Small Cap Value Report (Mon 11 July 2022) - JOUL, QTX, MPAC, MORE, GLE

11th Jul '22 by Paul Scott

66 comments 8868 reads

Good morning, we have Paul & Graham here today. I hope you're coping alright in this heatwave. Today's report is finished.

Mello Monday tonight - last one before the Mello team down tools for the summer! Details here.

Agenda -

Paul's Section:

Joules (LON:JOUL) (I hold) - a Sunday Times article reveals that KPMG debt advisory has been called in. An RNS from the company this morning confirms it. Clearly not good news, and this share is now a lot more high risk, unfortunately.

Hostmore (LON:MORE) (I hold) - another one of mine, which has crapped out due to the consumer downturn. Today's update is reassuring though - forecasts have been considerably lowered, and it's trading in line - that's the way to do it. I challenge the EBITDA numbers though, which translate into very little real profits this year!

MJ GLEESON (LON:GLE) - not a company I know well, but I'm very impressed on a review of today's positive trading update. This share looks really attractively priced right now, and with an average selling price of only £167k, its niche of affordable homes should be relatively insulated against macro headwinds. Uncertainty over cladding remediation costs looks the only negative.

Graham's Section:

Quartix Technologies (LON:QTX) (£161m) - A good trading update from Quartix, guiding full-year results in line with market expectations. Growth is according to plan, and H2 should show further improvement compared to H1. I remain impressed with this company’s transparency and see many attractions as a potential investment. Unfortunately, the valuation of six times annualised recurring revenues is very aggressive, especially when you consider that total revenues are only growing at a single-digit rate and the company continues to battle against underlying price erosion.

MPAC (LON:MPAC) (£54m) - A nasty profit warning and Mpac gets its earnings estimates slashed. A partial recovery is seen next year, with an almost full recovery in 2024. My concern is that recovery appears to be reliant on supply chain, economic and inflationary problems being fixed, which I’m not sure I’d be willing to bet on. Of course, many companies are in the same boat and also need these problems to be resolved. Mpac does at least have a decent net cash position, which should help to support the valuation.

Podcast - episode 2 of Paul's…

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FREng

11th Jul '22

Re MPAC (LON:MPAC) comments earlier.

I used to run a software engineering company. During recessions, I learnt the hard way that our market was other businesses investing in their own future and that when the future is uncertain or they get short of cash, they stop investing - often quickly and brutally.

That seems likely to apply to many B2B businesses that depend on individual contracts or contract extensions or individual license sales.

carmensfella

If any of you would like a last minute free ticket for tonight's Mello show we have 20 to give away as it is so hot out there and we want you to come inside and cool down in front of a fan and watch the show. So when you register here https://www.tickettailor.com/events/melloeventslimited/719317# just enter the code 1107FREE where it requests a promo code and it will be complimentary just for this one.

ridavies

Re Michael C, I gave him the benefit of the doubt and thought that perhaps he chose Umbrella deliberately because of the way some small caps especially are being punished eg today Joules (LON:JOUL) and one of the stars - until today - £MPAC! It never rains but it pours!

Thanks for that FREng re Sylvania Platinum (LON:SLP) where I saw the RNS early morning referring to announcements dates but I didnt see this one. Came out later/separately?

....and Tandem (LON:TND) and.....and.....

Interesting market response to MJ GLEESON (LON:GLE) which as Paul Scott

says makes all the right noises and ticks all the right boxes. Clearly it is not strong in the south east and perhaps regardless of average house price, affordability etc it is only affordable if people - two people in their case - have a job. Most impressive is that ownership is cheaper than renting - again with the same employment caveats.

Yet the market was unimpressed. Less than 1% uplift. No accounting for taste. Doesnt augur well for the expectations of the building market.

Not sure that I feel the same was Paul about the possible negative cladding implications since they have after all been through a significant first stage of assessment.

ken mitchell

Also really liked the podcast.

I’m no longer holding SAGA, as one of the key attractions was that unlike other cruise Companies they also had a successful insurance business to help mitigate against covid cruise losses. But now with their cruise business doing well again (for now and hoping covid doesn’t put a spanner in the works) could a concern be their 3 year fixed rate policies?

As a customer I’m pleased that there’s no price increase on the policies for 3 years. But if inflation stays high or goes even higher surely SAGA’s profit margins are going to take a hit?

peterg

The Sylvania Platinum (LON:SLP) RNS was a single one - entitled Notice of Results AND Production Update.

Paul Scott

Fed Chair Powell is on record as saying recently that current higher inflation is caused by the "collision" of two factors -

1. Supply shocks, essentially due to the pandemic & its aftermath, and more recently Ukraine, and

2. Excess demand for "stuff", when people couldn't spend their money on experiences, like travel/leisure/hospitality, and it was diverted into buying goods.

It seems to me that point 2 above was due to, with hindsight, too much money printing & stimulus in the pandemic.

The quantity of physical goods imported, hitting ports in the US went up 20% in the pandemic, so no wonder ports & supply chains couldn't cope.

All the above factors are linked, surely. It's not one or the other.

yiannos1

Perfectly summed up

The Phoenix

Is it not the case though that in 08/09 the banks held on to all the QE issuedand invested it into bonds and stocks so we got asset price inflation, where as in 2020 money was given directly to the public to spend so this time it went into the mainstream.

I don't disagree with the energy crunch argument you present but I'm finding it difficult to square that the trillions printed globally during the pandemic haven't had an impact on where we are now.

abtan

MJ GLEESON (LON:GLE) (I hold)

Last night I was coincidentally looking at MJ GLEESON (LON:GLE) 's trading update from just 10 days, where details were oddly vague, but with a little bit of work one could see that the company was very likely going to beat revenue and profit forecasts for FY22.

Bizarrely I then saw that the share price had barely moved since then. Market sentiment is clearly not good for house builders right now.

Nonetheless I would say that MJ GLEESON (LON:GLE) is my favourite listed housebuilder, especially given their low selling prices. If key workers - their main customer base - can afford their homes, then the company should always do well.

Management said this back in 2020:

"At the heart of what we do is build homes that are genuinely affordable and provide our customers with the opportunity for wealth creation through home ownership. It is substantially cheaper to buy a Gleeson home than rent with a typical three-bed Gleeson home costing as little as £76 per week with a Help to Buy mortgage compared to renting a three-bed home which costs around £138 per week in the private rental market.

A working couple on the Minimum Wage can buy a home on any Gleeson Homes development site."

I have hope that this will prove to be a long term winner and plan to keep holding in the "do nothing" section of my portfolio.

Cheers

Lochinver

Joules (JOUL) is rapidly turning into the case study of how to destroy shareholder value of our times.

I keep banging away on here how little emphasis is put on management capability when making investment decisions in small cap companies . Where are the measures and checks and balances on the people at the top who make the big decisions ?

Just a brief review of Linked In shows that the Joules chairman knows a bit about selling sofas . No clothing retail knowledge of any kind. No experience of dealing with clothing suppliers in the far east. But its ok - he's taken on the chairmanship of a vehicle retailer

The CEO, ex Asda maketeer, decided to outsource not only all the logistics, but also all the internal logistics expertise. Fine when all is well but suicidal when that knowledge becomes fundamental to survival. He then decides to invest in a £20m head office vanity project packed with twice as many people that they should need, even though most won't even be spending their time there. He then decides that it would be a good idea to throw money at a garden products business absolutely saturated with competitors, at the top of the market, when it has nothing to do with the core product. He then resigns, but get this : he's still there !! Incredible !

A relatively recently appointed Fd who has no experience whatsoever of retail, clothing, supply chain, working capital management, stock control, overseas sourcing and margin and cost control in a retail environment . Yes. Seriously.

You just couldn't make this stuff up !

And yet this kind of thing is happening across plc uk time and time again

Even this week, with the demerger of GSK. How can it be possible that an ex Oreal executive can be placed in charge of a sophisticated pharmaceutical company when she has absolutely no knowledge or experience of products, science, customers, technology, medicine, the health sector, competitors, the market place etc etc

Aaargh !!!

Graham Neary

12th Jul '22

Thank you very much for looking into this re: Record (LON:REC) ! I'd need to look into the structure of her bonus to comment further as to how she will be incentivised over the next three years but that's something I should try to do next time I'm covering this. That total comp. is certainly eye-catching against a £140m market cap. Thanks again! Graham

illiswilgig

'How can it be possible that an ex Oreal executive can be placed in charge of a sophisticated pharmaceutical company when she has absolutely no knowledge or experience of products, science, customers, technology, medicine, the health sector, competitors, the market place etc etc...'

But Rutland Ram surely you jest? I'll give you one guess.

Oh alright then. It's simple. She went to the right school, the right university (MA in classics) and had the right parents.........and in 2020 was appointed 'Dame Commander of the Order of the British Empire'.......for services to the pharmaceutical industry. Yes really. That's 7 years running (or making a) Horlicks and 3 years as CEO of GSK. Yes really. But what do you expect? It seems to stack up well against the qualifications required to run the country?

cheers

Mark

cmpeckham

The details of the US and UK experiences are slightly different. For the sake of brevity I focused on the UK experience where all of the inflation can be attributed to supply shocks. In the US, demand was kept higher than in the UK. But even in the US, although demand for some categories of goods (stay at home goods) was higher, aggregate demand was not and neither was total consumer demand (services fell off a cliff). All that monetary policy can change is aggregate demand, not which goods or services people decide to spend it on. If you can remember at the time, the talk was of a "V" shaped recovery and the authorities job was to keep demand intact so that the V shaped recovery could take place. The big picture was that they did that well, but the supply side of the economy did not recover as quickly as expected, hence inflation became more than the "transitory" type that had always been expected.

As for how they maintained that demand, it was not to do with money printing, it was down to massive fiscal deficits. QE does very little to demand because it hardly impacts the consumer. It is confined to asset markets, with some tiny trickle down effects. Fiscal deficits have a big impact on demand, particularly one-off stimulus like that used in the US, because they put money directly in to consumers pockets. They are independent of QE, they could have happened exactly the same without QE. In that situation, demand would have been only slightly lower than it was with QE.

QE is the process of the central bank creating new money and using it to buy bonds and similar assets from banks. That's all it is. QE does not involve giving money to the public (or indeed giving money to anyone). As far as the world outside of the central bank is concerned, the only difference is that a zero duration government note called "cash" has been substituted for a long duration government note called a "bond" at the prevailing market price of exchange. All of the transactions take place in asset portfolios and the effects are largely confined to pushing up the price of assets. The channels connecting these events to consumer demand are weak.

To put money in the public's hands requires a fiscal deficit. These really can increase demand and so inflation, but a fiscal deficit is a different thing to QE.

DaviStoVest

I think there is a lot of confusion about QE, how it works, and the way that it impacts on economic activity. The term 'quantitative easing' is itself gnomic in the extreme and only adds to the confusion. I'm an economist by background (though not a macro or monetary specialist) but find this stuff pretty tough to understand. Can't be easy then for the majority who don't have an education in the miserable science.

Anyway, thank you for your very clear explanation and argument. I find this very helpful.

Of course they do give money to the public.

They drive the rates down , hence the mortgage rates go down. , loan rates go down etc etc etc.

Andy Walters

14th Jul '22

Hi Graham,

Many thanks for your write-up on our company (Quartix Technologies (LON:QTX)) and for the kind words about our reporting.

You are quite right in stating that the growth in new installations is part of a second derivative function, whereas the growth in unit base and ARR are first derivatives. I think that we have caused a little confusion at the half-year point by stating these last two without making it clear that they are 6-month figures:

“Continuing:

Vehicle subscription base +9.4% to 221,800 vehicles.
Annualised subscription base value +6.6% to £26m.”

So these are growth figures from Jan 1 2022 to June 30 2022. I will see if we can publish the 12 month growth (i.e. from July 1 2021 to June 30 2022) instead of, or as well as, those figures in our Interim Report at the end of this month.

I hope that helps,

Andy Walters, (Founder/ Non-Exec, Quartix Technologies (LON:QTX))

Small Cap Value Report (Mon 11 July 2022) - JOUL, QTX, MPAC, MORE, GLE

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Paul Scott

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