Small Cap Value Report (Mon 10 Feb 2020) - NMC, UPGS, BOOM, TND, VLX, LUCE, INTU

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10th Feb '20 by Paul Scott

37 comments 8504 reads

Good morning, it’s Paul here, with Monday's SCVR.

I hope that subscribers survived the weekend storms, without any harm to family, friends, or outbuildings.

Estimated timings today - I have a conference call with a company to prepare for & participate in, which is eating into my time this morning. I'm taking an early lunch break today too, to get out in the sunshine before it disappears (am trying to have a better work/life balance, exercising when I can - EDIT too late, it's started raining again lol!). Hence today's report will be mainly done by 1pm, but I'll carry on until c.4pm to finish off anything left dangling.
EDIT at 15:46 - I've covered as much as I can today, so today's report is now finished.

Being forced to stay indoors yesterday did at least allow me to get on top of the mountains of paperwork in my office, with what I call "speedy filing". This involves leaving large piles of paperwork untouched, for several years, whereupon it can simply be transferred directly into the recycling bin. Much more efficient than actual filing.

It's also useful thinking time, with my attention currently focused on;

China supply chains

We've discussed this before, but I noticed late last week that several shares which rely heavily on imports from China, began to drop sharply. A good example is Up Global Sourcing Holdings (LON:UPGS) which imports branded consumer goods, e.g. small domestic appliances, a lot of which come from China. Its business is bound to take at least a temporary hit from supply disruption. The market has anticipated this, with a sharp fall in share price recently, giving up all of the Boris bounce;

At what point does this become a buying opportunity? After all, with small caps, it only usually takes a handful of sellers to smash up a share price in times of uncertainty. If buyers are sitting on their hands due to that uncertainty, then sellers have nobody to sell to, hence the price is just marked down until bargain hunters emerge. This can create some marvellous opportunities.

As we know, catching falling knives can often be dangerous as there could be deeper underlying problems that the sellers know about, and the buyers don't. E.g. I got caught out with that on Mysale (LON:MYSL) shares…

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Martin Verlaine

10th Feb '20

Can I claim originality? Not a today programme listener and I profess to cancelling my subscriptions to NYT many years ago! Seriously, this does feel more serious than Saars but maybe someone who has better research than I can post a list of the most vulnerable companies. If this equals fewer Chinese tourists and Students maybe the backwash is more significant? Not trying to be alarmist, merely realistic

catalogue

In the midst of all this spare a thought for the victims (other than financial). I am sure everyone does but it is too easy to forget those suffering in Hove as well as Hong Kong.

https://www.cdc.gov/coronaviru...

Nothingventured

STRIX ( £Ketl) is down today over 4.0% and I wonder if this is China related with them having factories out there? Could be a buying opportunity at some point?

Jim

Pete Snipes

Hi. For anyone interested in Volex. This video is from their investor roadshow last November after the half year report. Presented by the CFO Daren Morris. He highlights the progress and just how Volex is positioned around the world

https://www.youtube.com/watch?v=QJQufQboZfE

jonesj

Coronavirus figures have hit triple figures in Japan.

As far as I can tell, the WHO initial death rate estimate will have to be increased from the 2% figure. Deaths/Cases is already 2.25%, but that includes many recently diagnosed cases, where the result is not yet known.

Case numbers have been increasing by around 20 % a day, falling to around10% a day recently. That's the result with everything closed in China, although I suppose there is an incubation period. Quite a rate of compounding.

Some are talking this down and comparing with normal flu deaths. For something additional to flu deaths, with a higher death rate and a fast growth rate, I don't think this should be underestimated in such a way.

cmpeckham

Paul: "When we're buying shares, we're not just buying this year's or next year's earnings. We're buying the company's future earnings, in perpetuity. So one bad year really doesn't matter, in the long term."

So true, and in fact it is much more true today than it was 20 or 30 years ago. That is because long term interest rates are dramatically lower today than back then. Future earnings have to be discounted at a long term interest rate to get a present value and hence a logical valuation. But if long term interest rates are close to zero, then you don't have to do much discounting of the future.

This is a major part of the reason why growth investing has outperformed - and value investing underperformed - over recent years. Growth shares have their big earnings in the future, so a growth share when valued on today's interest rates is logically worth a lot more than one valued on 1980s interest rates.

By the same token, a hit to this years earnings should be much less of an issue today than it was in 1980, because near term earnings are much less important to the valuation. So it would be logical for stock markets to react less to issues like the coronavirus than they would have done historically. Somehow though, if things get bad, I doubt there will be much logic involved.

mojomogoz

Some thoughts on UP Global Sourcing Holdings (LON:UPGS) -> The big reveal happened this morning. Price down 7.5% to 59p at moment. Having travelled down from 100p at turn of year and 90p from T0 #Coronavirus.

Must have released a stinker rns then?

Well, on the negative side they announced that there will indeed be production disruption in China due to #Coronavirus. So any hopes of miracle news dashed! There must have been something more negative to add to sp woes?

Maybe muted revenue growth….H1 20 v H1 19 shows 2.8% growth to £67.7m (bit below 5% expected). Obvs much less exciting that H1 19 v H1 18 were the increase was a whopping 36%. Is this negative?…not in any objective sense.

Revenue result is reasonably positive standalone result and very positive in a valuation context. 1) Standalone its shows robust demand for its good during a period where some others struggled -> at least a partial win by not losing?!

Then 2) The mute 2.8% growth versus whopping 36% in prior period needs context. H1 18->H1 19 had new growth in Europe and a bounce-back in demand from established customers who had pulled horns in during 2018’s tough UK retail climate.

Orientation tricky but implicitly H1 19->H1 20 at 2.8% rev growth is effectively a bit more revenue growth and continued operational momentum than is credited by just basic arithmetic. No prizes from sceptics but if you believe the business is good then some solace.

3) Debt headroom of £13.2m implied approx £5m more trade financing being used YoY given that they renegotiated facilities up by £8m+ during period…that’s a positive as that means the forward order book is stronger than the same time last year.

Its early H2 20 for #UPGS and #Coronavirus will impact…but the start point to H2 20 implied in debt headroom disclosure is quite positive. Back in 2018 part of their pw problem was that the discount retailer channel was temporarily stuffed after a lot of growth.

This last TU suggests that there is no temporary growth indigestion coming from the massive European sales expansion and add that to an adjustment for the extent to which ongoing op momentum is a bit disguised by big bounce-back from 2018 => looks healthy.

At 7x p/e and 7% yield #UPGS is close to no brainer (if you believe in the durability of model and management). Current short term China woes may be good for the quick and adaptable UPGS if they can show customers superior op dynamic during tough time.

dangersimpson

re: Tandem (LON:TND) 110p to 205p +35p dividends over 10 years is a compound return of 8% PA, about the same as the FTSE All-share total return of the period and significantly less than the 11% compound annual return of the FTSE small-cap total return.

Most of the Tandem (LON:TND) return is due to a rise in the last year as more activist investors have bought in, unhappy at the level of management remuneration, in my opinion, this makes it doubly embarrassing for the outgoing chairman to hold up this average-to-poor return as a sign of success in an RNS.

Paul Scott

Of course, I'm sure everybody is thinking very much about the suffering of people affected by coronavirus. Plus worrying about how our own family & friends might be affected if this thing becomes a pandemic. That's a given.

mammyoko

As Graham has so eloquently written about before, Tandem (LON:TND) is clearly being run largely for the benefit of the Directors with disdain being shown towards shareholders who question them. As a consequence, regardless of its financial prospects, I regard it as uninvestable. It would be a small portfolio that only contained small companies that treated their shareholders with integrity, but I see no reason to hold shares where the Directors take salaries that are highly significant in the context of the company's pre-tax profit and distributions to shareholders. And who treat the position of PDMR as if only insiders are capable of running the company when they have made some absolutely howlers on the acquisition front. As shareholders we need to be able to trust the custodians of the companies that we invest in. I can see absolutely no reason to place any trust in the Directors of Tandem (LON:TND) .

davidjhill

I think it's dangerous taking too many leaps. I know that as investors we are somewhat programmed to try and extrapolate but this is somewhat different.

This is a new virus and therefore death rates are actually statistically pretty meaningless currently. There could be far more cases of infection than are reported, as only those diagnosed are given and for that you have to have visited a doctor and been tested. It is quite likely that many people get it, recover at home or have mild symptoms but the reality is we don't know.

The fact that 2% of reported cases have resulted in death so far doesn't mean that this is the death rate either. It could potentially be higher but it could also be very materially lower. Much more likely to be the latter I'd say as very few deaths will occur undetected whilst many mild cases are likely to not be reported, but again that's only my hypothesis.

Since it is early in the viruses progression medical professionals will learn quite quickly how to treat in order to limit the death rate, even before any new drugs or vaccines are introduced and so death rates may well come down as this is better understood. Viruses like this do spread and quickly. The fact that the rate of new cases is stabilising just means that the Chinese in particular, appear to be doing a reasonable job of containing it so far.

Comparing this with Flu I agree is probably not correct as that is a well understood virus that has been around for a very long time and has affected hundreds of millions of people, but at least the comparison acts as a counter balance to the media frenzy that would otherwise ensue. "Killer Virus Spreads" was the headline in black bold letters a few days ago on one London paper! Nothing like bad news to sell content even if it does potentially induce fear and panic!

In reality the discovery of this virus is a serious event, one that should be treated with caution and should be contained as far as is possible. However, in my opinion the psychology of the crowd will be the more telling factor on stock prices.

herbie47

Yes I read that the cruiseliner in Japan cases have doubled in the last day to 136 with many elderly people. Also hearing many in China are awaiting testing. Also results are taking around 7 days in Bangkok which is the only test centre for many countries in that area, so there is quite a big lag from getting the symptoms and the results. Cases may well increase per day if testing is speeded up which is something China is trying to do.

wildshot

Thanks for another mammoth report Paul.

Very scathing attack there on £:TND, I hope the directors read and take note and what good investor relations should be and would build confidence in the management.. By them being so defensive and anti-shareholder relations is not going to encourage investment. Maybe the outgoing Chair lost his complete sense of purpose or is just a bad egg?

thirty fifty twenty

Tandem (LON:TND) - interesting that the outgoing C'man quotes the share price from the start of his tenure. He doesn't mention that prior to that he was CFO since 1993 when the price was c.£10.00 (does he believe that as CFO he has no input to the success of the company??)

Seems very incestuous management team.

Given the small number of employees (on lower wages) I wonder how much of the £10 million of the Pension liabilities are actually for the benefit of the directors themselves?

Brian Geary , who has a 10% stake in CRL since the days of sub 10p, has recently disclosed a > 3% stake. Probably the recent price rise was caused by others following his disclosure.

Hi wildshot,

I tried to be balanced with my report on Tandem (LON:TND) - yes their investor communications is terrible, but it's quite a nice little business, and looks cheap.

One shareholder complained to me about Director remuneration, so I today checked it to the last annual report, and found that actually it was OK in both 2018 & 2017, so I didn't criticise the company for that.

This situation does raise the point that reckless posts on bulletin boards clearly do real damage to company's perceptions of their small shareholders. A few noisy idiots can clearly taint the image of the whole private shareholder base. So maybe the silent & sensible majority need to take better control of wayward bulletin boards?

Regards, Paul.

P.S. In my experience, pretty much all small cap CEO & CFOs do read bulletin boards! And are often exasperated with what people write on them! That can result in either of these reactions;

1) Alienation, and they don't want to talk to any private investors (sounds like Tandem's Chairman has gone that way), or

2) Relief when a sensible & well-informed shareholder does ring them up to discuss the business.

GrahamF

David

Agreed that we don’t want panic and scaremongering headlines. But we don’t want complacency Or naïveté either.

40,000 cases is quite a large number. Certainly more than a handful. While, there may be unreported mild cases that mean the average death rate may be lower, that should not be a comfort to us as it has been clearly shown that those that are infected but display few or no symptoms can be contagious. The ski chalet “superspreader” may turn out to be unusual but it demonstrates that the infected are contagious even with few or no symptoms.

Furthermore, medics already are well aware how to treat viruses. They are unlikely to be able to improve the death rate in the absence of new medicines.

So, given the high number of cases, it seems unlikely that the death rate will turn out to be very materially lower than the 2% and note that this is orders of magnitude higher than for common flu.

Added to that is the concern over the incubation time. Sure, the range of about 2 - 10 days could change somewhat as more data becomes available but currently it does seem to be longer than for the other flu or respiratory viruses. That means infected people going about their business for longer and potentially infecting more people before they are diagnosed than with the other viruses. So more of the population may catch it for that reason.

The outlook does appear to be potentially very grim unless we are lucky in some way.

abtan

Watchstone (LON:WTG)

Hi David

Just to add to your thoughts, I'm hoping for:

150p total distribution within the year
with the remaining Ingenie business + £20m (or 40p per share) effectively thrown in for free.

The current share price is currently 150p

I know that Ingenie burns through £5-6m per year, so I hope I'm being prudent with my estimate.

In the current uncertain climate Watchstone (LON:WTG) seems like a good cash substitute.

Fingers crossed we're not missing anything.

Zoiberg

11th Feb '20

I have been thinking along the same lines. The Chinese workforce is now returning to work. The authorities must have been faced with a tough decision - do we extend the holiday period even longer and damage the economy further or let business resume and hope for the best i.e. hope that the epidemic doesn't get totally out of control as a result.

In a similar vein I noticed that (from memory) the number of deaths on Saturday in China was reported at around 90 which struck me as being more than 10% of total deaths. I hope this simply represents more efficient reporting .

It was 89 on Saturday and 97 on Sunday, 108 on Monday. The total is now over 1,000 and cases over 40,000. Only about 4,000 have recovered. Who knows how accurate the Chinese figures are. The WHO has a team in China now so maybe things will become clearer.

Here is a link: https://www.worldometers.info/coronavirus/

Small Cap Value Report (Mon 10 Feb 2020) - NMC, UPGS, BOOM, TND, VLX, LUCE, INTU

China supply chains

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Paul Scott

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