Small Cap Value Report (Fri 7 June 2019) - SOM, SUN, GAW

7th Jun by Paul Scott

53 comments 11888 reads

Good morning, it's Paul here!

EDIT at 15:19: thanks for all the interesting reader comments today on Somero Enterprises Inc (LON:SOM) - some outstanding contributions, bravo! End of edit.

Somero Enterprises Inc (LON:SOM)

Share price: 280p (down c.20% today, at 09:08)
No. shares: 56.3m
Market cap: £157.6m

Trading update (profit warning)

This company is based in the USA (its largest market), and sells laser-guided concrete screeding machines, to lay perfectly flat concrete floors for warehouses, etc.

I'll spend some time, properly looking into this, because I've always liked this company and am thinking in terms of buying the dip, possibly.

What's gone wrong?

Trading during the five month period to the end of May 2019 has fallen below management's expectations, primarily due to adverse weather conditions in the US, the Company's largest market. Broad sections of the US experienced the highest levels of rainfall on record.*

[Paul Scott: The asterisk relates to some rainfall data, given at the end of the announcement.]

The record rainfall seen in the US has delayed project starts which in turn has slowed the pace of equipment purchased by our customers, the impact of which was seen through historically strong trading months of March and April.

If this is true, then it fits my definition of a good profit warning - i.e. something that's a one-off negative, and should be easy to recover from. Therefore I'm starting to get interested - re a possible purchase on the dip.

The downside risk is that the adverse weather explanation might be masking a more negative cyclical trend, or a deterioration in Somero's competitive position, possibly?

Things have started to improve - which is positive, and adds weight to the adverse weather argument being true;

Whilst there was an improvement in trading to end the month of May, and although the Company expects weather conditions and therefore trading in the US will improve throughout the rest of 2019, the Board now does not expect the Company to fully recapture the shortfall caused by this extended period of poor weather in the current financial year...

Revised guidance is provided - extremely useful - all companies should do this when putting out a profit warning. If they're not…

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tomps3

7th Jun

Somero Enterprises Inc (LON:SOM) were pretty bullish inMarch, at FY19 results presentation.

However, they had similar problems in June 17, due to weather, although at that time also citing political uncertainty. They do tend to say it how it is.

Today they reaffirm what they said in March, 'customer optimism for 2019 and beyond is reinforced by extended backlogs and healthy new project starts.' Granted it would have been nice to have had more positive news from other geographies, beyond US.

Opportunities: From the September 18 presentation, we know they have a new Chinese national to develop business in China. Hopefully, at some stage that promised market will come to fruition (although we've been waiting a while). They are also pushing out the sky scrapper product, although they've said before, they think this will be a slow build to break into new markets.

Obviously cautious of signs of a US slowdown, but optimistic that this is not cited in today's report. However, weather could be an on-going feature for SOM, now weather patterns seem more chaotic than historically.

cholertonandrew

Hi Paul,

Thanks for some great reports this week.

I thought your IPO document video was really helpful. I did wonder on really busy news days whether doing part of the SCVR report in video form might be an idea worth considering and whether it could save you time. I thought it might be a useful idea.

Cloudcall have posted a new video on their YouTube channel which has customers talking about what they like about the product. I thought it made interesting viewing and might be worth a look, only about 17 minutes long.

Have a good weekend.

Regards
Andrew

Star8

Re Somero
(I currently hold shares here and have held them for about a couple of years.Based on the disclosed information to date I have no intention of selling)

I read all the half yearly and annual reports on all the companies I hold, not just for the information disclosed but also to capture the flavour of the company. As a paragon of virtue check out the Berkshire Hathaway Annual Report: sparse, factual and no jazzy egocentric photos and tendentious PR photos and charts.

Somero strikes me as a down to earth company with little ego and a concentration on what it does well - the manufacture of a very specialist product with little direct competition. It sees a world -wide market for its products and is starting to try and develop distribution networks for this niche product.

It has shown a lot of discipline and shareholder awareness in distributing good but reasonably covered dividends and surplus cash as special dividends.

It will obviously be hit by a construction downturn in its markets; industrial and commercial buildings and shopping malls. Also, not apparently mentioned elsewhere as far as I know, it will probably be hit by any counter attack to Trump tariffs i.e overseas markets putting up tariffs on US exports .

Those taking a long term view might find Somero attractive. Companies with its record and potential as well as apparent honesty seem few and far between.Those taking a short term view might decide the better option is to wait or even sell out.

smegster

Hi Weasel,

I had exactly the same poor 'computer says no' kind of response from IWEB, when I complaint about the the full 30% holding tax being withheld on the holding of Somero Enterprises Inc (LON:SOM) in my SIPP accounts, I was told they "don't deal with tax", then they tried to fob me off by saying CREST had applied the correct tax and that it was up to me to try and claim back the tax. Very poor service indeed

sharmvr

It also depends on how the broker/administrator deals with it.
They might have one client account for SIPP and ISA overseas holdings - same tax treatment or separate in which case WHT @15% is deducted for ISA but 0 for SIPP.

HL and AJ Bell offer this as I understand, not sure about II. HL confirmed through review of TnC.

Cockerhoop

Games Workshop (LON:GAW) a niche retailer.................wash your mouth out!

They design, manufacture and sell the hobby along with evolving, developing and licensing the 40 years of IP across novels, physical and digital gaming.

mojomogoz

I looked at Somero Enterprises Inc (LON:SOM) a year or more ago. It looks like a great business and I wondered about buying. I was put off for a number of reasons and here's my rather shallow reasons for why I didn't (some very informed people already argued against some of these).

1) I don't like being in a crowd and Somero is very very popular! Its relatively low valuation despite very high margins and good growth is a bit dissonant given popularity...

2) Following on from 1, it seems almost a little too good to be true - loved but cheap.

3) Cyclical stocks are supposed to have high margin around price peaks and vice versa. Somero seems like it should be quite a cyclical stock. That doesn't seem to be the assumption of investors though who view it to be a secular flat floor thing. They may be right but if its cyclical then perhaps a lower valuation is more appropriate discounting future lower margins, earnings and revenues. What the balance between cyclicality and growth? Where does the growth peak out? I don't think this is very visible. There's a lot of builders not using Somero equipment...this could be good and opportunity but it may also say that there's alternatives to buying their kit. Are they riding cyclical rather than secular growth at the moment for their specific products? I don't have an answers but I don't feel confident that they can have very strong IP or defence against competition or different methods.

4) Chinese growth upside seems to be a chimera. Its hard to believe that this is not a relatively simple technology for the Chinese to rip-off

5) I'm skeptical that there can be a competitive and IP moat therefore that they will not face competition and/or price pressure.

6) Perhaps what made me most cautious is that management had a 5 year plan that was due to finish quite soon after I'd looked at stock (I think it is over now). This made me cautious of investing around the end of that period as any weaknesses in the business and its strategy will be covered up until the LTIP has been earned if possible. Is this the bad news creeping out now?

7) I recall that a senior guy involved in business for long time has sold out all or a lot of holding recently. He's retiring so fair enough....but with hindsight was it a signal (consider 5 year plan)

Its probably a great company but the above 1-6 stopped me digging more as I felt I would not have the ability to see the opportunity for the company to such an extent that it outweighed the above.

I'll probably be wrong to sit aside and if you know better then this is a buying opp.

drvodkaquickstep

Hi Graham

Its a real shame as I have been invested on and off in Modern Water (LON:MWG) since late 2013 and despite the awful looking chart its actually been good investment for me as I have moved in and out depending on price.

I actually suggested to David that they attend Mello as I like their technology and their monitoring division was a stable and viable business but they have failed to secure enough orders of their membrane technology and the Gibraltar STP project is still dragging its heels and this would have been a life line whilst they built up sales elsewhere.

So I am partly responsible if anyone invested off the back of Mello but ultimately we all have to make our own decisions. I sold the last of mine in April this year.

Hopefully they will be thrown a lifeline but I feel a more dynamic CEO is needed if they do stay in business. Alan Wilson coming in as chairman did shake things up but was only a short term filip.

The challenges of investing in tech stocks..!

SundayTrader

Paul

Thanks for the commentary on Surgical Innovations (LON:SUN), which I rate as interesting. I don't hold.

I would guess that a part of the problem in the UK and Europe was some first quarter stockpiling both sides of the channel on imagined fears about disruption at the Channel ports. This would then be unwinding in the second quarter, in which case the profit warning might be a bit on the pessimistic side.

The muted NHS demand sounds more serious to me. Minimally invasive surgery is cost-saving, but the equipment costs more, and the surgeons have to take time out to acquire the skillset. So it is plausible that the existing growth estimates were a bit optimistic. However, this is still a growth stock, and the rating after the fall looks attractive.

simoan

The trouble is (I'm replying to mojomogoz and his 7 points negatives against investing in Somero Enterprises Inc (LON:SOM) here) I could make a list of negative points like that about any company you would care to name. I'm not volunteering to do it right now, but name me your biggest holding and I guarantee I could easily come up with a list of negative points about making an investment. Best still, you could probably do it yourself :-)

All companies have negative and positive points but the fact remains unless you closely watched the weather in the US you would not have seen this mornings warning coming. I knew instantly there was trouble without even reading the RNS because of the timing - the trading update is normally in mid July. Not a great way to end the week but my portfolio was still up 0.5% today, so not a disaster.

Anyway, you live and learn; I will be paying more attention to Michael Fish in future.

All the best, Si

Camtab

Did anyone go to the FCCN meeting? Was anything said? I saw the price rise 5p yesterday and it has gone back 5p today so I assume no action.

Sorry to let you down Si but thanks for the the offer....

RM (LON:RM.) UP Global Sourcing Holdings (LON:UPGS) SCS (LON:SCS) Celtic (LON:CCP) all about equal

UP Global Sourcing Holdings (LON:UPGS) probably easiest to knock in my low brow generic way but negatives on one or all welcome

Knock me out ;)

jonesj

Where I have found broker service to be unsatisfactory and the so-called "customer service" people are unhelpful, I have always had good success by looking up and contacting the company directors about the matter.
Perhaps your chances with iWeb are not quite as good, since it is part of Halifax & hence Lloyds, rather than a more entrepreneurial broker.

The CEO of Lloyds is: Antonio Horte-Osorio (antonio.osorio@lloydsbanking.com), 25 Gresham Street, London, EC2V 7HN.

However, perhaps it is more productive to find out who is managing the Halifax stockbroking operation and complain directly to them, strongly requesting that they need to fix the issue to be competitive with other retail brokers.

acdoug

re mojomogoz reasons for not investing in Somero
point 7: The CEO/President was fortunate to sell 1.4% out of his 2.5% holding on 28 March at a price of 340
Forgive me for being cynical about well-timed share dealings by those in the know, but it bugs me.
That said, i have done very well since i bought shares in 2016 following Paul's July post. Thank you for pointing it out, Paul

Zipmanpeter

Paul,

Re" "MrContarian (who posts his excellent morning small cap tweets here first thing, and gets cross with me when I forget to put up the placeholder!)" ......Why not give him the job formally

.... or better yet get the techs to simply automate the task.

It is a great service seeing the pre 8am comments/stocks with action happening that day.

Good weekend

Weasel

10th Jun

Yeah, I got a lot of excuses from them that were a best ehhh BS, when I pointed this out the guy just fell back on "business decision" and kept repeating it every sentence.
It frustrates me even more as WHT is not supposed to apply to SIPP's so they have gone out of their way to tax something that should be exempt. I pointed that out and all the SIPP girl could tell me was this was the first and only time she had encountered that issue.

I have moved my Somero Enterprises Inc (LON:SOM) out of my ISA and SIPP, annoyingly a week before the profit warning, but at least now I can reclaim the WHT. Or at least, writ it off against UK tax due.

Not a bad idea.
I will have a look and see how far I get with tracking down some of the top brass at Iweb.

I did have a quick look at some of the other brokers, HL in particular were massively more expensive than IWeb. So whilst I would have avoided the WHT issue with HL I would have paid a lot more over the course of a year in dealing fees and Admin/holding fees.

MarkLDN

13th Jun

No one is saying it is a one off and you can't also trust Somero's weather forecasting abilities for the same time next year. But what you can trust and no for d*mn sure is that Somero are going to be investing in ways to ensure their clients' projects are prepared for bad weather. The construction industry is not going to start selling less construction because of worse weather, they will adapt. For instance, scaffolding is wrapped with weather protection in the UK to protect workers behind it. Why can't floors be "wrapped" to protect them against bad weather. They do it at Wimbledon.

abtan

Hi Mark

I can't pertain to know how weather events could have had such a material impact on Somero Enterprises Inc (LON:SOM) given their international footprint, and also the vast size of the US.

And my knowledge of changing international weather patterns is restricted to Attenborough documentaries and glimpses of the news, such as this article published last week about the unusually high number of tornadoes this year in the US:

https://www.washingtonpost.com/weather/2019/06/05/five-take-aways-biggest-swarm-us-tornadoes-since/?noredirect=on&utm_term=.ab51c5e78dd8

I'm not sure how any construction service can protect themselves against a tornado, or any other serious weather conditions, otherwise I imagine they would have done that already.

In any case, it was merely an observation; whether it has any basis for the future performance of Somero Enterprises Inc (LON:SOM) , I have no idea, but I am surprised that all the comments I've read seem 100% confident that this year's weather impact (whatever those weather circumstances were) will be a one-off.

I sadly do not have such conviction.

Source

15th Jul

Can seem why Somero CEO sold out of a LOT of shares in March now at £3.50-ish...

Small Cap Value Report (Fri 7 June 2019) - SOM, SUN, GAW

Somero Enterprises Inc (LON:SOM)

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Paul Scott

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