Small Cap Value Report (Fri 3 Feb 2023) - BWNG, BBSN, NANO, TUNE, Paul's portfolio now

Thanks Paul.  Always  great to find an hour or so to listen and take stock.  

Enjoy the weekend (perhaps better on the coast than here in deepest, darkest, rural North Dorset is grey).   

As always, great podcast Paul! 

HUI are delisting from AQSE on the 14th Feb having just got a listing on the LSE .

Hi Jayman,

Yes sorry about that, my little website for publishing podcasts has got a problem with the SSL certificate. I've bought another one, but it isn't configured properly apparently. I don't understand all the emails I'm getting from the hosting company, so will have to try and sort it over the weekend. Sorry about that.

In the meantime, I'll put tomorrow's podcast on the main podcast platforms as usual (e.g. apple, google, spotify, etc). So it might be better to access it via that. I publish through acast, which then distributes my podcasts far & wide on the various platforms!

Regards, Paul.

You may well subscribe to Bloomberg's John Authers daily newsletter, if not it is usually worth a read, especially at times like this.

Although his take is more US centric I imagine the same scenario applies more or less to UK and Europe. 

In answer to your question this is a section from this morning's offering.

Apologies for some reason not being able to just add a link.

If risk assets have enjoyed a historic rally, it remains difficult to see exactly why. Even if traders are right to call central bankers’ bluff and bet that target rates will soon come down, after all, that still implies a slowdown in the economy — which would be bad for risk assets. If the economy isn’t grinding toward a halt noticeably, why would the central bankers cut rates?

As ever, positioning plainly has much to answer for. Across markets, this looks like a classic “short squeeze” as the stocks that had taken the biggest hit have seen the biggest rebound. For one nice illustration, this chart shows the performance of S&P 500 members for the year so far, on the vertical axis, and from August’s brief high to 2022’s year-end on the horizontal axis. The biggest fallers in the last downdraft of 2022 are the biggest gainers in this rally, with Tesla Inc. in the vanguard:

The short squeeze is particularly effective because there’s an abundance of liquidity to finance it. Arguably, this is the critical factor that had not been expected even a month ago, and that has turned market dynamics on their head. Some of the reasons for the turn in liquidity are counterintuitive, and include:

• China, where a U-turn on public health and Covid has been followed through with a U-turn on liquidity. The sums involved are vast — in December and January, the People’s Bank of China released 3 trillion yuan (about $425 billion) through open market operations, a sum 3.5 times greater than its total injections for the previous two years.
• Japan, where the Bank of Japan’s shift in its yield curve control target in December prompted many traders to bet that the bank would be forced to allow yields to rise still further. That prompted the BOJ to buy even more Japanese Government Bonds.
• The US, where the impending debt ceiling showdown has forced the Treasury into accounting maneuvers to delay the day of reckoning. These mostly have the effect of counteracting the Fed’s attempt to tighten its balance sheet, and releasing more liquidity.

On top of this, the fall in yields creates its own momentum, making money cheaper and enabling more speculative activity. The liquidity effect in China has been most dramatic, as illustrated here by Mike Howell of CrossBorder Capital. The orange line shows the rolling three-month total of liquidity injections by the PBOC via open market operations, while the dotted black line is a NowCast of moves in global GDP:

Liquidity on this scale can keep markets moving for a long time. Howell tends to think this is the beginning of a new liquidity cycle, which could mean a long strong run for risk assets. Others expect it to be shorter-lived. Harry Colvin of Longview Economics said: “What we’ve seen for the last few weeks has been a short-covering rally, and then in the last few days an aggressive short squeeze.” With the economic data still pointing to an imminent recession, he suggests the short squeeze can’t last much longer, and that buying bonds is going to make far more sense than equities for the rest of the year.

And indeed, if this isn’t a short squeeze it looks an awful lot like one. John Roque of 22V Research points to a series of startling successes during this rally, which have all the hallmarks of an indiscriminate liquidity-driven rally. Non-profitable tech stocks are up 17% in the last five days, he says, and 27.5% in 2023. Meanwhile, high beta momentum is also up 17% for the week, and 28% for the year to date, while the most heavily shorted stocks have done better still, up 15% in five days and 29% for the year.

It’s dangerous, as ever, to try to get in the way of a wall of liquidity. But unless that liquidity succeeds in keeping the economy afloat, the risk is that asset prices will sink.

That is nothing, ASOS (LON:ASC) is up about 90% in just over a month, many retailers are also strongly up. Some had good Christmas trading. 

I've Bookmarked the spreadsheet so it's always easy to find

Paul said earlier this week that he didn't want to publish his link in SCVRs as the link would get out to recipients of Stockopedia's marketing emails.

If you open an ISA account you can trade dividend paying companies without a tax issue, and if you reinvest them via a DRIP, if you enough faith in them, they do a little bit of averaging down (and up) during market wobbles/runs.

I am sure you must be well aware of this, but never let it be said I didn't fail to take the opportunity to say something unoriginal :-)

Still holding onto Crestchic (LON:LOAD).

Do you know the timetable for completion?

I sold my K3 Capital (LON:K3C) today, don't want it delisting in my ISA, had a nightmare with another delisting, with my broker, took ages to sort out.

Crestchic (LON:LOAD)  

This can obviously work in both ways but anyone who sold at the point the bid was confirmed and recycled into pretty much any decent small or mid cap would have enjoyed an extra return in double figures by now. That’s why I always sell once the SP is within 5% of the bid.

In the first half of last year, this would not have worked as your repurposed funds would likely have joined the tumbling valuations - as I found to my cost.

However, even if January’s gains are a bear market rally, we are probably nearer the end than the beginning and I would be looking to grab upside elsewhere, but ideally from 1st Jan, not 3rd Feb!

I've met the management and been to their semi annual presentations and don't find it gruff at all. They are usually pretty patient and responsive to questions. Remember that as a leasing company they don't have lots of people - it is a surprisingly small number so there is a time element here.

I think the trading update is what it is and pretty much as expected. I've been through the numbers and there is a lot of hidden value in the B/S that will come out later down the line I think.

As I understand it only 1 of the old Virgin Aus aircraft are yet to find a home and that shouldn't take too long - the others should be be done shortly.

Market dynamics are good - second hand plane values are going up and lease market currently in favour of the suppliers. A lot of old aircraft were retired during covid and this has left a gap. 

Debt is completely misunderstood by some retail investors.

1) Most of the debt is actually matched on a plane by plane basis against the lease. That means the lessor is actually paying down the capital as well as the interest. Thus at the end of the lease Avation (LON:AVAP) own the aircraft unencumbered and can re-lease it or sell it. However, as planes have a solid 20 year plus lifespan if maintained well and most leases are around 10 years the asset value actually goes up rather than down as a second hand car might.   They don't take interest rate risk so the only risk is counterparty credit risk.

2) The bonds of $350m make up the rest but I expect $100m of these to be bought back at 85c in the $. That should release another $10m to NAV and lower ongoing costs. The residual $250m is fine to 2026. I expect circa $50m will come from FCF, $100m will come from unencumbered plane sales and the residual will be re-financed.

Thus the main risk is not debt at all as this is all asset backed and the second hand market is liquid. Main risk is lessee's going bust or 2nd hand values falling. Market dynamics don't suggest the latter but you do have to be comfortable with the companies policy on the former. Nonetheless trading at 40c in the $ leaves a lot of margin. Historically aircraft lessors trade at 1.1* NAV. I see this doubling but I don't know when - will depend on sentiment.

If you email Richard you will usually get a very prompt response.

The senior team at Avation (LON:AVAP) come across well in presentations and face-to-face, yet evasive in written statements. Today's RNS went down badly, though you could argue the SP got ahead of itself last week. 

My conclusion is that they are badly-advised by their comms company and should report a standard range of metrics and KPIs (not choosing the ones that look best) with prior-year comparatives as Mr Contrarian has pointed out. I have more sympathy with them on aircraft sales, what can they say? A deal's not a deal until it's done.  They don't want to appear desperate.

Thanks for that, I am a holder of Intercede (LON:IGP) and had noticed the spike up today, but hadn't got round to investigating the reason for it

I don't take seriously companies with funny names. 

Mojomogoz

I am quite bullish but I take your point , which is a good one   

Although, the Greens have put several million into Brave Bison (LON:BBSN) in buying their initial stake and in the 2021 fundraise - it is difficult to know what proportion of their wealth is invested here.    In the past I went through the accounts of the unlisted Tangent Communications and Portland Asset Management but was not much the wiser. 

I do think they know the business and from what I can tell they work hard.   I am  sure they would like a larger vehicle - but I think that they see  Brave Bison (LON:BBSN) as the vehicle that they want to grow.   In my mind, I therefore discount any talk about a bigger media group buying £BBSN.    I doubt the Greens would want to sell - and as you say the asssets are a bit of a odd mix  that the Greens need to work hard to put into a coherent  shape - so who would buy them?

I never read too much into LTIPs.  But I think it is worth looking at the (comparatively low) salaries  of the Greens  (and no bonuses) and the LTIP announced in RNS on 20 Dec 2021.   The LTIP is arguably very generous but for it to be worth anything the share price has to rise to 3p and was set up when the price was at 1.425p.  It starts being worth very meaningful amounts if the share price rises to 5p or 7p.  My reading from the LTIP is that the Greens are  (maybe) committed at least medium term.

I am only reading the tea leaves - the best we can do as outsiders. 
 

Morning joshwood976,

Yes good idea, I can do an updated list of my own personal holdings. It would be quite easy now, because (as mentioned numerous times here & in my podcasts), I capitulated with my spread bet accounts last year, and closed them. Now I'm just concentrating on ungeared investing, so smaller positions, and less risk. The plan being to just gradually rebuild, rather than shoot for the moon & the stars again, before burning up on re-entry, which is the story of my life to date!  ;-)

Actually, let's do it now, it won't take long - my current portfolio, positions in descending size order (so BOTB is my largest holding), with reasons -

Some of these are quite recent purchases, from the proceeds of selling my Seraphine (LON:BUMP) shares (takeover bid in progress, but I gave away the last 3% in order to grab some opportunities where I see more immediate upside (and so far so good))

In size order, largest first -

Best Of The Best (LON:BOTB) - I'm very impressed with the most recent update - interims, reviewed here. Business has now stabilised after the pandemic boom.  Cash in bank, pays generous divis/buybacks, fwd PER is only 8.5, so under-priced as it is now. But international growth through Tedi Sagi's 30% investment is the exciting bit, which could transform things for the upside. If BOTB's cautious management don't want to run fast enough, then maybe Sagi might bid for the whole thing? Risk:reward looks tremendous to me, but might need to be patient. Intended holding period - 2 years to begin with, but depends on newsflow.  

XP Factory (LON:XPF) - more speculative, but I really like the concept of experiential leisure, and think the Boom Battle Bars concept is a winner. Very rapid roll-out done in 2022. In line recent update. Should out-perform regular bars. I think a consumer recovery is coming in 2023 or maybe 2024, so good upside from a bombed out sector maybe? Some risk, as cash looks tight, but it can safely run existing bars for cashflow (EBITDA positive now), and some are franchised, lowering risk. Great deals from landlords, who prefer this concept to regular bars, big reverse premiums cover most of the fit-out costs. Switched-on CEO.

WANdisco (LON:WAND) - bit of a punt. Mentioned a lot in SCVRs. Something big seems to be happening, with repeated, large contract wins in the last 6 months. Huge market cap for a loss-making co with a terrible track record. 3 out of 5 major shareholders (including shrewdie Richard Griffiths) are adding (recently). So this has credible backers (including USA funds), not a bulletin board ramp. Has amazing momentum at the moment - buyers are catching every dip.

Revolution Bars (LON:RBG) - a recent purchase at 6p. I'm worried about bank debt taken on to buy Peach Pubs, but am hoping that the bank might remain co-operative. Wobbly recent trading at core business, but good at Peach. Tiny market cap is the main attraction here, so just a shorter term trade on trading improving, which could make it return to 20p, a 3-bagger, possibly? Also, energy cost headwinds could become a tailwind, if current trends continue. Horrible sector, might gain market share as competition goes under? So quite high risk:reward here, not for widows/orphans. I've gone into it with eyes wide open, so it won't kill me if they have to do another discounted placing, which is main risk.

hVIVO (LON:HVO) - another recent purchase, covered in SCVR 25 Jan 2023. Readers got me onto this one, and I'm impressed with the latest update, big contract wins, moved into profit. All suggests something interesting is going on here, and claims to be world leader in its niche. CEO seemed a bit over-excitable in recent webinar! But with contracted order book covering nearly all 2023 forecast, looks set up for trading ahead exps updates.

Beeks Financial Cloud (LON:BKS) - a long-standing position, covered frequently in the SCVRs.

Watkin Jones (LON:WJG) - builds student housing, and build to let. Forward-sells projects, so little balance sheet risk. Demand returning from institutions, after wobbles caused by political shenanigans last autumn. Expect soft H1 2023, but after that should do well. Cheap on fwd PER & divi yield, lower margins for a year or two, but that's all baked into forecasts. I think shares could double/triple on a 2 year view.

Portmeirion (LON:PMP) - just too cheap, and performing well. Could be a doubler if things go well?

Cambridge Cognition Holdings (LON:COG) - longstanding position, I remain positive about it, long-term holding.

 MJ GLEESON (LON:GLE) - my favourite housebuilder, bounced, but still cheap. Builds very affordable houses that are likely to remain in demand. I'm looking through likely soft patch in H1 of 2023. Could be a doubler, once economy back on track in 2024 or beyond? Amazing bal sht, so no risk, even in a bad recession (looking less likely now).

Oxford Biodynamics (LON:OBD) - just a punt, after they got a placing away at a premium. Low conviction, but small enough to not worry about this holding.

Please don't rush out and buy any of these without doing your own research. In fact, some readers might decide this is a good list to open short positions on, which would have served you well with my main share picks after the market peaked in about summer 2021!

So rather than just buying back my old stuff, I've mostly picked new ideas. 

Anyway, I hope that's interesting, and gives you some ideas to research.

I've got a list as long as my arm of other ideas to invest in, so see my spreadsheet here of 2023's best value/GARP watchlist ideas from me - some of which will do well, others won't, which is what I expect to happen. Note the "Speculative" tab is fanning out quite strongly with some doing well, and some doing badly. But the main 2 tabs are up 12% YTD, because we're currently in a bull run for small caps, so they're just rising with the market I think. No stock-picking genius involved, I could have picked anything!

Regards, Paul.

This would be brilliant!

Good idea! Maybe that's something I could do once it's quieter in between reporting seasons?

GOOD LUCK !

Good morning shopping 365!

Thanks for flagging this hidden trading update, and a relatively big acquisition, from Brave Bison (LON:BBSN) - it does indeed look interesting, I'll put up a brief comment on it next.

Best wishes, Paul.