Small Cap Value Report (Fri 6 Sept 2019) - CRW, BLV, JSG, ACRL, GAMA, VCP

I know it is yesterday's news and Graham commented on Somero Enterprises Inc (LON:SOM) in the SCVR but the plunge in their share price looks extreme to me. They had already warned the market at the beginning of July that the 1H was hit by bad weather in the US though they were confident that they would achieve sales in the $83-87m range for the FY. Analysts forecasts for EPS are unchanged from July 6th (according to Stocko data) so why in any rationale world should the share price fall by close to 50% since the trading update. It would seem to be a double whammy to me on basically the same information. Is it the failure to make headway in China, trade wars, hurricanes on the Eastern seaboard or has this business really hit the buffers. Stockopedia data if updated correctly is very positive (multiple screens passed, high quality and value metrics, strong balance sheet, etc.)though obviously momentum has been hit hard by the recent falls in share price. Any thoughts welcome on whether investors should join the rush to the exit or hang in there for a turnaround.

In reply to post #510751

Hi Effortlesscool;

I would suggest that, in future, all five placeholders for the following week are set up on the preceding Friday or at the weekend.

That's a really good idea, thanks!

I'll have a word with Graham, and see what he thinks.

Regards, Paul.

UPDATE: Graham also thinks this is an excellent idea, so we'll start doing this from now on. I'm scheduled to write all next week's SCVRs, so I'll put up all 5 placeholders later today. Thanks for your excellent suggestion, which will make life a little easier for everyone!  :-)

In reply to post #510796

Hi jamesporter,

Hi Paul - I'd be interested in your thoughts on Staffline - HRNet increasing its stake to 29.95% and results due 11 September. HRNet's position strongly implies a takeover is imminent? Best regards.

Yes, I've been following Staffline (LON:STAF) (in which I have a long position) closely, and bought more when HRNet increased to 25%. That they have since increased to almost 30%, does indeed suggest a full takeover bid could be a possibility. I noticed that a large trade went through at 160p recently, which must have been them going from 25% to almost 30%. Previously, they paid 180p for most of the 25% stake (when the price was much lower, about 125-130p from memory).

HRNet's own accounts are available on the internet, it's listed in Singapore, and you can work out that is has enough cash to buy Staffline outright, even at a decent premium. It commented;

Based on the notification made, the Group is interested in 29.95% of the voting rights of Staffline.
The Group had originally acquired this shareholding interest in Staffline as an investment in furtherance of its strategy to opportunistically enter new markets in the human resources space. 

My hunch is that the chance of a full bid for Staffline by HRnet, looks fairly high. It would have to pay at least 180p, as that's the existing highest price it has paid.

Fingers crossed!

Regards, Paul.

Hi Paul,

Have you recorded an audio interview with £SOS management? I seem to remember you mentioning it in one of your reports. 

Cheers.

Ben  

In reply to post #510891

ACounsell,

I agree that the fall in Somero Enterprises Inc (LON:SOM) share price seems excessive, and it looks good value now.

Management have been pretty straight with shareholders over the years, so I trust their explanation that the disappointing H1 figures are down to exceptionally wet spring weather in the USA, delaying contract starts.

On the downside, the company seems to have made almost no inroads into China, which was heralded as a huge new market a few years ago.

The equipment is long-life, so I suppose there must also come a point where everyone who needs a laser-guided concrete screeding machine, has already got one?

Regards, Paul.

In reply to post #510911

Hi Ben,

Have you recorded an audio interview with Sosandar (LON:SOS) management? I seem to remember you mentioning it in one of your reports. 

I'm looking to do another audio interview with Sosandar (LON:SOS) (in which I hold a long position) management, when we have some material new information about trading.

As we know, sales growth in Apr-Jun 2019 was poor, at 23%, against c.100% forecast for the year. Various reasons were given, which I think explains some of the growth rate slowing, but not all of it. Also, like other subscribers, I've noticed that their emails contain a lot more discounting than they did last year.

As things stand, the only thing that matters is how Sosandar performs in the crucial autumn/winter season, starting about now. They're very bullish about the prospects, and adamant that they will achieve the tough forecast growth, due to a considerable expansion (I think they mentioned a doubling) of the product range, and a big increase in marketing spend.

After the recent over-subscribed (e.g. I was scaled back to half what I applied for) placing at 15p, the company has more cash than at any point in the past. Yet the valuation is near the lows. So you could argue that risk:reward now is better than at any point in the past.

We'll just have to wait & see what happens, in terms of A/W trading. If it's good, then there's considerable upside. If it's not so good, then the share price could continue to languish.

Time will tell!

Regards, Paul.

In reply to post #510871

Hi harrinr,

You asked for my current view on Gear4Music (G4M).

The recent trading update said;

"The specific actions that we have undertaken to improve gross margins and ensure that the Group is operationally robust ahead of our peak trading period continue to yield positive results.  As such, we remain confident that the Group is well-positioned to grow revenue and improve profitability.

"Consequently, I am pleased to report that the Group has continued to trade in line with the Board's expectations for the full year."

That sounds fine to me.

I'm not currently holding any G4M shares, mainly because I had to chuck out a lot of things due to heavy losses on Sosandar shares in my Spreadex account.

However, I am keen to go back into G4M at some point, when funds are available, and once Brexit uncertainty is resolved, one way or another. I think it's likely to be a much larger company in say 5 years' time. The market seems to have gone from extreme optimism, to extreme pessimism, about smaller, niche eCommerce businesses.

Regards, Paul.

Thanks for another fine report Paul.

Ref Motorpoint (LON:MOTR) Share Sale for Divorce
I thought it was typical for assets to be shared approximately 50:50 in a divorce. Selling 11m shares at 200p, he's sold 82% of his holding and raised £22 million before tax. For 50:50, he would presumably only have to have to have raised ~£13. Of course, perhaps there are other assets he doesn't want to liquidate in a divorce settlement.

I don't hold this, but if I did, then I would be checking very carefully after seeing directors at several other companies sell stock and issue a profit warning a few weeks later.

Ref: Somero Enterprises Inc (LON:SOM)

The Somero equipment may well be long life, but companies like JCB seem to do quite well selling products which probably last for >15 years.

I am tempted to have a very close look at this, but am concerned about my lack of understanding of their competitiveness against competitors like Ligchine in the USA & the cyclicality of the business.   I have always written China off as a market for Somero.  

Hi Paul

Just  wondered if you had time to share any thoughts you had on £WEY Graham ran out of time to cover them last week.

Revenues up 43% but then that money went out the door on marketing.

To paraphrase what you have mentioned in previous SCVR about online companies, I saw this update as good news because the marketing taps can always be turned off quite easily in the future.

I saw that Miton reduced their holding by almost 3% in the following days. So maybe they read something very different.

And thank you for today’s report.

In reply to post #510751

Actually, Stockopedia have a decent sized tech team. Surely they can automate this process so that Paul and Graham can get on with providing their insights without any extra chores.

In reply to post #510936

1) I thought JCB had just released rough numbers for 2018 (as you know it is private) but commented that times were getting tougher viz. The Times headline of Sept 3rd (no pun intended)
'.JCB growth has stalled despite £4bn milestone'

They are clearly quite different businesses but both - as they are both in the capital equipment universe - may traditionally have been regarded as heavily cyclical. i.e. largely dependent on private capital spending. With major slowdowns in major manufacturing industries worldwide this may be a concern.

2) When I attended a meeting for Somero a few years back I was mightily impressed and I still am. The fact is, however, that in the years prior to that meeting there had been an almighty slowdown and the company had lost money. Between Dec 2008 and Dec 2012 profits were zilch. They then took off in a dramatic fashion up to 2016/17. As did the share price.

The market is worried that the stuttering results, bad weather or no, may be the harbinger of another big slowdown. It is pricing this in. Clearly the company has been and presumably is sill highly geared in the operational sense.

In general you buy this sort of company when the news is terrible and you sell when it is exceptionally good. Where exactly we are in the cycle I don't know but there is just a suggestion/possibility that we have passed the peak.

In reply to post #510926

Paul - thanks for your update -  much appreciated
Rob 

In reply to post #510831

Hi Laughton,

At your prompting, I'm just reading the updated note on Boohoo (LON:BOO) available on Research Tree. It reads very positively.

Given such strong ongoing growth, plus 3 more brands recently acquired (Karen Millen, Coast, and something else), the BooHoo group seems to be becoming an online clothing, multi-brand, behemoth.

It's amazing to see that BOO's market cap is now more than 50% higher than that of ASOS (LON:ASC) - although hardly surprising, as Asos has never really generated any free cashflow, and just flogs stuff at a negligible net margin. Whereas BooHoo is sticking to its 10% EBITDA margin, despite funding losses from expanding its new brands.

BOO is an absolutely class act. If only I'd hung onto my original stake in it - ah well, never mind!

Given its exceptional performance, and continued strong growth, I don't think BOO looks expensive, even after recent rises.

Regards, Paul. 

In reply to post #510916

The equipment is long-life, so I suppose there must also come a point where everyone who needs a laser-guided concrete screeding machine, has already got one?

That is certainly true. However,  where £SOM differ from JCB, for example, is that as I understand it, they are still growing by selling machines either to new customers, or people buying more - they are probably doing little business replacing existing machinery - they have for example, I believe,  only sold one  Sky Screed so far. That is a large new market to tap  - IF they are successful in tapping it. They are making all the right noises there, but until they have hard sales figures we won't know how succesful they've been.

As for China, I totally agree. I've never given that much attention, and fortunately it doesn't make up a signficant part of their market - though clearly writing it off removes a potentially large additional one!

In reply to post #510906

Thanks Paul. I like the use of "had originally" in HRNets statement. It implies their position has changed which is supported by their increased holding. I agree its going to receive a bid. Have bought it again today.

In reply to post #511016

I've never paid much attention to ASOS (LON:ASC) despite holding Boohoo (LON:BOO)
Your comments prompted me to have a quick (ie ultra superficial) look. afaics the big recent issue is around major capital investment with numerous glitches in implementation. It seems to be straining to manage its current scale; presumably there will come a point where Boohoo (LON:BOO) feel the requirement to warehouse in the US & EU. These ought to be transitory issues, even if they last longer than originally hoped, That could tempt me to consider investing, if there weren't also signs of sales and marketing management being overstretched. I don't think they are necessarily expensive at 2500p. I'll keep an eye on them for a while; what I'd like to see is evidence of a deeper management culture that is able to stay on top of the smaller day-to-day and month-to-month issues leaving top management free to manage strategies.

In reply to post #510951

Hi JonBirdy,

Just  wondered if you had time to share any thoughts you had on Wey Education (LON:WEY) Graham ran out of time to cover them last week.

Sorry Jon, no I've not looked at WEY recently.

Prompted by you, I find WEY's latest update very confusing. It says;

Therefore, it is anticipated that revenues for the full year will exceed £6.0m, well ahead of market expectations. This represents a year on year increase in revenue of over 43%.

This increased revenue has allowed the Group to increase its marketing spend in the current year to ensure as far as possible that revenue expectations for the year ended 31 August 2020 will be met.

Nevertheless, it is expected that adjusted profits for the current year will be at least in line with market expectations.  

Whoever wrote that RNS should be re-assigned to less intellectually-demanding duties!

Education businesses should issue crystal-clear announcements, and have management that take pride in showcasing standards of real excellence, in both spoken & written English.

I'm amazed at how poor educational standards are today. Every other word is "like". Spoken English seems to be a mumbling confusion, not identifiable as English at all.

I was lucky enough to have been educated at a state grammar school, in the 1980s. My education wasn't perfect, but it was pretty good. It gave grammar school children like me, from an ordinary background (no money) not only an equal footing to the privately-educated people, but it made us realise how thick most of the people from private schools really were! Plummy accents, over-confident, but thick as two short planks, was my conclusion when I arrived at University.  It was easy to beat them, as they were complacent & dim-witted.

I would love to start a new online school. The priority would be to reject mediocrity, and instead insist on impeccable standards of written and spoken English.

The single best way to get ahead in life, is to walk into any situation, and speak clearly, and intelligently.

Regards, Paul.

Paul, That's an impressive report and commentary for a day with no news! 

Hi Paul - Accrol Group (LON:ACRL) I think it is worth looking at this with a different lens. The management is new and have done a phenomenal job turning round a business that was effectively bust.

Exceptional costs will reduce to £1m this year and net debt has already been reduced considerably and set to reduce further this year. What has been most impressive for me though is that this management have put in mechanisms to pass through changes in raw material costs in their pricing contracts. Not only that but they are now turning attention to long term supply contracts where they can reduce raw material input volatility and hedging on FX. These last two turnaround items should set the business up to be much more resilient.

Growth in toilet tissue is up now in the low teens so there is plenty of scope to re-rate. They are already cash generative again.

Valuation is the tricky one. I am long primarily because I backed this turnaround team, so my average in price to be fair for disclosure is 20p.

However, broker/nomad reckons that after this current full year of stabilisation they will produce EPS of 3.5p.
The interesting bit though is the operational gearing. Even though they assume only 4.5% p/a of revenue growth in each of the 2 years after that EPS goes to 6.5p and net debt down to £10m (which is less than 1* ebitda). However, revenue growth looks deliberately conservative to me as that is set lower than market growth I believe, so think there is upside potential there too. Even if we assume this 4.5% revenue growth then placing them at 8-12* earnings reveals a less than shabby 52p - 78p share price potential. The Zeus Capital note is on Research Tree.

I wouldn't have touched previous management with a bargepole but I think this turnaround mgmt are of a different quality, so worth looking more closely at the progress they've made.

In reply to post #511091

Thanks Paul

I also went to a state grammar school. Whilst the concept of selective state education does not sit easily with me (all state education should be good) it nonetheless was a very good school. 

Like you, it benefited me greatly.

Radio 6 DJ Gideon Coe was a few years above me!

Jon