Small Cap Value Report (Mon 13 Mar 2023) - MCON

13th Mar '23 by Paul Scott

61 comments 8748 reads

Good morning from Paul & Graham!

Breaking news! HSBC has bought SVB UK, in a deal that involves no taxpayer money. Details here.

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.

Graham’s Section:

Mincon (LON:MCON)

Share price: 88.5p (pre-market)

Market cap: £188m / €212m

This is an Irish engineering group that designs, manufacturers, sells and services rock drilling equipment. Perhaps we can think of it as the “anti-Somero” (since the equipment from Somero Enterprises (LON:SOM) is designed to create perfectly smooth surfaces!). Like Somero, Mincon sells its own proprietary equipment, though Mincon also sells some 3rd-party gear.

Today, Mincon publishes its results for 2022, and here are the highlights:

Revenue +18% to €170m, with 19% growth in its own products vs. just 10% growth in 3rd party products. Own products are now responsible for 83% of total revenue.
Gross profit +11% to €54m.
Operating profit +9% to €19.7m
Net income +1% to €14.7m

Financial results

As you might notice from the above, there is a disappointing lack of progression as we go down the income statement: the percentage increases get smaller rather than larger!

This is worth investigating, as usually we want operational leverage to produce the opposite result.

First, the reduction in the gross profit margin: this is caused by two factors. 1) Input cost inflation, although the company says…

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Lucky dip

13th Mar '23

In a day like today, I only look at the fallers shares. It is a buy for me regardless what happens over the week. I pick up those I thought were good values last week, surely they are better value this week. Can they fall more? possible but I can not time the market. I buy some this week and some more in 2-3 weeks regardless what has happened to the share price.

Boon

I fully expect a few more banks to go under. Either USA, or in Europe. But I expect them to be smaller ones.

The catalyst for a collapse, in all three cases so far, has been depositors pulling deposits.

This is much less likely to happen with the big banks. For two reasons. The first is a diversified depositor base. The second is high regulation, meaning higher amount of regulatory capital buffers. And the third is that if a depositor is skittish, they will pull from small banks, but the money needs to go somewhere (eg big banks).

Hence why I think it is a good opportunity to buy into just the Big Banks (but not the wider banking index as a whole).

WarrantStar

Davidjhill. Thanks for posting Goldman Sachs forecast that UK inflation will fall below 2% this year. This is the most positive piece of economic forecasting that I have heard in the last year! If they are right, then this would be very positive for share prices.

Rusty2

It is probably best if you read the other post about Alphawave IP (LON:AWE).

Yes different type of companies. Shares are down from around 450p, seems the market does not trust this company. Forecasts have been reduced recently.

BnB

The UK market absolutely wet itself over SVB today whereas the US market appears a little more level headed. Perhaps party down to the awful liquidity in the UK markets these days.

I'm seeing a dichotomy between a relief rally for tech (SVB depositors made good by regulators/Fed) and the recession trade exemplified by a flight to safety (bond yields slashed, healthcare and staples up) and away from cyclicals (industrials pummelled - esp Europe owing to the previous assumption that a recession had been averted)

Lord Gnome

Would this be the same Golden Sacks that was forecasting oil at $200? To be taken with a rather large pinch of salt.

Trio

I'd start it at 6.30/7.00 ending it by 9.30/10.00 and restrict the time of some presentations. Some are not concise enough, which may well be sending your viewers to sleep, hence their earlier bed times!

davidjhill

all economic forecasting is to be taken with a large pinch of salt in its absolute

what is interesting is why they think that - not the actual number, and whether the direction of travel is there.

I'm seeing minuscule liquidity in the UK

Completely agree. Couldn't buy a full GBP10k of Treatt (LON:TET) this morning when markets were in full sell-off. Nevertheless, the behaviour I described (tech relief vs recession trade) is global. If anything, more pronounced in continental Europe than here.

I have now taken a a sizeable position in Invesco STOXX Europe 600 Optimised Banks ETF Acc (LON:X7PP) !

Combined with my existing stake in Metro Bank (LON:MTRO) I'm now approximately 8% of the Boon Fund in banks.

A decent call with European banks having deposited significant collateral with the ECB (= reduced need to liquidate bonds at a loss) and European depositors being very slow-reacting and primarily retail and small value.

For the bold, wouldn't iShares US Regional Banks ETF be the better bet - down 27% at one point today? My thinking is that one or more small banks might run into difficulties, fail even, but there are 38 holdings in the fund. Will Biden, facing re-election in 18 months, let depositors suffer across ALL of them? No way. And if matters were so bad that he, the Treasury and the Fed couldn't together avert a calamity, then our whole portfolios are toast for a while anyway!!

BenHazz

I must say I've taken a similar approach and moved some money out of cash today and into US and UK equities that I've I had on the watchlist. Here's hoping it doesn't drop too much further. It's my personal view that this drop might be a bit overdone. We could see a climb back up with decent CPI data tomorrow and even a possible fed rate pause in the coming weeks. Here's hoping!

JohnDoe2378

Correct. The UK market really is dreadful for the private investor

Nanotrader09

I have little ones who are up 5am and during the night, so I go to bed at 9pm!

Ah, but if you see my comment above... I think small and regional banks are going to take more of a beating. I know the Feds are working on a liquidity line (giving cash for underwater bonds at the par price). But I think their recovery will lag the big banks.

If anything, the big banks will benefit out of this. Depositors will increasingly shift money from small to big banks, accepting low interest - perfect for the big banks NIM.

In a day or two, the narrative will be: "as expected, the Feds/BoE/ECB will do whatever it takes to secure the banking sector. Big banks are the last to be let to fall. Super secure, low PEs, good dividend yields (especially given the dropping rate expectations now) - lots to like."

I wouldn't be surprised if the big banks share prices eclipse the pre-SVB prices in the coming weeks.

I think small and regional banks are going to take more of a beating

My interpretation is they already have (in terms of SP) - thereby giving you a potentially better entry.

This is a purely academic discussion since I actually took the alternate course myself and bought a big U.S. bank today. I don’t like banks as investments usually - unless they have strong wealth management revenues - and I hate small ones!

carmensfella

14th Mar '23

We do not control or pre run through company presentations....it is their own work and they are all different lengths as some are new to Mello so we give a bit longer. Basically the Q&A tends to be longer with new companies whereas regulars need less time to get the message across. It is far from easy hosting these but I try to keep everyone awake

Mark Selby1

Hi Mr Boon. I was surprised to see the extent of the divergence in performance between (LON:X7PP) & (LON:X7PS) which I think is the Euro denominated version of your bank ETF.. I think I've decided that the recent falls are maybe not such good opportunities when you look at the huge increases in value that have already taken place since mid Octoberfor both these ETFs. I guess I am more nervous about future bad debt provisions rather than the recent SVB bank shenanigans. Anyway I hope it works out to be a very profitable investment for you. I always read your observations with great interest. In passing, I am surprised to see the extent of falls in Barclays Bank. Cheers.

Interesting observation about the two ETFs in different currencies and their diverging performance! That really shouldn't happen if the ETFs are the same underlying portfolio of shares. Both are full replication I believe.

I am cognisant of the potential for increase in bad debt provisioning. I have bought Invesco STOXX Europe 600 Optimised Banks ETF Acc (LON:X7PP) not as a long term hold, but more short term. I believe that within the next month or two, the markets will get the valuations of the big banks back to where they were pre-SVB. And then even go higher, because the big banks now have gotten more customer growth, deposit inflows (at low interest rates), allowing them lend more and also expand their NIM.

However, I do view the banking sector as being at the start of a boom cycle, now that rates have returned to normality. Therefore, I will be looking for longer term holds - specific bank stocks. Just need to find a way to get comfortable going through so many pages in each annual report :)

Small Cap Value Report (Mon 13 Mar 2023) - MCON

Graham’s Section:

Mincon (LON:MCON)

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Paul Scott

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