Small Cap Value Report (Fri 9 Aug 2019) - SND, BUR, OTB, PEN | Paul Scott

9th Aug '19 by Paul Scott

30 comments 9554 reads

Good morning!

There are not any backlog things for me to write about, so this article will appear blank for the morning - so subscribers can add comments as usual.

Managing expectations - the main body of this article will appear during Friday afternoon, section by section, and will be done by 6pm. If that changes, I'll update this introduction accordingly. I'm sorry if it annoys people that I haven't finished each article by 1pm, but that's just how it is. I'd rather take my time, and write something worth reading, with some thought having gone into it, than rushing for deadlines.

Thanks for bearing with me. You now have my undivided attention for the rest of the day.

Update at 16:40 - today's report is now complete.

Sanderson (LON:SND)

Share price: 140p
No. shares: 60.5m
Market cap: £84.7m

Takeover bid update

In my view, this bid undervalues the company, and was at an insufficient premium. Although the share price did have a nice run upwards in the months before the bid.

Today the bidder, Aptean, says it has got irrevocable undertakings and letters of intent over 49% of the company's shares. That seems a bit lacklustre, clearly some shareholders are not impressed with the 140p offer. So it's not necessarily a done deal yet.

Why did management recommend a bid at such a modest premium? The deal might be driven by institutions wanting an exit? (as it's too illiquid to allow Instis to sell in the market). A city contact told me this week that small cap fund managers are worrying about liquidity, after the Woodford fiasco, nobody else wants to get caught out holding lots of illiquid stocks, whilst facing client redemptions. That's an interesting point, and sounds plausible to me.

The risk is that, if the bid falls through, then the share price could tank back down to 100p maybe.

My own experience of takeover bids is usually very good, I've had lots of them over the years, including once amazingly, when I had three on the same day! Wish I could remember the details of what they were, but I definitely didn't imagine it.

Then there was the debacle with Revolution Bars (LON:RBG) (in which I hold a long position) where a (with hindsight, generous)…

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MrContrarian

9th Aug '19

My morning smallcap tweet: Tide goes out for Beach Boys

Pennant International (LON:PEN)

On the Beach Group (OTB) warns FY performance below the Board's expectations due to weak £ forcing it to increase prices while rivals protected by hedged FX.
Pennant (PEN) guides FY materially lower than market expectations with EBITA £1.8m. Blames delay to Ajax armoured fighting vehicle contract and to the Aviation Skills Partnership business. Curse of H2 weighting.

Tortoise investor

Holders of £OTB should have seen problems coming. At the half-year results published in May, revenue was actually falling once you stripped out the revenue benefit of acquisitions made since the previous year - I had calculated international revenue had fallen 56% (sounds dramatic but it was previously a small percentage of total revenue), the main websites had only grown 1%, and even the acquisition Classic Holidays had seen revenue fall from £20m to £18.5m. But you had to do all the homework yourself because the company focused on the topline figures. It usually pays to dig behind the headlines - this is not a growth stock right now.

Martin C

The key here is that they don't hedge currency fluctuations. In the event of a no-deal and GBP tanking, they will need to hike their prices up another 10-20% (making them less competitive) or let their margins erode away completely. Closed my short at the open, but just gone short again as its bounced around 9-10% off the low. Think this is one to have a guarenteed stop loss on though, just in case no-deal is blocked or they attract a bidder.

Gerard88

Totally agree on the potential for a 10-20% further loss. Why on earth don't they hedge some of their exposure?

Trident

Could a lower pound for longer be the final spur for inflationary pressures to come home to roost? Bit of nasty mix for Govt's if so, with so much debt and promising spending booms, that the national bill increases for interest payments.

Everyone seems to be playing beggar my neighbour with lower currencies, so I wonder if we are heading for a higher interest rate world. It probably won't happen in a hurry, but may creep in day by day, which reminds me of a piece of Shakespeare, and is my small slightly downbeat contribution to culture on a Friday morning (sorry):

Tomorrow, and tomorrow, and tomorrow,
Creeps in this petty pace from day to day,
To the last syllable of recorded time;
And all our yesterdays have lighted fools
The way to dusty death. Out, out, brief candle!
Life's but a walking shadow, a poor player,
That struts and frets his hour upon the stage,
And then is heard no more. It is a tale
Told by an idiot, full of sound and fury,
Signifying nothing.

JohnEustace

They really need to pick up the phone to £AFX - which I hold.

I can't imagine running a business like OTB without some currency management in place. It makes it uninvestable for me.

ACounsell

Excellent - the last 5 lines would seem to be a good description of our new Prime Minister given the way things are going! He may have plenty of time to book a more expensive holiday with £OTB!

stuartb58

Had a look at Vitec after helpful comments yesterday. One point does concern me a little - under note 7 about "Taxation" there is comment about possible breach of EU regulations and potential liability £8.3M in respect of unauthorised State Aid. Not sure why this should affect VTC in particular, as I have not seen it before. Any views?

Snoo

I feel that some extra commentary on On The Beach (LON:OTB) RNS would have helped regarding hedging, they seem to imply that they are just winging it.

I am sure their view may be that in the long-term the upside risks balance the downside, but in a prolonged downturn for the £, what then?

I've looked at their site a few times but am not really able to discern what their moat is. Is it not true that you could pick up the same flights/hotel on Expedia?

grumpy5

One of the few things from school that I was forced to learn that I can still remember. Very apposite.

Small Cap Value Report (Fri 9 Aug 2019) - SND, BUR, OTB, PEN

Sanderson (LON:SND)

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Paul Scott

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