Small Cap Value Report (Fri 3 July 2020) - MANO, CMCX, NUM, TRAK, TAST, RBN

3rd Jul '20 by Paul Scott

82 comments 10021 reads

Good morning, it's Paul here with Friday's SCVR.

No preamble today, as I was too tired last night to put anything together. Let's see what the 7am RNS brings.

Police forces are apparently on a New Year's Eve footing for "Super Saturday" tomorrow's pubs opening day. It's obviously going to be carnage, and no doubt we'll have Priti Patel & other Govt ministers chastising us on Monday for the bad behaviour of a hooligan anti-social minority (about 20% of the UK population I would guess! And growing every year, it seems).

Estimated timings - should be mostly done by 1pm, but I want to cover a few stragglers left over from earlier this week, after lunch. So final finish time c.4pm.
Update at 17:56 - today's report is now finished.

Running through the list, there's hardly anything of interest today. Looking at the reader requests today;

Manolete Partners (LON:MANO)

546p (up 7% ) - mkt cap £237.8m

Final Results - I've not come across this company before. It floated in Dec 2018, and seems to be involved in litigation financing. Graham outsourced coverage of it to subscriber abtan who wrote an interesting piece on it here on 21 Nov 2019. Reading that piece, it's clear that this share is not of interest to me, and I'm not interested in ploughing through loads of details on individual cases in order to work out what the shares might be worth.

Having a quick skim of the results today FY 03/2020, the headline numbers look good - adjusted (for IPO costs) PBT up 40% to £9.5m.

Final divi doubled to 3p (a very low yield though). Outlook statements reads positively.

My main worry with this sector (as some readers have commented on below) is that short sellers attacked another, larger, litigation funding company, Burford Capital (LON:BUR) and the share price has never recovered - currently sitting at about 500p, still about 75% down from its peak. I remember listening to the conference call from Burford when it was fighting the shorting attack, and it struck me how many potential problems there are with estimating the outcomes of cases, realised/unrealised profits, selling fractions of cases just before the year end to establish a higher book value, etc. It sounded an absolute minefield. The more information Burford provided, the more questions it seemed to stimulate.

According…

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Gromley

3rd Jul '20

"Trakm8 Holdings (LON:TRAK)

"Can someone explain why a Director was allowed to buy £50k-worth of shares just before this price sensitive news was announced?"

I had exactly the same thought when I saw the rns today"

A curious one indeed.

He bought after the results release, it's common for Directors to do that (as they come out of the closed period.

As a NED perhaps he didn't have any direct visibility of these contract negotiations?

However, he is the CEO of Microlise a partner and investor in Trakm8 Holdings (LON:TRAK)

Microlise "support 14 of the UK’s 15 largest retailers" so it makes it a little less credible that he would not have known about a contract with "a major UK food retailer".

Some explanation required I agree.

Equity Development

Hey Paul,

In response to your broker moan what every company should commit to is providing freely available research that is as professional as the brokers, sometimes more so, which PIs can see and comes from a properly regulated firm.

The flip side to this is that it’s not just a broker problem. PLCs also need to start treating PIs as investors who matter. Too many of them never actually look at their registers below the top FMs, others do but either don’t care or think it’s too difficult, which it isn’t, while others, often the less experienced ones, believe everything their brokers tell them! Many smaller companies don’t correlate their (usually low) trading volumes with the investor audience that is actually most relevant, which is PIs. Bottom line is that, regardless of size or liquidity, there is no acceptable reason why PIs should bot have access to the same type of information as FMs!

All that said, I have sympathy for good houses like Shore, PH, Numis etc who hold onto their best sales people and therefore their ability to raise capital efficiently: because they pay well they need to raise revenue from getting investors to pay for research. MiFID II made their model harder.

What a company really needs is one good broker and Equity Development (this isn’t the BBC so I don’t have to name the competition!). Certainly not two brokers doing the same thing.

Hannah

timarr

Yes, I always said to clients that IHT is both the easiest and most difficult tax to avoid.

The OTS IHT review from last year covered this:

In its first report the OTS highlighted the fact that very few people are currently within the scope of Inheritance Tax, with fewerthan 25,000 estates being liable each year. This is less than 5% of all deaths, even though ten times as many estates need to complete and submit forms.

https://www.gov.uk/government/...

There are 11 recommendations, perhaps the most important one for investors was the one that suggested that BPR IHT relief on AIM shares should be reviewed. It didn't go as far as definitely recommending it be removed but it did rather pointedly note that the original purpose of BPR was to stop family businesses being broken up to deal with IHT.

If they do decide to address IHT - and it really goes against Conservative Party instincts - then tidying up the use of BPR on AIM shares looks likely. I really can't imagine a Tory PM taxing ISAs although it's probably inevitable with a future Labour administration - although even then I would be very surprised if that was retrospective.

Overall they'd obviously like to go after the big internet companies but that'll be difficult while seeking a trade deal with the Trump administration. If he loses in November then it's more probable, I'd have thought, the Democrats are more likely to look at regulation and raising taxes and will need international support to make that work.

The other thing investors should dwell on is that governments are inclined to tax things that can't get away - so buildings, utilities and most people. Taxing higher earners relatively less is more about pragmatism than ideology - although multiple studies show that less dispersion in wealth creates a happier society. The World's Happiest Country report has the five relatively high taxing Nordic countries in the top seven along with Switzerland and the Netherlands.

timarr

mr_spock

"...if a restaurant or bar goes bust, then what is the most likely outcome for that site? Answer: the landlord just rents it out to a new operator."

I couldn't agree more. There is a site near me - three or four different bars in the last five years I think.

Caper4

who would be a commercial landlord in this day and age? Pre-pack and bugger the landlord seems to be the order of the day.

Bluesky Ventura

Hi Cmpeckham et al,

I like the discussion this created and hope people find this as useful as I do.

The best definition for EPV I can find is Earnings power value (EPV) is a technique for valuing stocks by making assumptions about the sustainability of current earnings and the cost of capital but not future growth. Earnings power value (EPV) is derived by dividing a company's adjusted earnings by its weighted average cost of capital (WACC).

I prefer EPV as does not need to take into account future growth.

For Cmc Markets (LON:CMCX) EPV, I've used WACC of 15%.

I ignore forecast from brokers and do my own research. I think you'll find forecasts will change soon and be upgraded.

Likewise good luck for the future

Kind regards,

BSV

soldierboy232

Having spent 35 years practising civil litigation, for plaintiffs and defendants, I would not invest a penny in companies such as Burford. The risk of such an investment is immeasurable, in my opinion.

mojomogoz

The case for Tasty (LON:TAST)

- Tidied up by of offloading expensive underperforming sites
- Improved menus and marketing a lot
- Improved terms and training of staff compared to few years ago (prompted by minimum wage and Brexit considerations)
- Pre death of High St c.3 years ago this was a clear build, ramp sales and punt to private equity game
- Since then they've clearly decided that they want to be one of the last guys standing and have taken action accordingly (see above)
- They've got a lot of experience running restaurants (going back in the family with likes of Wimpey and some other US influenced chain that I've forgotten the name of...and then running thro to some recent pizza/pasta style places flipped to PE some years back)
- There was quite a lot of fat to trim from the pre death of the High Street Tasty. They've done it quite well with the help of dilutive equity raises. There's a but of admin expense that I have never been able to work out and management wont tell me more (I've met once and spoken to a couple of times). I was digging as I felt it could probably be cut out....I even felt there was possibly even as element of sort of gamesmanship (leverage for negotiations eg rent or a little bit more room for when needed). I'm far from certain about this but I felt it was there and that it could swing from loss making to profitable on it even though general conditions were a bit dire.
- They could have taken the business private in last couple of years. The equity they can raise on public markets isn't the reason to stay there as its piddling amount given valuation. The founders are likely wealthy enough that they can take private (de-list for peanuts) and fund...and probably make more money for themselves doing that. But they have persevered...that's positive for shareholders...but why they doing this?
- My guess is that its a combo of ego and proof that they can and know what they are doing when others don't (see Jamie etc).
- I thought this path seemed to be playing out quite well...at least until the Covid bomb hit

I thought the above made for a compelling option like risk-reward.

Issues
- Covid19 blew the bleeding doors off
- [Add in any other points re High St dead here and anything else negative here...I know, there are problems!]

Anyway, I've got a wheelbarrow load of shares in Tasty. Obvs its like confetti at this price. i was up on my penny punt until the pesky Covid came....I don't know how this turns out...but the owners are canny lads...a bit scary frankly in an old fashioned East End sort of vibe :) ...they most surely know the game they play and how to play it hard => I've got a hunch that if anyone is going to pull off a High St miracle its these guys.

Clearly my wheelbarrow may just be fuel for a flame out.

Exciting

If the above madness entices you....be aware that you stand to lose whatever you risk. Not a safe situation!

Ciao for now

JohnEustace

I guess insurance is only a concern for those of us who lack the foresight to be wealthy enough to not have to bother.

UK_Investor_8888

I am heavily in CMX peers IGG +51% and PLUS500 +26%.

I am getting sleepless nights about my exit strategy on PLUS500. It has a habit of violently correcting (taking off the table my dreams as it plummets back to earth Icarus like).

I strongly agree with the comments about risks with hedging or one bad news release citing new regulation and puff, 25% gone in seconds.

TBH, my cortisol levels will be easier once I take my money and run.

Can anyone tell how much a little bit longer to hang in for?

Paul Scott

All very good, but none of it matters. All that matters is getting out of the lease liabilities, hence TAST is uninvestable unless/until it does a CVA or pre-pack.

Yup, it's really grim for landlords owning retail sites. There again, they've made hay for decades, so of all the people to feel sorry for right now, commercial landlords are bottom of the list for me!

simoan

I prefer EPV as does not need to take into account future growth.

That may be the case but it makes all kinds of other ridiculous assumptions about the future that make it worthless IMHO. It's just a fudge of an equally pointless analysis method - Discounted Cash Flow (DCF). It assumes that the future operations of a company will look exactly like the past, which as we find out on the SCVR at regular intervals, is a ridiculous assertion on which to base an investment decision.

I looked at EPV when doing a trial of Sharepad a few years ago. If you use it as a valuation method you'd never buy anything as the EPV is almost always way lower than the current share price. Here's an article explaining it's use by Phil Oakley:

https://www.sharescope.co.uk/p...

All the best, Si

4th Jul '20

I am getting sleepless nights about my exit strategy on PLUS500. It has a habit of violently correcting (taking off the table my dreams as it plummets back to earth Icarus like).

With Plus500 (LON:PLUS) it's always worth keeping an eye on director sales and purchases, the timing of which seem to be a good indicator of future share price moves.

In terms of quality as vouched for by hedging policy I think it's reasonable to say that Ig Group (LON:IGG) followed by Cmc Markets (LON:CMCX) followed by Plus500 (LON:PLUS) would be the hierarchy in descending order. The latter's hedging policy - or lack of it - exposes shareholders to much more uncertainty. Their last trading update saw profits wiped out by customers all betting the right way. Obviously that can go the other way too, but I like a bit more certainty and a lot more sleep than they can offer.

As an aside - and nothing specifically to do with PLUS - I don't invest in Israeli tech firms any more as the corporate culture seems to be quite narrowly focused on self-interest.

Anyway, good luck with the wax and feathers.

Thanks for your patronage and first level thinking.

Anyway, back to analysis rather than flippancy...pre covid Tasty (LON:TAST) had gotten themselves in a position whereby they had a good fighting chance and my points above paint a quick picture of that.

I acknowledge Tasty (LON:TAST) is high risk. That risk has increased due covid but perhaps also has the chance of resolution due to combination of general acute risks that all in the economy must now share, govt support (loans, probably extended furlough for sector, ability to conduct radical surgery due to circumstances which relates to shared risk thing, long forbearance on leases and/or direct support to 'high st' from govt). There's a chance covid is more a speeding of resolution for Tasty and in that perverse sense more opportunity than risk.

The situation would be improved by reductions in lease payments...but again surgery has been done getting rid of expensive trophy locations that don't fit the brand (eg they are a Kettering moderate income family brand not Canary Wharf or fancy Cobham brand).

IM(very flawed)O the dial on survival is about more than just leases and is how much can they get back to revenue and op cash flow like end of 2019 whilst reducing and stalling costs. Obvs leases are part of that (and provisions illustrate that there is some stress from it). But so are the points I make in first post and they relate to the ability to optimally manage leases too (not the CEO is a commercial real estate lawyer so add that to the owners who have personal and family restaurant operating heritage). I believe there is some flex in non wage operating costs that can come through too (they stepped up a few years back and I haven't been able to get a good explanation for what happened and whether it sustains...quite cagey).

This is not a strong recommendation from me in anyway. DYOR. This is a tiny option like holding for me and I don't do lots of work on it as the circumstances are not there to make it a significant holding and I know from experience that the company are going to be cagey and not that forthcoming.

Analysis or banalysis...you guys decide.

(PS note the following post balance sheet event from 7 Jan... "dim t More London site was assigned for a gross consideration of £2m and on 8 January 2020 the Group repaid the outstanding bank loan of £1.7m"...so another non optimal give brand focus site offloaded)

5th Jul '20

More waffle. You don't know what you're talking about.

Rents have to drastically come down. Nothing else matters. That can only be done by a pre-pack or a CVA. I've been saying this for years, and I'm right.

Quiz (LON:QUIZ) has done what ALL retailers need to do - get rid of the lease liabilities.

Then re-negotiate drastically lower rents, or even rent-frees.

BUT in 2021, things could change for the better again, who knows?

abtan

6th Jul '20

Hi Paul

I am both honoured by my previous Manolete Partners (LON:MANO) commentary mention in this SCVR, and yet hurt that it put you off investigating further :)

Since your post I have, however, been in touch with the company and decided to sell my holding.

I found their response unsatisfactory and quite rude given that I have emailed them before (and received polite responses) and was baffled that I was being castigated for not signing off with my full name (which was essentially my email address + my first name clearly wasn't enough) and my position.

A snippet:

"I am not spending my valuable time conversing with someone who hasn’t the decency to properly introduce themselves."

As I'm always a very small shareholder, I would never be offended if an IR team chose not to respond to me, but I certainly wasn't pleased with that response, especially given that I have had no problems emailing in the past. In the end my decision to sell was therefore an emotional one.

For anyone interested, my initial email to them is below (with their responses in bold and CAPS).

Subject: FY20 Follow-Up Questions

"Hi (names of people being emailed)

Thank you for the results last week.

I'm going to jump straight into some follow-up questions:

1 - # CASES

Can I confirm the number of live cases at the end of FY20?
There were 84 cases at the end of FY19 (excluding cartel)
- less 54 completed cases
+ plus 141 new cases,
therefore I was expecting 171 live cases.
However, you have indicated 152 live cases at the end of March 2020 (and >200 cases at the end of June 2020).
What am I missing?
READ THE PRESS RELEASE 201 [Abtan: I don't know what this means]

2 - GROSS PROCEEDS PER CASE
FY19 £9.3m gross proceeds from 35 completed cases, so £265k per case.

This seems high in comparison to both:
a) the FY20 vintage of £188k per case (or MANO gain of £79k per case)
b) the FY19 vintage of £94k per case (or MANO gain of £34k per case)
Could you provide some more insight around the £265k figure? It is much higher than the other 2 figures highlighted.

Additionally, the below slide indicates £100k gross proceeds per case in FY20 (£76m gross cash generated/75 completed cases, from FY18/19/20 vintages).

Based on the total proceeds per case per vintage above (£188k and £94k respectively) that implies a very large skew of cash inflows from cases pre-FY20
Is there any rationale for this? I thought cash collections were relatively prompt. but this implies they actually might take several years.

IT ALL DEPENDS ON THE MIX OF CASES IN A PARTICULAR PERIOD

3 - 2016 VINTAGE

In the 2016 vintage why has the Manolete gain dropped from £2,995k to £2,979k?
This is now the 2nd time 100% completed prior year figures have changed retrospectively.
Is this an adjustment we can expect repeatedly going forward?
OBVIOUSLY SMALL ADJUSTMENTS OCCUR IF WE RECEIVE EXTRA INCOME ON A CASE WHERE WE HAVE PROVIDED BEFORE OR VICE VERSA

4 - AVERAGE LENGTH OF CASES
Average case duration is stated as 12 months.
Based on the list of large cases you have helpfully published over the last 12 months, it appears as though many large cases appear to take longer to complete.
So is the 12 month average simply the middle of 2 extremes, whereby lots of smaller cases settle within months, whereas the larger cases take several years?
IT IS THE ARITHMETIC MEAN OF ALL CLOSED CASES

5 - CASH GENERATION
Is there any concern that cash generated from completed cases in FY20 (£7.6m) is lower than FY19 (£8.3m)?
NO. AGAIN IT IS JUST THE MIX IN ANY ONE 12 MONTH PERIOD.

Thank you in advance for your responses

My first name"

Now now Mr Scott! I can see that you decided to call me a clueless idiot at 3am in the morning after being on the pop. Very naughty.

Obvs, you might be right..but if we judge it all on where the price ends up and its higher than now then I have top ragging rights over you and will be king for a day!

Thanks for your input anyway...first level thinking is often correct ;)

Your mojo
xxx

Michael Tee

8th Jul '20

@mogomojoz.

I think you should put your money where your mouth is and buy a lot more shares. I also think you should stop spending your hard earned money at McDonalds and KFC.

Follow Paul Scott's lead and eat at Tasty. He seems to be doing more to support the share price than you.

Small Cap Value Report (Fri 3 July 2020) - MANO, CMCX, NUM, TRAK, TAST, RBN

Manolete Partners (LON:MANO)

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