Small Cap Value Report (Fri 9 June 2023) - MEGP, MIDW, SHOE, NWF, COST, SFOR, WAND

9th Jun '23 by Paul Scott

28 comments 7080 reads

Good morning from Paul!

Today's report is now finished.

I was very impressed with Megan's webinar earlier this week. If you missed it, this is well worth a listen over the weekend - some useful insights, with high quality stocks tending to perform better in market downturns. (Note: it's silent at the start, then starts properly at about 3m 25s)

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 them as possible candidates for further research if they interest you. Our opinions will sometimes turn out to be right, and sometimes wrong, because it's anybody's guess what direction market sentiment will take & nobody can predict the future with certainty. We are analysing the company fundamentals, not trying to predict market sentiment.

We stick to companies that have issued news on the day, with market caps up to about £700m. We avoid the smallest, and most speculative companies, and also avoid a few specialist sectors (e.g. natural resources, pharma/biotech).

A key assumption is that readers DYOR (do your own research), and make your own investment decisions. Reader comments are welcomed - please be civil, rational, and include the company name/ticker, otherwise people won't necessarily know what company you are referring to.

What does our colour-coding mean? Will it guarantee instant, easy riches? Sadly not! Share prices move up or down for many reasons, and can often detach from the company fundamentals. So we're not making any predictions about what share prices will do.

Green - means in our opinion, a company is well-financed (so low risk of dilution/insolvency), is trading well, and has a reasonably good outlook, with the shares reasonably priced.

Amber - means we don't have a strong view either way, and can see some positives, and some negatives. Often companies like this are good, but expensive.

Red - means we see significant, or serious problems, so anyone looking at the share needs to be aware of the high risk.

Quick Comments

To round off the week -

S4 Capital (LON:SFOR) - down 5% to 123p (£708m) - AGM TU - Paul - RED

Sir Martin Sorrell’s rapidly growing…

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martinji

9th Jun '23

hi JASVFS I'm also a holder of Steppe Cement (LON:STCM), I'll share my off the cuff thoughts

- impressed with their cost controls, given local inflation
- this combined with sensible capex gives a good impression of management
- there are no mention of future divis, or of intended divi policy, I wonder if they may cut the divi to reduce debt given the 20% interest rate
- it remains super cheap but probably deservedly so given the political instability, increasing cost of debt, potential for a deterioration in $ exchange rate, and cyclicality

this is only a very small holding for me and I'll continue to hold for now.

carvalio

Thanks for looking into it Paul. Have a good weekend.

The Boon Fund

Very annoying that Safestay (LON:SSTY) decides to release FY results at 11am. And on a Friday too. One suspects some bad news buried?

Initial skim seems to be OK. And looks like a profit upgrade for FY23 coming, as first four months of trading already "significantly ahead of budget" and management outlook for the rest of the year is positive on all the key trading indicators.

(i hold in the Boon Fund)

Paul Scott

Hi JASVFS,

Sorry I didn't get round to looking at Steppe Cement (LON:STCM) and I'm not sure I could add any value by commenting on it, as mentioned last time, it's a bit of a special situation.

The market clearly doesn't believe the divis are sustainable, which is what an 18.2% forecast yield is telling us. Its track record on divi payments has been very good, so there might be a (risky) opportunity here perhaps?

It's not one I would take on personally, as I don't normally buy anything overseas listed on AIM (apart from Somero Enterprises (LON:SOM) )

Good luck with it!

Regards, Paul.

thirty fifty twenty

Safestay (LON:SSTY) i assumed 11am results rather than 7am was more suited to their target customer and latest check out time.

the outlook commentary seems very positive and confident to increase prices and occupancy in a growing market which will allow debt to fall further.

dusc. i hold and have bgt more this morning

Lamb of Wall Street

Thanks for sharing Megan's webinar, just finished listening and thought it was very good. I have updated my screens, which has given some shares to have a further look at.

Lawrence Judd

Thanks for watching - glad you enjoyed it!

cheeky_minnows

WANdisco (LON:WAND) wasn't a particularly flattering name even before their negligence / fraud was known about.

Anyway on a quiet Friday afternoon I thought it would be a good opportunity to thank you Paul, Graham and occasionally Roland for the views on various companies - it has been very good recently. I also watched a few of Eds videos recently on the Stockopedia youtube site, which are well worth a watch for anyone that hasnt seen them.

Tommy H

For my small town thoughts on ME International (LON:MEGP) they have installed washing machines / dryers at the local garage, and other than the occasional youth sitting in the largest machine when it is raining, they seem to have a reasonable amount of use when looking when I drive past. The machines different sizes, with the largest able to wash a super-king duvet, which given the local dry cleaner Johnson Service (LON:JSG) has now shut which used to do a reasonable trade on duvet cleaning I figure there is a reasonable demand for these. Which for a "middle class rural market town" you kind of think that every house has a washing machine therefore what demand?

But guess there is always, machine broken waiting for a delivery, the outlaws have just been got to throw everything through, duvet needs doing, and washing the kit for the local football/cricket/netball team stuff there is a demand.

You learn every day.

Tommy

I hold in Mum's ISA (aka SIPP)

Costain (LON:COST)

I would do a quick search on "Costain" and "National Highways" what used to be Highways Agency/Highways England. This obviously gets all yesterday's articles, but if you go back a little bit as well gives a wider story.

Firstly, the A66 is currently in Development Consent Order (Planning Approval) stage, so due to start next year subject to Secretary of State approval. Costain is one of four Contractors involved, so there is also Balfour Beatty (LON:BBY) , Kier (LON:KIE) and Keltbray stated as winning work packages. So it is part of the £1.3bn not all of it, then spread over say 3-5 years and think typical construction margins. So is probably a small hit to this years revenue and profit as it is early stages right now and loss of future workbook for 2024-28.

I think that the bigger part is there was a similar announcement in May regarding the cancellation of the M62 central barrier project, and from memory I think that the top two managers of the Highways Division left the company at the same time.

Obviously Highways is one branch of Costain, so there are other parts of the business that will continue through this, I don't know the percentages of turnover/margin that come out of Highways.

I do not hold.

fanmail

Have never understood the attractions of NWF. It operates in three very competitive markets, with margins to match, of which two have long term structural problems.

I used to buy my heating oil from NWF but now choose a local competitor who consistently beat them on price by an appreciable margin and provide an equivalent service.

Perhaps you can indeed make a silk purse out of a sow's ear...

abtan

Safestay (LON:SSTY) (I hold)

Thanks Boon, I completely missed that!

Here are some thoughts that I jotted down as I was going through today's report.
I view all of the below as positives.

Capex Budget Clarity:
"from 1 January 2023, we have allocated 3% of total revenues in order to maintain these high standards in our hostels."
"colleges and schools only making up 10% of accommodation revenue whereas historically these made up around 28% of this revenue."
"We have also decided to brand the Group as Safestay Hostels and Hotels"
"We are currently formulating a COVID 19 business interruption insurance claim, as we believe our policy wording is similar to some recent successful outcomes for insured parties in our industry. Whilst a successful claim may result in a material payout to the Group, at this stage, there can be no certainty of any financially beneficial outcome."
Sales for the first 4 months of the year are significantly ahead of 2022.

----

By my own calculations Net Assets currently = £19.1m vs the current market cap of £19.2m

This includes all Cash, Debt and Property, including the Elephant and Castle hostel where there is an option to buy back the property.

A possible risk here could be that some of the valuations are from 2021, though it's not concerning enough to make me want to sell.

---

I've modelled out various occupancy rates (73%-79% vs 77.3% in 2019) and bed rates (£23.70 - £24.00 vs £23.62 in 2022) for 2023 and I believe cash generation should come in somewhere between £2.3m and £3.6m.

Note that this included a £1m/year CBILs payment that will conclude in 3 years.

Based on this - and the material asset-backing - the current £19m market cap seems too low.

Happy holder for now.

TEIN

Tommy, have you tried switching the machine on with said youth in the drum?

In the late update yesterday by Costain (LON:COST) they confirmed:

"this project was included in our preferred bidder book and therefore this decision has no impact on the Group's order book"

Order book is defined as: revenue from contracts which are partially or fully unsatisfied and probable revenue from water frameworks included at allocated volume.

Costain reports on future visibility in three ways.

Secured Revenues for FY[x]: these are contracts where there is locked-in agreement for the works to be done in the financial year. I take this as more or less in the bank.

Order Book: contracts have been signed, but typically as projects are multi-year, timing of revenue could be delayed. But it is past the bidding stage. Of course, projects could be cancelled.

Preferred Bidder: this is the stage before Order Book. Costain is selected for the project (or part of the consortium), and detailed negotiations are started on final scope, pricing, specifications, delivery, etc. At this stage there is also no "competition", but the wet ink is not on the contracts yet either.

Looks like the A66 project fell in the last category.

At 31 Dec 2022, the status of all three were >£1bn Secured Revenue FY23, £2.8bn Order Book, £1.6bn Preferred Bidder Book.

------------

Now, this update also included the statement that the order book is broadly unchanged at £2.8bn from Dec22. On the surface, worrying. As it suggests that future growth might plateau, given the order book has not grown.

BUT.... digging in the FY report, Costain states that not all the high-margin, high-growth consultancy work can be reflected in this framework (Secured>OrderBook>Preferred) so we are not given visibility into whether this segment of the business is growing in H1.

FY results confirmed to still be in line with expectations though.

Therefore, I am puzzled why the shares are still down c10%. That gap should close. I would have bought more today but I'm maxed out on my current position size here, given gains since buying.

(I hold in the Boon Fund)

10th Jun '23

The mystery share in this weekend's podcast is RWS Holdings (LON:RWS)

The mystery share for this weekend's podcast is RWS Holdings (LON:RWS)

Caper4

11th Jun '23

I always enjoy listening to your podcast Paul, especially your market musings . Did not really appreciate your comment though that mortgage rates should be lower and saving rates reduced, as savers can afford it . Well tell that to the many retired people who rely on savings income and have been subsidising bloody mortgage rates since 2008 !!!

Hi Caper4,

Yes that's a fair point re interest rates, and savers having subsidised borrowers for the last 15 years, point taken!

I suppose my main criticism is the speed of interest rate rises. Also the randomness of fixed rates ending on mortgages, which will allow some people to ride out this period, when others will be thrown into crisis.

paulhunt999

12th Jun '23

My son has worked for Midwich for 8 years. They are busy and are a very forward thinking company and look after their workforce well. Always a good sign for me. Save on a lot of recruitment costs

Charles Mitchell

29th Jun '23

Personally I am not convinced. They are moving away from specialist to more of a broadstream distributor- but not of the size of Ingram for example. I do buy from AV distis, but not Midwich.

Small Cap Value Report (Fri 9 June 2023) - MEGP, MIDW, SHOE, NWF, COST, SFOR, WAND

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