Small Cap Value Report (Fri 9 Feb 2018) - IQE, TNI, HRG, 7DIG, SUS

8th Feb '18 by Graham Neary

69 comments 21207 reads

Good morning!

Paul is writing again this morning, with additions to yesterday's article. He will be adding:

DFS Furniture (LON:DFS)
Dillistone (LON:DSG)
Elektron Technology (LON:EKT)
Creightons (LON:CRL)

So if you're interested in reading about them, his article is here.

Over here, I'm planning to start with:

IQE (LON:IQE)
Trinity Mirror (LON:TNI)
Hogg Robinson (LON:HRG)
7digital
S&U (LON:SUS)

And then I'll see if there are any other interesting stories to cover.

Cheers!

Market movements: a quick follow-up on the general market level. The FTSE is in the red today, at 7140 as I write this. This compares with 7780 on January 12. So we have a lot more potential bargains lying around than we did a few weeks ago.

Last year's low was around the 7100 level, so I'll reiterate that this is a key "level" - I think the mood would start to get a lot more bearish if we retraced back into 2016 territory.

I am still 25% in cash and have placed a few bids under some stocks I'm interested in. If somebody hits my bids, I'll be pleased. Or if the market doesn't drop low enough to hit them, then the rest of my portfolio will probably be doing ok.

Don't forget to bear in mind the potential impact of a stronger GBP on your stocks. One of the big-caps I own is British American Tobacco (LON:BATS) and I need to remember that its earnings in dollars aren't worth quite so much as they were before, when converted to GBP.

I'm also still playing with the idea of shorting the NASDAQ or some component of it, to hedge my exposure to market sentiment. However, the logical side of my brain is telling me that the hedge has a negative expected outcome and that it's a fine strategy to remain unhedged while also holding plenty of spare cash in the event of a major market crash.…

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TerryHancock

9th Feb '18

I sold out of IQE in late 2014 when it became apparent that the (still current) CEO had taken out a loan against his equity holding, in similar vein to the notorious Quindell crew and using the same Equity First vehicle. Whatever the reason and however legitimate the transaction it struck me at the time as evidence of sharp practice and entirely consistent with the opaque accounting apparent even then and causing so much controversy now. Making things complicated and hard to follow is done for a reason, and generally not a good one.

barnetpeter

I said a couple of days not to rush to buy this mkt and here we go again. Ftse futures just about hanging on to 7000. Already the 2017 gains are history. My guess is 6800 will be short term lows with 6000 by end of year. Interest rates have to go up...central banks cannot hold them any longer. That means falling profits and the curse of many companies.....growing pension scheme deficits. My view is that plenty of company profits are dubious in fact and are just doubtful accounting mechanisms. Many assets are way overpriced and especially house prices. When you see all this building going on and at mad prices that no-one can afford or wants to pay....two bedroom leasehold box flats in Brighton for up to half a million? Cash......

Graham Neary

re: 7DIG

Hi, I've added it to the report, cheers. G

JohnMM1969

I think its a case of if interest rates rise, the pension scheme deficits will fall as the liabilities will be discounted by a higher interest rate.

jonesj

Exactly.

IQE (LON:IQE) is so heavily discussed, whatever they do, I shall pass & look elsewhere.

Gromley

Hi Graham - Re Trinity Mirror (LON:TNI) or in fact N&S - which N&S company did you pull the figures for (there are so many to choose from!!)?

I thought that it was Northern and Shell Media Group Limited (04086466) - but the numbers appear a little different from those you quote.

Paul Scott

Hi Graham!

IQE (LON:IQE) - I don't currently have any view on this stock, other than it's too complicated, and it dawned on me after reading Tom Winnifrith's article on it last year (which was very good, generally, in particular looking at competitors), that I didn't really understand the company or sector, so I sold out.

Trinity Mirror (LON:TNI) - I started buying this one recently, and bought some more today. What's interesting is that rising interest rates might now help reduce the pension liabilities, over time. So I quite like the idea of looking again at companies with pension deficits. Picking up more newspaper assets, and stripping out duplicated costs, sounds very sensible to me. The cash generation of newspapers is astonishingly high, considering it's a declining sector. Remember that TNI paid off its debt from cashflow, as I predicted back in 2012. Something may happen, who knows?

Creightons (LON:CRL) - I've just updated yesterday's report with a review of this - the profit warning doesn't look too bad to me, and it might possibly be a buying opportunity?

Have a lovely weekend everyone!

Paul.

10th Feb '18

Blimey Paul - back in Trinity Mirror (LON:TNI) ?

That takes me back - I remember a good few years ago buying in somewhere around the 20p ish and then reading something you wrote suggesting the fundamentals could support a valuation of £2+. I thought it was fanciful nonsense until I worked the numbers and found that I agreed.

As I recall you sold out 'too soon' on the phone hacking issues, I top sliced quite heavily between about 60p & 120p but we actually made the predicted £2 and then some, sadly that coincided with a period when I pretty much switched off from active investing - so I still have all of those.

I have however been accumulating again over the last few months so this is again one of my biggest positions. I believe PH recently re-iterated a price target of £1.90, which I'd regard as credible - but I don't honestly expect to still be holding at that level.

tabhair

I appreciate the response, Graham.

Unfortunately I have come to the same conclusion as you. Namely, that the uncertainty of the proposed acquisition throws too much uncertainty into the air for me to make this worthy of investment. Like its counterpart in Ireland Independent News & Media (LON:INM), clearly there is a business here that could be stage managed into maintaining a decent stream of cash flow for shareholders. Unfortunately, in both cases management have deemed it to be that they should embark on acquisitions in their related sectors.

Hi,

The Connect (LON:CNCT) profit warning didn't look too bad to me. Disappointing yes, but only a fairly modest miss on predicted profits. Does that warrant a near-halving in share price? I'd say probably not, so have been adding a bit to my position. Won't be a big one.

Regards, Paul.

Zoiberg

Si, I'm certain that we are all in the business of predicting the future. Predicting the past just isn't profitable!

Mammyoko, Was it Rockerfeller who was asked on his death bed what had been the secret of his success? The old man beckoned the questioner to him and whispered "buy low and sell high". I think there is very much a need for a discussion on the current market gyrations and the underlying economics. Please don't apologise.

pka

Hi Paul, you wrote:

"IQE (LON:IQE) - I don't currently have any view on this stock, other than it's too complicated, and it dawned on me after reading Tom Winnifrith's article on it last year (which was very good, generally, in particular looking at competitors), that I didn't really understand the company or sector, so I sold out."

For someone who doesn't understand the company or sector, with hindsight the timing of your buying and selling IQE's shares last year was perfect!

simoan

Hi Graham,

Hi Si, what you say may be true, however, MW prints an excerpt from CSC's 2016 annual report (p. 6 of MW paper) which states that CSC "purchased £20 million of intellectual property from the IQE plc Group". I don't see any reference to a license being purchased.

I've now had time to look at the IQE and CSC accounts for 2016. The transaction described in "Related Party Transactions" of the CSC accounts is definitely not a license. You and MW are correct that this is a sale of IP by IQE to CSC. The word "purchased" is used, and besides, the amount is way higher than you'd expect for a license fee (IQE's total license fee revenue in 2016 was approx. £7m). It is all quite murky and the RPT section is worth reading if you're an IQE (LON:IQE) holder. The CSC accounts are here:

https://s3-eu-west-1.amazonaws...

However, it was reading the IQE 2016 annual report that has put me off even a short term long position. The director remuneration alone is a bit rich and the whole thing reads more like a sales brochure. Last post from me on IQE (LON:IQE) !

Thanks for your most excellent contributions.

All the best, Si

Yes, not much point in predicting the past, I grant you. If you want to predict the future I would tear up all your investment books, I mean, who needs to listen to Buffet & Munger, Terry Smith, David Dreman etc. They are yesterday's men. And in the name of equality, this is your girl!

https://www.amazon.co.uk/Books...

Hi Gromley

re: Trinity Mirror (LON:TNI)

Yes, 04086466. I've used some rounding.

Best,

Graham

Trinity Mirror (LON:TNI)

Thanks Graham - actually it wasn't rounding - you cite the N&S pension deficit at £64m, which actually would seem plausible give that TNI commit to pay in £70m by 2027, but the N&S accounts only seem to show £23m (£19m net of tax).

Was there something else you had taken into account?

On a more general note, as a general principle I agree with your caution as to whether EBITDA get converts into net earnings, however, whilst I haven't gone through the N&S numbers in vast detail I notice it shares so similarity with TNI. In 2016 N&S accounted depreciation of £7.5m but capex of only £1.8m (in the prior year depreciation + impairment was £15.8m vs £5.4m capex).

Trinity Mirror (LON:TNI) has been a massive cash cow (beyond it's reported profits) - using that cash recently to fund (i) Debt reduction, (ii) Pension Deficit reduction, (iii) Dividends , (iv) sharebuybacks, (v) phone hacking damages. (The latter is hopefully winding down)

It looks to me as though the N&S deal should strengthen this profile.

hawkipa

Hi,
Really interested why you think instis (presume you mean institutions) aren’t ‘loading up at this level’. It’s simply impossible to tell what they are doing at any given time. Most will be mandate driven. Remember, there is a significant difference between an institutional and retail mandate. I think it’s worth considering, at times like this, marginal players ie hedge funds can have a disproportionate effect on moves and we have no clue what they are doing until well after the fact. The weekly equity fund outflows you cite need to be contextualised to the inflows in previous weeks/months. Simply put, citing anything like this is extremely presumptuous & should not be used as a basis for forming a view.
Regards

11th Feb '18

Morning Gromley,

re: Trinity Mirror (LON:TNI) and N&S

£23m is the accounting pension deficit in 2016, while £64m is the actuarial pension deficit in 2015 (see the RNS for the proposed acquisition). The next actuarial valuation of the deficit is due this year.

Cheers,

Graham

cig

14th Feb '18

Interest rates rise usually implies some inflation, which increases the liabilities, and everything else being equal lower asset prices, which negatively impacts the assets side.

Small Cap Value Report (Fri 9 Feb 2018) - IQE, TNI, HRG, 7DIG, SUS

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Graham Neary

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