weekend!!

PS. In net tangible surplus we trust!!!

Boon

But why take Russia specific risks when so many diversified global miners have almost equivalent high dividend yields?

Take Rio Tinto (LON:RIO)

No Russia risk. Somewhat diversified (although still heavily iron ore atm). 8.6% forward yield. Future copper play now that its Mongolia mine expansion has green light. Maybe lithium play too if Serbia reverses decision and gives it back its license for a new mine.

(I hold)

TEIN

DotDigital (Dotdigital (LON:DOTD)) has no moat.

There are a lot of businesses in this eCommerce space doing the same stuff, DotDigital's absence of a moat will be a factor in their churn rate and inability to grow earnings. Given the headwinds we're facing, measuring the depth and width of one's moats would be a weekend well spent.

Thank you for the preambles Paul, I always look out for your musings and where you might be sat writing them!

Bert Fox

Sounds good. How about one in the Leadenhall branch?

Dojosan

29th Jan '22

Potential takeover target for Dechra Pharmaceuticals (LON:DPH) too at current prices

Gulf Marine Services (LON:GMS) I would not consider this to be a "safe to hold" long term category. Their indebtedness is at very high levels and whilst oil's doing well, they will reap benefits, one has to be very mindful of their situation.

There is nothing wrong with a sector which does not require a high tangible asset base, acquiring businesses and therfore creating tangible assets.

But, at the end of the day, the business must generate tangible wealth for shareholders, otherwise we are all just busy fools, i.e. running around doing business for rhe sake of it without ever creating sufficient tangible wealth.

Epsilon

Point taken dahokolomoki, but it's the sheer scale of valuation gap that provide the opportunity, The table below appeared in yesterday.s FT;

"All of these multibillion-dollar companies have double-digit dividend yields & double-digit revenue growth, and price/earnings ratios below 10. Some of them look frankly absurd — Gazprom, say, with 40 per cent growth, a 17 percent dividend in the year ahead, and a P/E of 3 (the dividend may turn out to be even higher than that, if oil prices stay high."

The first four companies in the table above feature heavily in the UK listed Investment Trust Jpmorgan Russian Securities (LON:JRS) with an aggregate weight of 39%.

Moreover. the Trust itself trades on a 12% discount to its' own NAV.

"... at the end of the day ..."

Agreed, but in your method, the acquisition must generate net tangible wealth in year 1, not at some point in the future. Your calculation includes the cost of acquisition but excludes the future benefits that will accrue. This might possibly work if the acquired company is an ailing relic of the old economy bought at 1 x NTAV, but if it is a modern company with value in brands, software, customer relationships etc. then there is absolutely no chance. Although these assets might be vital to achieving those future tangible benefits, your model assigns them zero value. That is why your method works within its niche, but will often be grossly misleading for businesses that have recently made acquisitions.

30th Jan '22

At the very least, if Avon Protection (LON:AVON) current management and board is staying, for them to show commitment to the company by taking a bigger financial commitment. Buying shares in the open market in a meaningful way. Forgoing part of their renumeration for 2021. Resetting or clawback of past share awards.

None of this has happened.

As it stands now, this isn't a terribly diversified group, it has super reliance on lumpy, big government contracts, and management don't seem very good. Not trading at a bargain, still 10+ PE. No huge asset backing. So why invest?

But the question is then why?

Why is the market, and lets face it - these are quite large market cap companies with still ample trading liquidity for professional funds to go into - trading at such ludicrous P/Es, dividend yields etc?

I always believe in the large cap space, "if it is too good to be true, it probably is" given the sheer number of professional investors involved in that space. Sure, in small caps, with its illiquidity and less people tracking, there are often pockets of extreme value.

Jpmorgan Russian Securities (LON:JRS) is a good suggestion though. It might be an interesting play, either a Russia focused fund with exposure over a range of shares and industries, and/or a Russia ETF.

Rusty2

These are Russian companies, many investors don’t want to support them, £GAZP is 50% owned by the Russian Govt. I don’t know about the others but I’m sure there is some government involvement. If Russia does invade Ukraine there could be a war even with the UK. Are you comfortable with supporting Russian companies, I think many people are not and is why they are cheap. I certainly won’t be investing.

Gilgamesh_Investor

31st Jan '22

Great content, as always. I like the way you're doing this weekly roundup; makes for an interesting listen when out at the weekend.

I agree with your verdict, Jack. A large sell of mainly of growth stocks that have likely been riding on momentum throughout the pandemic. Some of the valuations of USA growth stocks are ridiculously overpriced; an article I recently read suggested the USA NASDAQ index needs to fall by 74% from current levels to warrant a fair value! £PTON is a perfect example, which I believe Paul alluded too on the prior weeks podcast! Tis' the season for value opportunities to emerge.

Keep up the good work,

Raleigh4343

I like the look of RBG as a good bounceback share. I Bought Fulham for their bright future IMHO. But RGB Stockrank is 21 which goes against the grain of using Stockopedia. And views?

Small Cap Value Report (Fri 28 Jan 2022) - DOTD, EMR, RWI, TET, CHLL, AVON

Paul's Preamble - UK Small Cap Valuations

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Paul Scott

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