Small Cap Value Report (Fri 4 Nov 2022) - DFS, NWOR, RCH, PMP, FOUR

4th Nov '22 by Paul Scott

54 comments 6541 reads

Good morning from Paul!

Today's report is now finished, thank you as always for tuning in, and adding your comments, which remain of a very high standard & tone - not always difficult in a bear market, when everyone's suffering. The next thrilling instalment of my podcast will go up tomorrow, summarising this week's SCVRs! Have a lovely weekend everyone, we survived another week!

Agenda

CEO interviews - I've done two this week!

Cerillion (LON:CER) - audio is here, written summary is here. A very good company, shares have multibagged, and the CEO explains why performance has soared in the last 2 years. Shares are expensive, but for good reason it seems.

UP Global Sourcing Holdings (LON:UPGS) - audio is here, written summary is here. This one is particularly interesting for wider read-across re supply chains. With some surprising revelations, which could be quite bullish for seeing inflation come down, and possibly some shares doing better than we might think, as supply chains normalise.

Moving on to today's news -

DFS Furniture (LON:DFS) - as you would expect for a furniture retailer, it's seeing more difficult conditions this year. Although today's update says the last 2 months have improved from a weak spring/summer. It's too early to call that a trend though. Profit guidance is for the middle of its published range. H2 weighting expected in FY 6/2023. Share buybacks funded by bank debt continue, which is madness given the macro picture. It remains uninvestable to me, due to the terrible balance sheet, so I see this share as high risk in the current environment. If I'm going to hold consumer-facing stocks through this recession, they need to have bulletproof balance sheets. And some might reasonably ask, why hold them at all?

National World (LON:NWOR) and Reach (LON:RCH) - [no section below] as subscribers have commented below, a bizarre situation emerged here last night, where small newspaper group National World (formed from the wreckage of Johnston Press) with its market cap of £54m, has announced it is considering launching a takeover bid for large newspaper group Reach, market cap £328m.

Clearly that doesn’t make sense, unless NWOR can explain how it intends to fund such a deal. If it’s a cash deal, then where is the cash going to come from? A huge equity…

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Bouden54

4th Nov '22

Reach (LON:RCH) of course smaller companies can take over larger companies - the most famous example being RBS's audacious bid for NatWest at the start of the 2000s. Not quite sure how this works - presumably they need investors to come on board to back the management of the smaller company and provide the necessary funding.

Epitychia

I think you want short duration. Interest rates are rising which means bond prices fall. The fall is approximately magnified by the duration. Therefore, you want short 1 or 2 year duration. Next year when rates start falling you want long duration.

darren23

directors of Georgia Capital have been selling recently- you would have to wonder why?

Longer dated yields can move completely independently of the overnight bank rate - so yes the bank rate is likely to keep rising for now , but longer yields are set by the market and forward looking - they will start to fall in anticipation of future rate cuts - so you can easily have a situation where the bank rate rises but long yields fall. Indeed, this is very much what I expect to happen so personally want long duration.

planetx

The last director sale was on 15 sept at 7.07 gbp (only 60k of his 774k holding ) , bank of Georgia at this date around 2100

Now Georgia cap 628 and bank Georgia 2380

So this seems to highlight

- director sold 7% ish of his shares at a great price timed that well

Given the 12.5 % decline in Georgia cap and the 10% increase in bank Georgia (assuming it holds) then do the maths looks a good entry point now .

Clearly the non bank of Georgia investments are vulnerable but it’s under half NAV , and the bulk of the NAV is the bank of Georgia .

I’ve topped up a bit today .

Martin VT

Agreed re not the easiest to understand…and it’s only been around four years since spinning assets out of £BGEO. However it’s recent sale of its water business appears to have proved its model and valuation.

As you say I will just tuck away.

The Phoenix

Thanks Bouden no issues with taking risk I just wondered if they fell under an EU equivalent , you are spot on re Ireland and Luxembourg but there are the odd US listed one's link below explains a bit more.

https://en.swissquote.lu/inter...

Deegee Eff

Reach (LON:RCH) Do not see it as necessarily a big problem. For investors it is merely a choice of who do you want running the company existing management or Montgomery ? Montgomery knows the business well, not only that that but Vijay is his FD and he is the ex FD of RCH (Though he is resigning ). NWOR would bring some cash and another cash generating business with no pension fund. Could be win win, reduction in overheads and more cash generation to allay any fears over the pension fund deficit, and according to The Times there is a possibility of Gannet being involved too.

Very interesting.

topvest

Thanks for the UPGS interview Paul - very interesting. I'm a long-term holder of UPGS. They have a fantastic management team led by Simon Showman. What I particularly like is their strategy of buying brands out of administration. As far as I understand it, Salter is the only brand they actually paid more than a nominal price for. Progress, Petra, Beldray and Kleeneze all purchased for virtually nothing and re-launched.

andrewdb

I partly agree but partly...

...business activity is partly based on confidence in the future.
If the future is bright and sunny, you tend to got out and have fun and spend
If the future is dark and gloomy, you tend to stay in and huddle over a cup of tea

Mr Bailey has forecast dark and gloomy. People will change their behavior based on his statements. Unlike the weather, that change in behavior can cause a reduction in economic activity all by itself. If this was a time where there was a lot of irrational exuberance, I would understand he is acting as the adult in the room.

But I have not noticed much sunny optimism recently, so currently think Mr Bailey is just a bit tone-deaf on public comms.

To be precise two Directors have sold a total of 120K shares in Georgia Capital (LON:CGEO) during the last year.

The main seller (100K) still has 750K shares and presumably will get more from remuneration if the company continues to be successful. Overall this does not seem an unreasonable level of sales to me.

mbarnard

I purchased a further 5000 shares yesterday for the same reason. They now hold 20.5% of Bank of Georgia and their NAV is up to 1904p. Aside from Bank of Georgia , their other investments have defensive qualities with good potential

Just to add to the valuation mix, Bank of Georgia (LON:BGEO) pays out in the region of £18m dividend pa (approximately 8%) to Georgia Capital (LON:CGEO) at present.

you can (sort of) through a platform called wisealpha.

I have (a small amount of money) with them.

This is what it looks like

I got some of

on the basis that they probably are not going to go under before jan 23 and they are senior secured. (sorry if the pics are a bit small)

DaviStoVest

A whole lot of FOMO exaggerating market movement today, I suspect. Investors holding defensive cash positions pushing to get back on the boat ... but it's still probably just another bear market rally.

The Boon Fund

There's probably a lot of sentiment that all the interest rate rise expectations (short term and medium term) has peaked.

However, forecast earnings still haven't been slashed enough. Always lags behind. Plus companies always leave it later than sooner to do profit warnings... and many companies have reporting Q4 coming up, or their seasonal high in Nov-Dec... so while current trading might be already missing market expectations, they might be adopting a wait and see approach of a hail mary. Because who loves to be the CEO or CFO that releases a profit warning, and causes the share price to tank 30%?

Today's strong rally is a dead cat bounce in my view.

GrahamScott

Hi Andrew, thought you might want to read this regarding the matalan bond.

https://www.drapersonline.com/...

Crestchic

Sone almighty trades just been logged , around 2.7 million GBP at around 252p .

Hard to figure out if these are buys or sells or a combination of both .

That’s about 4% of the company and it is not very liquid so cannot all be sells or buys .

Maybe a couple of institutions are buying or selling .

Hopefully an RNS or two will reveal all early next week.

My money is Harwood will be buying sone of these just can’t see them selling .

Bit weird really it dropped very briefly into the late 240s

Good entry point I think I did add some myself but not those huge trades .

Any guesses ?

thanks

It looks like I will now find out what "senior secured" actually means when things go wrong.

Albertos

6th Nov '22

Wish I could disagree with you.

Small Cap Value Report (Fri 4 Nov 2022) - DFS, NWOR, RCH, PMP, FOUR

Agenda

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Paul Scott

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