Small Cap Value Report (Mon 13 June 2022) - MRK, RBG, GTLY, TGP, SOM

13th Jun '22 by Paul Scott

76 comments 9068 reads

Good morning! It's Paul & Jack here with Monday's SCVR.

Mello is back with its virtual events tonight at 5pm, with three companies presenting plus a talk from Gervais Williams and the ever popular BASH. Stockopedia subscribers can get free tickets with the code FREE1306. You can sign up here.

Agenda -

Paul's Section:

Here is some material I wrote up over the weekend, my notes from 2 recent webinars with management -

Marks Electrical (LON:MRK) - a really impressive & comprehensive webinar with the CEO & CFO. This looks a good business, with lean overheads enabling it to make a reasonable profit margin. Management come across very well, and being entrepreneurial, and on the ball. It's going on my watch list.

Revolution Bars (LON:RBG) (I hold) - a trade magazine interviews the CEO. There's lots of positive stuff going on here, despite tough macro conditions.

Jack's section:

Gateley Holdings (LON:GTLY) - ahead of expectations full year trading update is reassuring given the share price falls seen across this part of the market (Knights Group in particular). But Gateley is faring much better than Knights and probably deserves a modest premium to some of its peers. At 13.3x forecast earnings though, I think the shares are fairly priced rather than cheap.

Tekmar (LON:TGP) - c30% fall in share price this morning as the company announces a formal sale process, on account of not having enough cash to execute its turnaround strategy. Increased pressure on working capital and a precarious financial position, so it’s not initiating the FSP from a position of strength.

Somero Enterprises (LON:SOM) - a solid (if short) AGM update, with more detail expected in July. The stock looks cheap here, but there is a risk of earnings falling if macro conditions worsen. FY21 was also much more profitable than average, but if this level can be maintained (which so far appears to be the case for FY22) then the shares will have to rerate at some point.

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…

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2ShedSam

13th Jun '22

Smoking was on its way out without the need for Vaping... I have a neighbour who never smoked but now Vapes, Teenagers who never smoked or intended to smoke but are now vaping. My mum eventually gave up smoking in her 60s but started vaping in her 70s. Irrespective of health effects, It's addictive and like smoking has the potential to be a lifetime liability (both consumer and the NHS). Companies like Supreme know this, which is what makes it potentially investible. Irrespective of moral stance (glass houses and all that), Supreme is not for me personally as they have some premises not too far from me and all I can see when I walk past it are lightweight shelving units full of boxes with people outside smoking & vaping. Just looks like an old school cash and carry warehouse but am sure there is more to the company than that (I hope!).

Bouden54

Nominal yields have recently increased more than future inflation expectations (so real yields have risen) - would expect this to be positive overall, although would differ for each scheme and depend on any hedging arrangements.

RutlandRam

I can only see things getting worse from here for Tekmar (TGP) I hold.

Given the sorry state of the share price over a long period I'm pretty sure an interested party would have made themselves known by now.
The fact that they haven't perhaps demonstrates that this really isn't a well regarded business in its own industry
Anyone interested may as well wait for it to fall over and snap up any value for pretty well nothing
This could happen sooner rather than later because presumably the recent contract wins are going to be cancelled by customers on hearing todays news that the company doesn't have enough money !
And the fact that this bad news comes out only four months after they did the placing that presumably was designed to plug the forecasted future finance shortfall suggests this isn't a well managed business at all

The main lesson for me is that I just held on to these for too long purely on a 'hope' that things would get better. And if I'm being totally honest with myself I wanted to avoid crystallising a big loss. Thats me behaving illogically and emotionally - a bird in the hand and all that. I really must learn this lesson.

eggbaconandbubble

Why no mention of Steppe Cement Steppe Cement (LON:STCM) today?

jamesalastair

nicely said.

timarr

If that's not a suggestion then I can't read. In contrast, describing what you do would be: "In the end I just buy companies ...".

OK, fair enough. Loose lips and all that.

To put this into perspective though, the post was in the context of previous posts today on the psychological difficulty of deciding when to buy or not in a bear market. My (and my alone, no recommendations) preferred approaching of dealing with this is by dripping money into the market gradually.

This worked out very well for me in 1987, 2000, 2008 and other corrections. Whether that will turn out to be the case in the very different conditions we find ourselves in today is another matter.

cmpeckham

As you may know it's called "dollar cost averaging" and is a good strategy ... so long as the investor is observing overall constraints on the percent of their portfolio in any asset class, including stocks. The "market" that funds are dripped in to should be the global asset market, including bonds, cash and hard assets. An allocation of 100% stocks is just super risky for the average person nearing retirement.

It used to be accepted that the percent of stocks in the portfolio should = (100 - age). The world has changed a bit since those days but not enough to void the good sense behind this rule entirely. See here:

https://www.investopedia.com/a...

"Target date" funds that implement variations of this rule are still hugely popular today and make great sense for passive investors. I have happily suggested (yes suggested) these to people who have asked me and for whom they were a good fit. I would not have suggested that they invest entirely in companies. For a skilled investor the rules may be different, but this is very much the exception, not the norm.

Blimey

tic_tac_toe

Revolution Bars (LON:RBG) Paul says"Most management have done basic roles in the business earlier in our careers (I started as a KP [Paul: don’t know what a KP is, sorry!]"

KP is likely to be Kitchen Porter, not sure if anyone esle has mentioned, but I reckon that is it.

Db47

https://www.nhs.uk/live-well/q...

if you think saving millions of lives worldwide is unethical more fool you MichaelFBS - presumably your ethical stance extends to oil, alcohol, fast fashion etc. etc.

Dieselhead2

Renold with their previously mentioned pension deficit springs to mind! We could be in for a very pleasant surprise with this part of their business, come results day. (I hold).

GabrielMulholland

Tungsten sell or wait?

MichaelFBS

I was careful to point out that we all have our own ethical boundaries and that I don’t try inflict mine, unlike the ESG crowd, on other people. Just that for me tobacco production and vape production were beyond my limits.

So no my ethical stance does not extend to oil, fast fashion etc etc. That was the point I was trying to make. I am sorry it was unclear.

Regards

Michael

illiswilgig

14th Jun '22

Tekmar (LON:TGP) (I hold)

Thank you RutlandRam - that summary pretty much nails it for me. Having been out of touch for a week - I am catching up (Tuesday) and am content to see how it plays out - but they have a very weak hand to play in my view. Significant risk of going bust - despite their assurance that they have enough to carry out the work contracted. Can only think that the main institutional shareholders said - No More - when they went back cap-in-hand after only 4 months.

Seems strange to be yelling - I'm for sale - with no potential customers announced but then we don't know whats happening under the covers and it might be that they are keen to flush out any interest whilst they talk with other parties. The recent US contract may stimulate some interest from across the pond as they ramp up for off-shore wind?

I still like the business, the market position and the market opportunuity - unfortunatly that will be for someone else to benefit from.

Mea Culpa. Totally avoidable mistake on my part. I recognised the balance sheet risk and the flaky track record - but still underestimated the level of risk, especially in view of global circumstances compounding their problems. over estimated the competence of management and failed to act on the continuing degradation in operating performance. As well as choosing to overlook the legacy issues. Very difficult learning lesson for me - I knew the balance sheet was too weak. But still allocated capital to it, Albeit I limited my investment.

What an idiot! Indeed, I am my own worst enemy.

cheers

Mark

MattH

Obviously, I am not Paul but from what I understand he was leveraged and facing margin calls in illiquid shares and doing nothing was not an option. He often cautions against the twin dangers of leverage and illiquidity.

tagware

"distressed purchases" - is Retail speak - it broke today and customer needs it to be replaced like NOW or tomorrow at the latus.

???

Foodie

19th Jun '22

Just for interest, purchased a new washing machine from Marks Electrical Marks Electrical (LON:MRK) ordered on Friday, delivered and installed today (Sunday) fantastic communication, by text and at least 6 emails keeping us updated, delivery drivers were excellent, and very efficient, reckon around 18 per van daily orders daily and around 400 miles daily (fuel costs got to hurt), although paid extra for the installation and removal of all packaging and the old machine and I guess within reason they can increase delivery charges

Overall competitive and impressed, on my watchlist now!

I thought AO World (LON:AO.) was good, but these are just as good if not better, plus I prefer Marks Electrical (LON:MRK) fundamentals

gmtrader

20th Jun '22

Fuel costs will obviously be more, but as someone who has driven for a living for the last 15 years, fuel is just 1 small part of the expenses. Overall it has probably added about £100k a year onto their costs. Wages will be their highest expense.
Thanks for sharing your experience though, and I hope you have added a review on trust pilot!

smilingmickey

21st Jun '22

Hello Abtan,

Spectra (in my view) is made up of a bunch of scientists who come up with interesting ideas some of which have been/will be commercialised. Much of the current revenue with their central bank customer is related to a development contract that funds the development of an improved security system which the Bank may/will subsequently utilise. Most of their R & D effort is devoted towards improvements in Security Systems.

The Solaris opportunity has been mentioned a few times by Spectra in the last few years. The idea of measuring viscosity of small quantities of liquid has come from the scientists, but the market it is directed towards is very distinct from the security business.

I would guess that Dr Nabaldy and his colleagues own the balance of Solaris not owned by Spectra (who I think own 48%.)

Small Cap Value Report (Mon 13 June 2022) - MRK, RBG, GTLY, TGP, SOM

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Paul Scott

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