Small Cap Value Report (Fri 30 Sept 2022) - MCB, MADE, TPX, XSG

29th Sep '22 by Paul Scott

47 comments 7264 reads

Good morning from Paul. What a chaotic week it's been, I'm so glad it's nearly over!

Some cracking reader comments this week, I'm delighted to see the reader comments section coming alive with really interesting posts this week, thanks to everyone who is contributing constructively.

Agenda -

McBride (LON:MCB) - a key refinancing announcement with its banks was announced yesterday, that strikes me as remarkably lenient. That then allowed FY 6/2022 results to be announced, which come with a "material uncertainty" over going concern warning. It's loss-making, and very heavily indebted to both the banks, and trade creditors. Cashflow is poor. So this is really a question as to whether the business can survive. It says current trading is improving, after 18% price rises were pushed through in H2, to recoup "rampant" inflation on costs. Shares could have little to no value, so best seen as a high risk call option on a turnaround. Risk:reward strikes me as poor, but I'll keep an eye on it, for a possible future turnaround.

Made.Com (LON:MADE) - as mentioned here before, the facts & figures lead me to believe that MADE is likely to be insolvent soon. I've gone through the interim numbers, just to be sure, and the numbers & commentary back up this view. The company has put itself up for sale, but why would anyone buy something that is now generating massive losses & burning through the little remaining cash? The going concern note is laughable. The shares remain uninvestable, and I would steer well clear. (more detail below).

Tpximpact Holdings (LON:TPX) - it's a profit warning for H1 from this acquisitive group of IT companies focused on the public sector, due to a botched strategy of centralising key functions in the group. However, there seems good visibility for an improved H2. Founder CEO & CFO are stepping down, but staying within the business, in an unusual move where they admit that more experienced leadership is needed, and bringing in a sector expert new CEO. Overall, I think this share is starting to look interesting as a potential turnaround, from a much more sensible (i.e. lower!) valuation.

Xeros Technology (LON:XSG) - a deeply discounted placing/open offer. I work through the numbers, which means ruinous dilution. Can you believe, the share count will have risen from 1m in 2014, to up to 294m…

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JimandTonic

30th Sep '22

Although I'm an old geezer, I'm quite new to investing (2 years+). I am, of course, feeling rather jittery about this economic situation, so a big thank you to the many people who have provided sound, encouraging advice this morning (especially Paul Scott whose balanced and knowledgeable opinions I always value).

I've no sage advice of my own, I'm afraid. I, like Socrates, am the wisest man in Athens because I know how little I know!

Bluesky Ventura

Hi Paul,

I am glad you are with me and like the Brtian Unchained policies and are optimistic about the economy. Clearly, anyone pointing out how it is affecting and likely to affect the economy is balderdash!

BSV

RDHOWARTH

Pension disclosure : following story re Serco (LON:SRP) I have quickly read the note in the accounts. Of a 1.5bn scheme - 100m surplus - LDI assets of 400m held on balance sheet at NAV. Different disclose to BT re NAV. Fairly limited info to go on but I’d be more sensitive to mis-selling I think.

Raleigh4343

Fulham Shore (LON:FUL) have decades of experience in building chains of restaurants and selling them on. This is happening nicely now. New additions with liw rents. I dxpect them to exit this bad economy in great shape with less competition.

Fair enough - most of it is leases though - devils in the detail.

BnB

Good point on the debt. But do consumers go back to Tesco once they’ve switched to the German discounters? The latter’s store opening program is it big threat.

Caper4

early death food :)

Tommy H

Hi BnB,

I know within Covid Years several of the friends were Furloughed or made Redundant so were looking at how they could trim the household costs. We are a smallish town, so finally have a German Discounter, whereas previously you had to drive at least 14km to get to one. So for me time + petrol costs meant I felt that I would not get my monies worth unless doing a massive shop.

The basic findings, as people with younger families were, yes it is reasonable quality, yes it is a good price, and sometimes absolute bargains, but to get everything you then had to go to Tesco to get what you could not get in the Discounter!

So I guess now we have one you shop there, then walk across the road to Tesco and get what you didn't find.

Obviously now folks are back in work they are on a one shop per week, I do not have time to go to more than one place, and interesting several have switched to Sainsburys as basically they could get a parking space and it is a lot quieter!

That is my sample of a few folks.

I am on the delivery saver for Tesco, so hardly ever face going into the store. I pretty much get everything I want delivered to the doorstep twice a week (now split shop to get fresher fruit and veg rather than one big shop). Tesco have been removing stuff from their stocks left right and centre, so product choice down. They have also been ramping prices rapidly across the board.

Cheers

Tommy

ps. I do not hold Tesco (LON:TSCO)

Phil117

Mine too. I also like to think in times like this of how great entrepreneurs like Dyson behave. Even though his business is unlisted its theoretical selling ‘price’ on any given day presumably also fluctuates with the state of the economy, cost of financing, animal spirits, prevailing tax rate, etc, etc. And yet he isn’t tempted to sell. Because his focus is on building Long Term intrinsic value. Now granted his non-business assets presumably nominally dwarf those of the average punter. And indeed I know, for example, he’s big on farmland. All that said from a portfolio perspective he breaks all the usual rules that advisors love: he is super concentrated from a company perspective, sector perspective, in the main Dyson industrial business. But that is the way great fortunes are made. Through decades of compounding. The caveat of course is that this strategy only works when being invested in the small per cent of truly quality / good companies. And I know we have very diverse opinions on here as to what ‘good’ represents. But if you have good companies, long only, unlevered, you can afford to sleep soundly, even in times like this

portugull

Thanks to Dicktrade for responding to my post early this morning re £BT.A

I now understand clearly that in 2025 Landlines will switch to Digital from Analogue.

Dennis Ayling

Actually this is a bit more complicated. The move to digital will mean using 'voice over IP', which means the phone will be connected to your router which needs external power (unlike current phones). So if your power goes off, no router & no phone. Now OFFCOM has said vulnerable people must be able contact emergency services on their land line during a power cut but that means battery backup. Power cuts in the country can last for hours so although this is a necessary move to more modern technology I'm not sure the role out will be smooth or cheap for a lot of people.

mainlydown

I happen to have been approached by TPX to sell business in the early days. The original listing was based on 4 or 5 companies with no coherent strategy purchased for no cash but 8 EBITDA in shares. These shares could not be sold for 2 years and you got topped up if you business did well in the group. Interestingly the CEO only owned part of one of the businesses and the CFO had no interest in them at all.

I did not let them buy my business but did buy stock which I sold with the heady post-covid tech bubble . I did think they had managed to get the strategy on track with the public sector focus but the management team always troubled me. It always seemed a good deal for them but not for the founders. It is quite unbelievable that they have decided to leave like this.

It does look cheap now (if they do get someone in that knows how to run it) BUT you have a lot of founders of small businesses wrapped in a group with a leadership that ran away, these guys are holding some very heavy bags. Will they dig in and get themselves out of this or write it off and start afresh?

Rusty2

They will need an internet connection. So wont work if no internet or in a power cut. Think many will get rid of landline phones.

Michael C

1st Oct '22

Thanks mainlydown. I hope you see this reply. Your comment is really, really useful for me because I spent much of yesterday researching Tpximpact Holdings (LON:TPX) and you have confirmed my conclusion that this is a cobbled-together bundle of good but small businesses run by talented people, and the cobbling-together has been done exceptionally badly. I did my research hoping to convince myself to buy. The price now is either ridiculously low or the business is running a risk of failure when the lock-in agreements expire and the talented people are free to leave, start up on their own again, and probably take their customers with them (depending on how effective the non-compete clauses are). I hoped it would be the former. It might have been except that your comment 'if they do get someone in that knows how to run it' is absolutely key. A simple online dig into the background of the new CEO, Bjorn Conway, leaves me wondering why the board thought he could sort the mess out. Obviously they will know more about him than I can find on the internet but what I have found makes me wonder what made them think he is the right person for the job.

Boon

Just thinking forward, based on what I've learnt. Many pension funds started investing in equities, to juice returns, as bond yields were tiny. LDIs were used because of this.

Now that bond yields are going back to healthy levels. Isn't the incentive now for UK pension funds to sell all their equities, buy gilts? They are now able to lock in a decent interest rate to match their long term liabilities.

Does this mean further downward pressure on share prices over the next few months? As pension funds all but exit the equities market?

peterg

Rusty2Yesterday 9:37 pmIn reply to Dicktrade

Yes, but many still live in places with poor or non existant mobile signal, and I can see that lasting for some time. For them a working landline - conventional or digital only can be essential. And of course, those most likely no have a mobile signal are also often the same people who live on places power lines can be blown down or damaged by snow or storm.

timarr

The issue is that the quest for zero risk investment has led defined benefit pension funds to invest ever higher percentages of funds in gilts. LDIs are supposed to manage the risk associated with movements in gilt prices and do so partially by using derivatives, some of which are probably equity based.

The problem with derivative models is that they blow up when the historical precedents are broken - which happens much more frequently than any of the standard models predict. In this case the rapid blowout in bond prices triggered by the reaction to the unfunded spending promises in the mini-budget forced margin calls on the pension funds - causing them to sell gilts to meet the calls, further underming the gilt market (and increasing the UK government's cost of borrowing to boot).

What actually needs to happen is that we need some sensible regulation that allows properly risk adjusted investment, which will include a decent allocation of equities and takes account of the inevitable added volatility this will cause. To put this in perspective - in 2000 pension funds had less than 20% of their value invested in bonds, while today it's over 70%.

But the general point is correct - pension funds will hold a proportion of their investments in equities alongside bonds, interest rate swaps, LDIs etc. As the return on the risk free asset (usually the 10 year government bond yield to maturity) increases then funds will sell equities and buy bonds that match their liabilities.

We're seeing this happen already - the vertiginous fall in some of the warehousing REITs is probably caused by this, as they needed to derate in order for their yields to match bonds returns, adjusted for the equity premium.

This is effectively why increases in interest rates lead to falls in share prices - it's via the medium of government bonds, which funds swap into from equities when the yield is high enough to match their liabilities. If interest rates continue to rise - probable but by no means certain - then we should expect stockmarkets to stagnate at best.

But all cycles turn and lots of UK equities are looking cheap right now, especially if you have dollars to spend.

timarr

bullhead

Totally agree with all your points Paul media have been appalling in their reporting and I would recommend people stop listening to the constant barrage of negative the sky is falling reporting you will be far happier

The Euro area like you say is in a far worse place this coming winter

2nd Oct '22

Yes this is the issue, they only changed the name recently in an attempt to line the businesses up. I think as independent entities they are all good businesses . It would be a tough job for anyone to solve this, you can only hope those with shares will decide their least worst option is to carry on and try salvage the share price. There have been plenty of these types of groups in our market (see Be Heard and The Marketing Group) all of them have seen a similar fate....

The Jayman

3rd Oct '22

Hi Paul, thanks again for your excellent weekly small cap summary podcast. Always adds value post-event reflecting on themes emerging.

Small Cap Value Report (Fri 30 Sept 2022) - MCB, MADE, TPX, XSG

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Paul Scott

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