Small Cap Value Report (Fri 28 Oct 2022) - LIKE, MADE, FRAN, MRK

28th Oct '22 by Paul Scott

26 comments 5347 reads

Good morning from Paul. Today's report is now finished. Join me tomorrow afternoon for my latest weekly roundup podcast!

Interview with corporate bond expert, Paul Hawkins. Click here for the audio. It's also been published on my podcast channel ("Paul Scott small caps"). I was burning the midnight oil yesterday evening, typing it up too (exclusively for Stockopedia subscribers) which is a separate post here. Very interesting, and I learned a lot (in particular that bonds do usually have covenants!). We discuss bonds generally, and also the SAGA 2026 bond, and how it relates to Saga equity (I hold).

Next CEO interview - will be next week, on Tuesday, with Cerillion (LON:CER) - an excellent software company, that's performing so well.

I was hoping to also talk to Shoe Zone (LON:SHOE) - another impressively performing company - but they declined my invitation, with no reason given. Rather disappointing, but never mind! I'll just give the slot to a different company that is more interested in talking to small shareholders.

Agenda

All written by Paul today, as it's a Friday.

Likewise (LON:LIKE) - my first look at this challenger carpet distributor (with Headlam (LON:HEAD) being the dominant player in that sector). It issues a fairly mild profit warning today, due to tougher market conditions & higher costs. But it's still profitable, and I check out the last balance sheet, which is solid (with freehold property included). Overall, I'm pleasantly surprised, and think this share is worth me covering in future. It could be a serious challenger to HEAD, as it's growing fast, and already delivering revenues of c.£120m for this year, so not a small business any more. Potentially interesting longer term, maybe?

Made.Com (LON:MADE) - an article in Retail Gazette, says that MADE could be going into administration with PWC imminently (today maybe?). The founder lashes out at management.

Franchise Brands (LON:FRAN) - issued a positive Q3 trading update yesterday, ahead of expectations. It looks a good business, which has established a strong track record of growth since listing in 2016. FRAN shares have been a rare strong performer this year. It's not cheap, but does seem an impressive growth business, with scope to bolt on more franchise businesses.

Marks Electrical (LON:MRK) - I missed this one about 2 weeks ago,…

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se01pfd

28th Oct '22

I think bond investment sounds really appealing. However, approaching it as a complete novice it's so difficult to find good quality information about what's on the market. Unlike equities where the data is easy to find. It may just be my approach.

I've listened to the podcasts, which are fantastic, and thought an etf or fund would be a good first step. So, far I'm struggling to find anything that matches the yields being discussed. Will continuing researching however, as on the face of it I find the topic fascinating.

May be easier to stick to equities!

Westway001

I'm with you!

FREng

The bond market is huge and overwhelmingly comprises professional investors. Why wouldn't it be efficient?

The Zulu Principle (Jim Slater) wouldn't seem to apply to corporate bonds, nor does the PI's abilility to be agile and to trade smaller volumes than the professionals. Where's our edge?

Epitychia

Hargreaves Landsdown have a list of bonds, but the spreads seem to wipe out the yield. Anyone have any thoughts?

sevenccc

Paul, the boss at Likewise (LON:LIKE) is Tony Brewer, ex chief at Headlam. They poached a number of people to set up the business. Must have been a falling out somewhere along the way or someone felt they weren't being adequately rewarded.

Alternatively it may be that Headlam (LON:HEAD) perhaps got too unwieldy through all the acquisitions they made over the years and there was too much resistance to change in the management team. Certainly Headlam have been trying to drive increased efficiency over the last few years to get operating margins up. Seem low for both and if now competing nationally it may be that they won't improve much for either. Share price trend for both looks similar for this year. Steadily down.

Paul Scott

Hi sevencc,

Yes that's right. Given that Headlam seems to have needed a massive sort-out, with numerous inefficiencies and problems being identified & improved by the new management, for me that puts a big question mark over the ability of the old management to do things any better at Likewise!

Regards, Paul.

Good points FREng!

What interests me, and where I think we could actually have an edge, is identifying bonds that are very unlikely to default, but where they've gone below investment grade for whatever reason, which then triggers an avalanche of sellers who are forced sellers under their mandates. This creates dislocated prices.

I know several distressed bond investors, who are real experts in that field, and they make fantastic multi-year returns, using this strategy.

The main problem seems to be that the minimum size can be £50-200k per bond, so this would only really work for people with portfolios probably £5m+

That said, Paul H did highlight Prefs, and investment trusts, which might be better ways for us to dip our toes in, and learn the ropes!

Fascinating subject though, so I really enjoyed learning more about it.

welwichia

Hi se01pfd,

>> and thought an etf or fund would be a good first step

If one is not averse to paying a management fee a collective type vehicle is certainly worth a consideration. It is the route I have chosen in this area as I just don't believe I could add anything e.g. in determining the creditworthiness of a corporate over and above that of a manager who has been doing this on a professional basis for 20+ years. I would be totally outside my circle of competence, so am happy to pay somebody the management fee.

My largest holding in this space is CQS New City High Yield Fund (LON:NCYF) which is an investment trust. This is currently yielding over 8% and would give one immediate access to a whole bond portfolio. With ITs one obviously has to be comfortable dealing with the discount/premium - I have held this over several years and opportunistically bought more whenever there was a meaningful discount. Very happy with results so far.

If ITs interest you, I'd start with the AIC website - here is a list of other ITs in the "Debt - Loan & Bonds" sector:

https://www.theaic.co.uk/aic/f...

My personal preference is just for Investment Trusts, so I have no knowledge of ETFs or OEICs (Funds).

Hi welwichia,

Thanks, very interesting. Quick question, does the investment trust you mention pay out the divis, to you as an investor, or do they accumulate the payments from the underlying bond holdings? Or a mixture?

Thanks, Paul.

Hi Paul,

they pay out quarterly and drop into my HL ISA as a regular cash dividend.

Here is the recent history:

The one thing to mention of course is that unlike holding an individual bond, you don't get to hold to maturity with a collective ... i.e. they just keep rolling over into new issues etc. So there is an element of uncertainty that you don't have with an individual bond where you know pretty well what you stand to gain if you hold to maturity. But in my case, I am just after a fire-and-forget stream of income ...

https://www.theaic.co.uk/compa... has all the dividend history, portfolio composition etc.

tony axon

Hi Paul NCYF pays 1/4 ly divs. currently 3 x 1p,and final 1.48p.

Have held for many years ,probably added from J Baron comment. Tony Axon

eParo

I like to look of Invesco Bond Income Plus (LON:BIPS)

Quality bond investments and manager likely to be adding more in this environment. Decent yield around 6.8%. Any holders/views?

Thank you. I will take a look at this. Sounds promising.

RDHOWARTH

This is very interesting thank you. Amazing performance over the last year all things considered... the premium a little off putting to me. Just read their report though and it all reads well. On the list. The one small reservation I have is that its towards junk and actually I can weather single stock risk and get a higher investment grade... Im not so keen on high yield as a space but that's a timing issue.

The Boon Fund

Are the big ad tech companies like Meta that operationally geared though?

On the surface yes - huge part of their costs are lumped into "fixed" -> which is headcount.

But at least in the USA, they can give 2 weeks notice, and little redundancy/severance. Granted, outside the USA in the UK and EU, it is a different story.

Plus they have so much "fixed costs" to trim -> free yoga classes. Free steak lunches. I am actually very sanguine that if they really wanted to, it would be easy for them to trim fixed costs, at least for the first 10-30% of fixed costs.

Bouden54

Yes 'fallen angels' as they are known in the fixed income world (companies downgraded from investment grade to junk). These often do very well for the reasons you mention - they can be picked up very cheaply due to forced selling (eg pension funds may not be allowed to hold junk bonds).

dartagnan2019

CQS New City High Yield Fund (LON:NCYF) , CQS New City High Yield Fund welwichia response and query.

You say you are ''very happy with the results so far''. However, checking the HL website it shows the performance as being negative ober 1, 3 and even 5 years - -9.9%, -12%, -17% respectively; this against a yield quoted as 8.5%.

There is a premium to NAV of 5%., why pay a premium for such poor performance. I don't follow how you can be 'very happy' on these figures. Have I missed something?

andrewdb

Wisealpha sells fractional bonds (I have a small amount with them)

29th Oct '22

Hi dartagnan2019,

if you think this is a poor performance, you should see some of my equity holdings over the last 12 months! :-)

More seriously though, we are probably looking at this from very different perspectives. In terms of capital gains, individual results will obviously vary a lot depending on whether one's purchase points coincide with the precise look-back dates you have chosen. As its stands, I am showing a small positive gain on the capital front ... however, this is not at all why I hold this! To my mind it does not make sense to evaluate a Fixed Income investment on anything other than a Total Return basis ... I have a small allocation here as a diversifier to an otherwise very equity-heavy portfolio. The regular and (so far) dependable cashflows at times like these are very welcome and provide "dry powder" that can be redeployed into equity assets that are trading a depressed valuations.

Also, in periods where the market just goes sideways for a prolonged period some form of yield may be the only achievable return. So, both in terms of a bit of non-equity diversification and in terms of providing a regular cashflow CQS New City High Yield Fund (LON:NCYF) has delivered for me ... even during the Covid period when many equity dividend payers had to cut or stop paying out.

I don't know if HL provides charts showing the total return - this is from sharepad:

I focus only on the black line (TR) and have used the dips in shareprice as opportunities to top-up. As they say ... YMMV ... for my particular circumstances, with my particular portfolio's purpose and composition it does currently meet the investment objectives I had hoped for ... for somebody else it may be the opposite of course.

have a good weekend!

I am also actively looking for "pension assets" hidden in companies. This is why I've taken a position in LPA (LON:LPA) in Oct. Scheme was already in surplus, and it looks like OKs like they "derisked" it in 2021, so hopefully no big equity losses. They've been meaning to sell it off for a while, so hoping any minute now for a huge cash windfall.

(I hold in the Boon fund)

Small Cap Value Report (Fri 28 Oct 2022) - LIKE, MADE, FRAN, MRK

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Paul Scott

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