Small Cap Value Report (Fri 31 Jan 2020) - FCCN, STAF, GAN, SAA

31st Jan '20 by Paul Scott

53 comments 7678 reads

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

Estimated timings today - it's a shorter & earlier report today, because I'm off to Malaga for the weekend with a couple of friends, for one of their birthdays. So I have to head to Heathrow mid-morning. So as not to short-change you, I got up at 5am to write some general ramblings here. Then I'll have a quick skim through the RNS after 7am. Fridays are normally very quiet for newsflow anyway.

For any new subscribers, I focus here on small cap results & trading updates. So I won't normally comment on other announcements (somebody asked me to comment on a placing & acquisition yesterday, which I wouldn't normally cover, unless there was something particularly noteworthy about it).

No reader requests today please, as there's not enough time.

This report will have to be completed by 10am, otherwise I'll miss my flight! And yes, I am offsetting my carbon!

Update at 09:14 - today's report is now finished. I think that's the earliest ever finish time!

USA Markets

These seem to be searching for direction. So far, fears of coronavirus haven't had much impact on the US market, as perhaps people are thinking it won't impact them, or is just a temporary factor? Also, I'm told quarterly earnings season so far has been good, which is normal for the US, where companies traditionally tend to set expectations at a level that is usually beaten.

I recently mentioned here the top 5 (by market cap) US stocks are such impressive, dominant companies, that their valuations don't actually look excessive to me. Here's the table again which I posted the other day, from Stockopedia's list of everything in the S&P 500 (in the "Browse Indices" section), which you can then sort & dig into any way you want.

Reviewing the news feed for each company, here is the state of play for the top 5 largest companies (by market cap) in the S&P 500;

Apple - reported on Tuesday, with growth in iPhone sales pushing profit above expectations. BUT it is quite heavily exposed to China. Skimming through the news feed, Moody's says that Coronavirus will temporarily slow down Apple's strong earnings momentum.

Microsoft - reported positively on Wednesday, with growth in cloud computing strong. I heard some…

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Vader

31st Jan '20

While Paul raised the theme of Audiobooks I will post my relevant favourites and hope not to be downvoted too much:

1. Treasure Islands - Tax Havens and the Men Who Stole the World - By Nicholas Shazton Brilliant book about the history of tax havens but also about the fascinating history of the city of London and the City of London Corporation
2. How to get rich - By Felix Denis - From a giant in British publishing an anti-self-help book on the pitfalls of getting rich, growing businesses and the value of ownership.

Nothingventured

I've started to do the same and feel far more comfortable with my larger holdings looking like winners with the loosers looking far smaller. What I've not managed to do is average up which some investors do - thus baking their winners with more capital. I've never had the confidence to do it and isstead slice some profits.

Jim

Threepeat

Not Just returns but also payments due

FWIW (and not advertising) when in practice I used TaxCalc a simple way to do and submit ITRs
Now retired still only costs me £30 or so for multiple returns for the family

As with all these things, like selling losers and not pressing the buy button when you should, its just a question of gritting teeth and doing it and then sighing with relief when done along with a small dram

I hold Gan (LON:GAN) and would be interested in an assessment. The shares are very expensive but I think the opportunity lies as individual states in the US roll out legalised gambling/gaming and GAN simply duplicates an existing opperation with new casinos and on-line gaming sites.

A US listing would be very interesting for holders.

gus 1065

Re. Paul’s short position on US large caps, one thing that springs to mind is the heavy concentration in a small number of mega tech caps such as Apple and Amazon in the context of the growing use/size of Index tracker funds and ETF’s. Previously, I’d thought in ignorance that an index such as the S&P 500 was quite diversified and that single company concentration risk was a minor issue. However, as these mega caps get bigger presumably the concentration in the funds get higher which in turn forces the index trackers to buy more of these stocks to track their index benchmark. While it’s a virtuous buying circle in a rising market presumably there’s a big risk that if sentiment or results turn there will be a reverse downward spiral that could get messy. Whether we like it or not, anyone holding a US index linked fund is probably holding a fair chunk of these stocks and isn’t really as diversified as they might like to think.

Gus.

Sylvania Platinum (LON:SLP) 9% drop in profits in Q2 from Q1, delivered 19,206 ounces for Q2 a drop of 8%
Costs per ounce decreased 7% per Ounce which should offset the lower production.

Issues include lack of electricity, water supply and depressed chrome prices impacting on fresh feed sources.

Eskom is the state-owned utility that supplies 95% of South Africa’s electricity. At least one-third of its power stations are broken or shut for maintenance. Due to lack of regulation and corruption, new players are not able to feed into the national grid.

According to South Africas new president Cyril Ramaphosa, an additional 5000 megawatts of electricity is needed to stop the South African economy shrinking but I can't see where this is going to come from given it's not clear yet if he has the power to break the grip his own party has these utilities.

Installed Capacity: 51,309 MW
▪Thermal: 46,776 MW
▪Hydroelectric: 661 MW
▪Other Renewables: 3,872 MW

SA Government making a big deal about a $250 million of financing to support the 60 MW Boschoff Solar Park in the Free State province of South Africa but that is just a drop in the ocean for the required 5000 megawatts. Private players are starting to enter the market but it will require the ANC owners to open up the grid something that they have been saying they will do for over 20 years now.

According to the Economist March is the worst time with Eskom regularly taking 4000 MW out of the system.

I am a holder of Sylvania Platinum (LON:SLP) but electricity is becoming a big concern for me. The requirements of a mine are way too high for generators and companies have no idea if the government will ever deliver anything.

TOPBANANA

I think comparing Q1 to Q2 for this company is very misleading. They themselves have said Q2 and Q3 are lower production quarters historically due to holidays etc.

If you look at Q2 results to Q2 and Q3 in 2018-2019 the results appear very positive.

Just my thoughts.

GreyInvestor

I’m ignoring Coronavirus from an investor point of view, but:

Reports out of China suggest a mortality rate of 2% and a hospitalisation rate of 20%. The latter is stunning; there is no way that the NHS could cope.

Let’s just hope that the number of cases has been hugely under reported, which would reduce the 20% to something more reasonable, and the same with the 2%.

This could be a bumpy few months, especially as by far our largest asset allocation is to South East Asia.

cmpeckham

I hold Sylvania Platinum (LON:SLP) but I top slice my big gains, like this one, so I can look at it with a level head. I'm now considering selling out of my remaining position. You added useful info on the power question, thanks for that. But it seems to me that the water issue may be even worse. At least with power, you can see a solution that the country as a whole is in need of. But what's the fix to the water problem?

Clissoldkid

I used to follow the edict of selling half when the price had doubled, so that the remaining holding was `free'. But I found that I was then likely to be annoyed whatever happened. If the price went up I kicked myself for having halved my profit; and if it went down I kicked myself for having not sold the lot!

In practice I've found that a trailing stop loss is the best solution, as it cancels out the gambling instinct, though that then raises the problem of how big a margin to allow to trigger a sale. And, of course, it can also effect a sale when there's just a blip in an otherwise upwards trajectory.

There's no perfect solution. Much as I enjoy investing I can see all too easily why so many people just invest in managed funds!

Thunderball

Look forward to the podcast guys, you have a subscriber right here!

$TSLA - Prof Scott Galloway, author of 'The Four' and tech spokesman has long been down on the stock and last year predicted its demise this year. He recently admitted he has got this all wrong and was chastened by a wealthy VC friend of his who advised him to 'never bet against a company with great product'. Clearly there are plenty of cases of great product failing for other reasons, but you have to tip your hat to Musk, whatever you think of him, he has a way that works and it is working. The valuation clearly seems nuts today, as it did 2 months ago when I was tempted to invest following the good production news and unveiling of the Cybertruck. I felt I had missed the party at $320 but its progress is now a momentum stock but where it ends I have no idea, it feels like the Bitcoin run in late 2018. I could nt buy now as it will surely correct at some point, but the company has got an awful lot right and seems unencumbered by the politics and drag of other mainstream Car Builders. Its a very interesting story.

Trident

One matter just as a general comment about Recruitment Agencies. Many operate providing contractors to companies on longer term contracts. This might be to companies directly, or through some third parties who then contractor an end client.

Under forthcoming changes, theoretically an end client may become liable to any unpaid or underpaid tax due where HMRC believes that the contractor does not pass scrutiny as independently self-employed. That is they are deemed to be in disguised employment, and liable for NI, and income tax that should have been paid as an employee.

Unfortunately the tests for this are often impossible to establish beyond all reasonable doubt, and the tech industry, and probably many Govt projects are underpinned by these contractors.

The rule change was originally introduced for the Public sector, who promptly ditched most contractors. You will note fuss from BBC contractors, for example, who were made to go through service companies, and then were told they had a huge tax liability.

So now its coming around to the Private sector, and it's a total mess, and Recruiters have written to the Govt advising them that projects will go offshore, and work will be lost if this change is put through 'as is'.

A lot of the Banks have already ditched self-employed contractors.

The origins of this particular legislation have been around under HMRC IR35 rules for a while, but this new end client liability has caused a bigger negative reaction. Phil Hammond some years back tried to push through a National Insurance increase for the self-employed, which was unpopular with Conservative back bench MP's, but had the merit of being a direct tax. The new legislation is a consequence of his row back, but is arguably much more damaging because of its inherent uncertainty of application.

So Recruiters will be in the firing line if longer term projects are rehashed, because the end client will push back on taking any liability, and so on down the chain.

Frankly its an absolute dogs breakfast that will hit the tech industry, and recruiters in a way that is unpredictable, but I have my doubts many in Govt understand it.

Recruiters try to include in their terms and conditions that the ultimate tax liability is passed on, but they will get strong push back down the chain now. Why pay a fee to a recruiter if they are dodging liability?

Ben1

I also sometimes use the sell half if it doubles. Sometimes I kick myself for not keeping the whole investment going, sometimes it works well as it has for me with PURP. I still feel the estate agency market needs shaking up, and am more relaxed now to hold some PURP (who may or may not be the right bet on this), but as it is now a small holding, and cost me nothing it's OK

pleaty1

Can you also look at the update from Sylvania Platinum (LON:SLP) when you return as well as Gan (LON:GAN)

Samphus

A second request for Gan (LON:GAN) when you return.

Cricketfan

1st Feb '20

Thanks Paul for the heads up on the Ball’s memoir. I am currently half way through the very touching Cameron book which, as you say, you don’t have to agree with to enjoy.

May I endorse your comments re ZANE which I have supported for some years now. It is a truly excellent tiny charity doing splendid work in a much needed area.

Enjoy Malaga. Maybe pronounced MyLager? I hope the sun shines.

Mark

patrick00

and a third!

Peter171

Paul, would like to have your thoughts on Gan. I have had great success with gambling stocks over the past few years and put a chunk of realised profits into Gan when it was in penny street and been in and out of it as it was an unknown quantity. However I think the pendulum is swinging in the coys favour and I think a US listing would be the icing on the cake just so long as they do not delist from the Uk.

I have been top slicing and topping up on the dips. What makes me keep coming back is watching the price charts for the PGM group of metals and Rhoduim which just keeps going north. It has top notch management which is key.

Martin5760

2nd Feb '20

Gan (LON:GAN) - another vote from me for your input on this company. I have been a holder for a while and barring any punitive future US regulations/taxation on online gambling consider this has the potential to really expand rapidly.
If anyone has any information or ideas I would be interested to learn more about the breakdown of their income; how much from sports betting, casinos, internet games....

I have had a cursory look around at some basic sports betting patterns in the US.

US football accounts for almost half of all US sports betting and the Super Bowl on Feb 2nd which closes the football season is the countrys biggest sports event for gambling.

March madness - Two weeks of a NCAA basketball tournament is the second largest sports betting event.

Baseball - more bets placed for the world series - at the end of October than the whole April-September season combined.

Does that suggest that their revenue from sports betting drops significantly for six months from April - September ?

Small Cap Value Report (Fri 31 Jan 2020) - FCCN, STAF, GAN, SAA

USA Markets

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Paul Scott

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