Small Cap Value Report (Fri 7 Jan 2022) - AIR, SAA, JDG, SDI, GRG, NXT, BME, LOOK

7th Jan '22 by Paul Scott

75 comments 11896 reads

Good morning, it's Paul & Jack here with the SCVR. Today's report is now finished.

Agenda -

Paul's section:

M&c Saatchi (LON:SAA) - a rather disappointing announcement, that Vin Murria wants to "merge" her listed cash shell Advancedadvt (LON:ADVT) with SAA in a paper deal. I can't see why SAA would be keen to surrender control to her? Let's await their response (since published, article updated).

Judges Scientific (LON:JDG) - a strong year end trading update, with profit guidance ahead of expectations. 2 brokers have upped forecast earnings by about 10%. Not cheap, but the stunning long-term track record justifies a premium price.

Sdi (LON:SDI) - a small acquisition is made, and an important repeat order is received, resulting in a significant 22% increase in Finncap's forecast for next year FY 4/2023. SDI has a fantastic track record of creating shareholder value, so it's toppy valuation looks justified.

Lookers (LON:LOOK) - yet another out-perform update. It seems car dealers are still enjoying booming profits, driven by a shortage of new and used cars. I very much like this sector, and think it's still far too cheap - even when you adjust for earnings normalising. More takeover bids look likely.

A quick review of yesterday's larger cap retailers updates;

Greggs (LON:GRG) - slightly ahead of forecasts. Too expensive.

Next (LON:NXT) - trading well, ups guidance. Cheap on a PER of 14

B&m European Value Retail Sa (LON:BME) - also trading well, looks good value on a PER of about 14.8 by my calcs.

Just FYI, I'm planning on looking at the following updates as this morning progresses: LOOK, Churchill China

Jack's section:

Air Partner (LON:AIR) - I hold - another materially ahead update, just three or so weeks after the last. Vaccine freight demand continues to drive business. This will revert at some point but could also last for longer than anticipated, which could potentially lead to FY22 upgrades. Assuming it does revert, the group has diversified its operations in recent years and is well-funded for further investment / acquisitions.

Explanatory notes -

A quick reminder that we don’t recommend any stocks. We aim to review trading updates & results of the day and offer our opinions on…

Unlock with Email

Unlock with Google

Already have an account?
Login here

thirty fifty twenty

7th Jan '22

Quarto Inc (LON:QRT) interesting that Lion Rock has bought a further 1.2m shares in recent weeks - at an average of 119p. given the price a few weeks back and the trading volumes they must have paid up to 125p for a good chunk of those.

QRT has huge H1 profits and gave a +ve trading update. the growth in the books sector this has been confirmed by industry stats, by Bloomsbury Publishing (LON:BMY) and by Lion Rock itself.

there is the potential of the triple benefit here of rising profits, reduced debt and higher rating. cuurently the shares are rated a fraction of £BMY.

the chart looks very solid.

the Stock Rank = 99, having been in the top green zone for over 2 years.

disc i bgt today

Benson

I have held for about 4 years and was saying that I wished that I had the full 20 bagged sorry if I misled

on_27

"Following the announcement (https://tools.eurolandir.com/t... by Air Partner, the global aviation services group, on 17 December 2021, the Company is pleased to report a further positive update on trading for the 12 months to 31 January 2022" - I read that as an improvement in the last 3 weeks although agree not clear and some numbers would have been helpful.

My modelling suggests even with freight normalizing to 2019 levels P/E is still below 9 once accounting for the growth in PJ business, the return of Group Charter and Safety/Security revenue streams (incl. Redline acq which has had no impact to date), and the recent Kenyon acquisition. Plus net cash equated to c.25% of the market cap. It is still only a small-mid sized position for me given the noise in the numbers and lack of historical evidence of value accretion from recent acquisitions vs. consideration paid.

timarr

RE: Thinksmart (LON:TSL)

The problem with that is that you were not comparing apples with apples. There were big timing differences and the accounting rules and basis in each country are different.

Well, as of 30th June last year Thinksmart valued the Clearpay stake at £125 million based on an unpublished independent valuation method, so no accounting rules involved. On the same day the Afterpay FY21 results calculated the value of the stake at just under £50 million.

From the announcement by Thinksmart on 20th December the valuation of the Clearpay stake, in Square shares, was calculated at £78.1 million, which appears to be the price the TSL directors agreed to strike the deal at, not the Block price at the time of original Afterpay / Square deal.

However ... 35% of that £78.1 million goes into the employee share option scheme so the actual value of the stake at that point was just over £50 million. However, even if we're generous enough to backdate that deal to the original Square / Afterpay transaction it was still only worth £73 million to shareholders.

The best you can say about it is that Montarello and Gammell have got plenty of skin in the game.

mammyoko

10 year treasury yield at one-year high of 1.80%. Watch out US tech holders?

Boon

Just had a quick glance at the capex cash flow, and it looks a bit low at first glance, on the Stocko financials. Air Partner (LON:AIR) is a share I've never held before; do they own their own planes? And what's the capex requirements looking like for the next few years?

Wilbraham

Positive take on M&c Saatchi (LON:SAA) situation from Richard Holway this morning:

Vin Murria strikes again!

Richard Holway, 08:25, 07 January 2022

I’ve known Vin Murria for well over 20 years back to her (and my) days with Elderstreet. Together she took on the small and loss-making Computer Software Group in 2002 and sold it for £500m in 2007. How in 2008 she turned her attention to Advanced Computer Software and grew it from scratch before selling it to Vista in 2015 for £765m. I was involved as a shareholder in all these transactions. I also had a bit of involvement when Vin was rightly awarded an OBE in the 2017 New Year’s Honours . Many call Vin the ‘Queen of UK Tech’ – I would concur!

In the last c5 years Vin has been involved as an NED in several companies – most notably Zoopla, Softcat and Bunzl – as well as backing a variety of smaller private companies eg Celetron .

In May 2020, Vin took a stake in the then much troubled M&C Saatchi. I fully declare that I am a bit of a Murria groupie. Whenever I learn that Vin has bought a stake or become an NED (BTW - always by reading it in the press!) I tend to follow suit. Vin was appointed to the M&C Saatchi board in March 21 a few weeks before she launched her SPAC - AdvancedAdvT

On Wednesday, AdvancedAdvT bought a 9.82% stake in M&C Saatchi and told the board to expect a takeover bid ‘in the near term’. As you might expect, M&C Saatchi shares have surged. Indeed they have now nearly tripled since I bought in 2020… BTW – It has been virtually impossible to buy shares in AdvancedAdvT – which was probably no bad thing as they have slumped on this news!

Since Vin joined the M&C Saatchi board the old board has been replaced and a new CEO appointed. The results have been really encouraging. Knowing Vin, she will use M&C Saatchi as her first block in building a bigger group by a series of acquisitions. Interestingly, M&C Saatchi new clients in the last year have mainly been in the digital tech world – Uber, Google, TikTok and Tinder to name but a few. So I can see the building of a group of digital media assets. A very good place to be methinks!

Those with access to the HotViews archive can read the many posts I have written about Vin. I suspect I will be writing many more in the near-term future!''

jimrog64

First mention I have seen of £QRT on Stocko for a long time. I bought in last year. Simple strategy as a starting point - looking for top ranked shares on Stocko which also had significant director buys. Then saw that they had been steadily reducing debt and turning the business round in an industry ( publishing ) that was doing well. Lots of discussion about Bloomsbury and other publishers but almost no discussion of Quarto on here or any of the bulletin boards. Have watched it quietly and steadily climb. With another 12% lift today I am now over 50% up on this one which is of course satisfying. As you say, potentially triple benefits and much further progress with this one. A similar strategy with a share which has had a huge amount of discussion on here has not been so successful. Great stock rank and directory buys at Volex (LON:VLX) but I am currently 10% down on that one. Certainly holding though as it is usually a good strategy and the metrics and potential for Volex (LON:VLX) remain.

rmillaree

yeah totally agree it’s really annoying when walking from the cluny to the botanist that there is no greggs on route - bir of a disgrace as that’s a good 15-20 minute walk so deffo nowhere near saturation level even in the toon

BnB

Duplicate

US tech ex FAANG is down 30% already in little over a month. We regret that your warning comes a little late for us, though your concern is appreciated :-)

DaviStoVest

When I was last in my home town, there was just one Greggs ... up by the Haymarket. Wish I'd been interested in investing way back then (and seen the possibility). Could have made a sizeable fortune.

davidjhill

No - what they did was agree on a number of Afterpay shares that convert to Block shares (618,750). That number would be the same if it were at the time of the offer or now.

At the time of the offer Block traded at $260 so the value would have been £125m + £6.5m in other assets = £131m. This equates to 125p

Today the value of those shares is £65m + £6.5m = £72m or 67p

This is the amount that goes to shareholders for the 6.5% stake (ie the 35% ESOP is already taken account of in the shares to be issued).

So the value agreed upon is 125p at the time of the offer and 67p now.

(Remember the price formula included reference to the Afterpay share price so given the falls in that todays price would be different to that on the date of the offer, even if it were cash.)

The £TSL price is now 49p so there is a 30% discount to NAV but in my experience there always will be at least a 15-20% discount until the shares are liquidated.

I agree about the best we can say is Montarello and Gammell have got plenty of skin in the game but the game has changed and its now a play on Block instead of a cash crystallisation event.

abtan

Air Partner (LON:AIR)

Hi Dahokolomoki

The company does not own any planes - instead they act as an intermediary between people/organisations/governments and plane owners.

As per their website they have 'access' to 7,000 aircraft.

To caveat the above, there was a £3.7m lease payment outstanding for an Italian aircraft on the balance sheet at the end of last year (and I think at the interims too).

I don't know the history of this, though I believe the final payment was originally meant to happen in 2021, but was then delayed until 2022.

Aside from this, there are no material capital expenditures that I would expect either now or in the future.

Cheers

Harry Hindsight

Greggs (LON:GRG) - there is limited comparison with Weatherspoons (historic interesting estate in a lot of popular town centre ish locations and sell beer cheaply). Greggs (LON:GRG) growth I thought was road users - to compete with The McD, not some town centre caf or bakery - nice little businesses on their own but not investments. It's about real estate - there are only so many roundabouts with services attached so once in place then nobody should be able to squeeze you out. Some ex travel agent shop convert into a sausage roll heater is wasting energy. If M&S start to do hot food in service stations and close down the competition then the rest can have their 'cafes'. All depends on whether we can afford to drive anywhere of course in the not too distant future.

Antehelion

agree, I happen to feel the same way on the 'everyone must remember to tag all posts with a ticker because some people don't read in threaded mode' angle. just fix the app to repeat the ticker from parent comments, its simples.

a reasonable chunk of the capability of this app/service is a forum tool (this), which has some clear and highly discussed faults that we don't see getting attention from the dev team.

I can't imagine it would take a lot to sort the text parsing issue to look more carefully at any word starting with a £, and doing a trailing non-alpha trim before replacing with the ticker macro if a match vs the known world of stocks. I know there are special cases such as Aviva (LON:AV.) which would add some secondary check behaviour to kick in, but these should be quite well understood by now.

That is really interesting, basically an asset-light model. In an industry that is usually asset-heavy. I'm going to have a deeper look at Air Partner this weekend!

The key is where does it go from here? :)

Also it is not just tech shares that are hit, but a whole range of other implications. Heavily indebted companies, on floating rate debt (to LIBOR? EURIBOR? etc) will face steeper interest rate costs next year. Of which many had never forecasted. That, along rising input costs (labour, raw materials, etc) is going to make 2022 really difficult for some companies, IMO.

In addition, companies below investment grade that have benefited from easy refinancing of their debt, will now face difficulty as the junk bond market liquidity dries up (since debt investors will have better yields in investment grade debt). What implications does that have?

Snowbum

8th Jan '22

Where could it go? With an increasingly hawkish fed , it could go up a lot more….

Bad news for tech.

I posted the trade plan shown below on Jan 5th, in the scores on the doors thread.

The upper section of the head has just completed on this week’s weekly candle. I remain short.

Paul Scott

The problem I have (which doesn't matter, as I sold my SAA shares a few weeks ago, thinking they looked fully priced), is that Vin Murria is not a PR specialist, she's a software specialist. Her approach mentions focusing on digitalisation, but SAA is already doing that.

SAA has done a great job in fixing historic issues, and above all improving trading, with a series of strong, out-perform trading updates from mid-2021 onwards, hence why I turned positive on this share in H2 of 2021, eventually buying some.

That doesn't strike me as a situation where a turnaround, and change of strategy or control is necessary, or beneficial. Combined with it being an all-paper offer, where ADVT shareholders are effectively trying to buy a slice of SAA and hence dilute existing holders, and take control, for no particular benefit to existing shareholders.

I think this approach looks ill-judged, and likely to be rejected by independent major shareholders.

Should Vin Murria resign as a SAA Director, if (as seems likely) the bid falls through? I suppose that depends on whether talks are amicable or not. If she backs down, and issues a statement saying she remains a supportive shareholder & Director, then maybe she could stay on. Or maybe shareholders would want her out?

A fascinating situation anyway, which I'm enjoying following!

Regards, Paul.

Small Cap Value Report (Fri 7 Jan 2022) - AIR, SAA, JDG, SDI, GRG, NXT, BME, LOOK

Unlock the rest of this article with a 14 day trial

About the Author

Paul Scott

75 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...