Small Cap Value Report (Mon 14 Dec 2020) - FOXT, FCCN, CDM, LSL, UPGS, OTMP, BOWL

14th Dec '20 by Paul Scott

72 comments 13117 reads

Good morning, it’s Paul here with the SCVR for Monday. This is a catchup report, as I needed a rest towards the end of last week. Fighting fit now, so I’ve done some writing on Sunday to make up for the gaps last week, see below. Apologies for any inconvenience.

Mello Monday

These are David Stredder's monthly investor evenings, formerly in a restaurant in Beckenham, now on Zoom! They're very popular, with several hundred investors tuning in each time.

It's tonight, from 6pm. The agenda looks great, I'm looking forward to hearing from Keith Ashworth-Lord. Also, our very own Jack Brumby is appearing again on the BASH (Buy, Avoid, Sell, Hold) panel - he was excellent last time, so no pressure Jack! Companies up for discussion include Volex, Polar Capital, Argentex and possibly Bioventix.

My friends Gordon Jones & Alan Charlton are also speaking, both of whom are very accomplished investors, so well worth listening to.

The code for half price tickets has not changed and is MMStocko21.

Agenda -

Foxtons (LON:FOXT) (I hold) - additional comments from Paul, following Jack's report on Friday

French Connection (LON:FCCN) (I hold) - trading update from last week

Codemasters Group (LON:CDM) - higher (recommended) takeover bid from EA, beating TTWO

Lsl Property Services (LON:LSL) - another estate agent, which reported last week

Up Global Sourcing Holdings (LON:UPGS) - a positive trading update, and still looks good value despite strong share price

Onthemarket (LON:OTMP) (I hold) - positive trading update

Timing - you have my full undivided attention today, so we'll see how we get on.

Foxtons (LON:FOXT)

(I hold)

Jack has already reported on the upbeat trading update from this London-based estate agents & lettings business. I have a few points to add;

Continued strong business is probably dependent on an extension of the Stamp Duty reductions - highly likely in my view - the Govt has extended other support schemes, and seems highly interventionist (e.g. the latest news being that it is preparing business support schemes for sectors vulnerable to no deal Brexit)
Supposed exodus of people from London - means rents & selling prices likely to fall, thereby generating new demand, and hence transactional revenue for Foxtons. I…

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mojomogoz

14th Dec '20

Today I wish to report on a miracle in banking:

Pcf (LON:PCF)

This company is achieving miraculous firsts and new innovative approaches in banking...frankly its sexy and not dull...I would unabashedly make love to it if I could...

Here are the key amazing things I learned on today's Equity Development call with the CEO:

Increasing lending through a pandemic and flash depression is conservative risk management
Lending more to existing customer base (+28% portfolio growth when new business originations fall) whilst forbearance goes up massively (ie customers experiencing stress) is conservative risk management
When a new acquisition like Azule to which you had aggressively ramped up lending (in area, production services, that is notorious for viscous cycles and precarious economics for many participants but you said it was low risk as you'd got security on the cameras etc) takes a massive impairment this is clearly NOT as you don't employ conservative risk management
More than doubling a new area of business, property bridge financing, during a crisis is conservative risk management

...LTV 60% average....brilliant....average UK bank has their mortgage book really well covered too as security price (the house) has risen and much more than loan....so this situation is not really different from say Lloyds...but we love PCF for it as obvs they are better at selecting the risk (even though they are in a new area)....no need to worry about the market freezing during a flash depression and so assets been stranded here (leading to duration mismatch stress, liquidity problems and then solvency)
Taking on a super high level of new deposits in midst of a pandemic / flash depression is an act of conservative risk management....IS NOT RECKLESS GROWTH IN FUNDS TO ENSURE THAT FUNDS ARE AVAILABLE TO REDIRECT TO NEW AREAS OF LENDING AS CURRENT AREAS ARE DISABLED BY COVID HIT!!!

YUP! Everything about PCF screams conservative and not cowboy.

TBH, this may work out well for current shareholders as they have recklessly stepped on the gas....and if economic risks keep moderating then they may look like great growth.

IMO they don't care. Their 70% shareholders wants them to grow as fast as possible using capital from public market. If the lending goes wrong they'll step in provide capital and take control of the whole thing at bargain price....but have a much bigger banking franchise that others have paid for.

FCA should check the management out.

ken mitchell

Thanks for fabulous updates again on so many shares today Paul. How you manage to absorb so much information so quickly and then write it all in detail on top is beyond me!

I hold both Codemasters Group (LON:CDM) and Onthemarket (LON:OTMP) and bought OTMP after an earlier update of yours at about half the current price. Looks a very interesting share to tuck away. Just hope that if (more likely when) they raise new money it’s via an Open Offer and not a placing for a privileged few with ordinary holders diluted.

timarr

Thinking about this more, BOO would presumably be paying 12% import tariffs already, while EU rules apply here. Then shipping goods on to EU customers tariff-free at the moment. If that changes to coming into the UK tariff-free, then paying 12% to export into the EU, surely it would end up unchanged.

Hi Paul

I'm not sure what you mean by this. I thought Boohoo were mainly manufacturing in the UK? If not it depends where they are making stuff because the EU has a lot of third country agreements where tariffs on clothing are low or non-existent.

But anyway - the EU tariff rates are 4% for fabrics, 8% for semi-finished garments and 12% for clothing. If we leave without a deal then those rates will apply to clothing sent from the UK to the EU. Sent the other way there would be 12% tariffs on clothing coming from the EU to the UK.

There are a small number of GSP (Generalised Scheme of Preferences) countries who can import tariff free into the EU. I believe these rights are protected after Brexit (deal or no-deal) including Bangladesh and Cambodia.

However, I think the biggest impact would be that the free trade agreement that the EU has with Turkey hasn't been rolled over for the UK, and that will have an impact on UK clothing manufacturers. Note that because Turkey is part of the EU customs union it's not allowed to sign such a deal with the UK until and unless the EU/UK deal is signed so this may happen quickly if a deal happens. If no-deal then that's another problem, you can understand why businesses are fed up with the delays - how on Earth can they plan around that?

Not sure if that helps and it's certainly not an area I know much about.

Boon

Paul, on French Connection (LON:FCCN)

You say that Mike Ashley with his 26% stake wouldn't let anyone buy it on the cheap.

But isn't there a risk of him combined with founder at 41%. They only need another one or two shareholders holding 8%, to then be able to force a delisting and taking it private?

This for me is the biggest risk for private investors as most of us wouldn't be able to stomach holding illiquid private shares for it to be made good someday.

Logical David

I believe Codemasters Group (LON:CDM) (I hold) has signed a 5 year deal for the IP licence to market the F1 Racing game with the potential option to extend the licence in the coming years.

JSLDUK

Good point, but could Frasers plc acquire French Connection plc and take it private, being a plc itself?

rmillaree

PCF (LON:PCF)
To be fair to the company i think the presentation of their financials is reasonably straightforward to make sense of. They have never hidden either the low historical impairment rate (nearly trebled in the latest accounts though ! so they are catching up now ) or the level of forbearance going on (£23 milion at 30/11/2020 down from peak of £40 mill.)
If we say 50% of current forebearance will turn to bad debt - say £11 million - thats a level 50% higher than this years impairment charge - so they can cope with that bad debt over the next couple of years really without dipping into reserves.
Ok it could be a can of worms like cattles where the numbers turn out to be jackanory but their business model seems reasonably simple in that the loans presumably have limited lifetime that shouldnt be that hard to model - they are confident of lower impairment going into 2021 (me not so!)

So i would want some sort of smoking gun as to what you think they are doing wrong before calling in the FCA. Just because the company could fail in worst case recession doesn't necessaily mean they are doing anything wrong - thats the gamble of the 2 sided coin whhe you have quick growth in income.
I think if we have flash depression where houseprices do go down 35% plus - i would almost expect this company to be wiped out there is no hiding the risk if we have worst case scenario depression. It might seem heedtheball to be lending at present but is it really? - that is their buisness after all and to be fair to them business and azule new originations were down so at least the lincreased lending is towards the secured segment and personal finance.

But to me it makes sense that they should be less crap than a large lumbering bank at everything they do - so if they have 40%+ security on properties they are providing bridging finance for that doesnt look like heedtheball risk to me. Looking at their overheads of £15 mill thats 3.5% of the value of their loan book - that seems fairly under contol number to me.

I do tip my hat to you for keeping the updates coming , and i would say your knowledge in this sector is way in advance of my own - so your comments do give me reason to question my continued holding here which is most appreciated.

rmillaree, my apologies for talking ill of your stock.

I stick by my view that lending activity by Pcf (LON:PCF) is far from conservative. The points I make above illustrate an approach of just ignoring emerging credit risk on their book and in the economy and carrying on regardless.

Think back to the early Noughties heyday of happy banking...Northern Rock here or some of the subprime stuff over in US....finding people to borrow from you is not hard, and they'll always be happy to borrow more. Lending is operationally simple. It would be worth checking out how much of PCF's lending is sourced through intermediaries as well...they will happily take the commission to find clients for you. Given their rapid growth I'd assume there's a decent element of this going on. I have started a non-bank credit business before and taken it through the regulatory process with the FCA. Not the same as being a bank...but familiarity with credit risk and processes.

But I've got good news for you! It seems probable that PCF doubled down on their risk and came through as the covid flash depression was caught and contained by actions of govt and CBs globally. So growing risk through a crisis will probably help deflate bad debts relative to good (although I'm sceptical about credit selection capabilities at PCF).

Anyway, I'm quite invested around banking with a position in 7 banks or credit businesses at the moment (plus another one if we extend the idea of providing credit to early stage equity finance...so similar-ish risk profile). 2 (+1) are held at full position size by me and then the other 5 are in thematic basket that makes for a bit over a whole position....

...PCF may outperform them all as in banking recklessness pays if you don't get caught out by it

PCF (LON:PCF)
rmillaree, my apologies for talking ill of your stock.

No apology is necessary , your comments are very valued. I would say this is not a big conviction holding of mine , simply a small piece in my potfolio where i thought the potential for growth merited a punt - i am well aware their are risks in their business model and somewhat sketchy historical provisioning.

if i had seen covid coming i probably wouldn't have gone near this share - hopefully they have had the opportunity though to get some of their dodgier loans swapped onto cbils or bounceback loans.

I would be interested to here your thoughts on other finance plays as investments - my only other bank type investment at present is virgin money uk and thats again a low conviction holding, i kind of think the brand name should be enough to see that venture through to being a lean money making machine although they have just taken some hefty provisions so that one isn't exactly working out how i had hoped at present. My belief is that Barclays/HSBC/and to a slightly lesser degree Natwest are so pathetic at providing any useful level of service for customers that the others don't have to shoot the lights to look good comparison. As with most banks unfortuantely it always seems like the jam is always just in the future and when it gets to the future that the taste isnt really of the proper jam variety sometgimes something thoroughly more unpleasant.

abtan

Codemasters Group (LON:CDM)

Thanks David.

So their license is only open for 5 years, after which it opens up again.

If F1 were to make a bid for the company, as someone here suggested, then surely they would be favourites, even if they made a lower offer?

Sounds a bit daft, but I imagine it's possible.

Codemasters Group (LON:CDM)
If F1 were to make a bid for the company, as someone here suggested, then surely they would be favourites, even if they made a lower offer?

Why ? surely current shareholders simply want highest exit price so that is simply highest bidder is it not.

Guesing i am misisng something here.

topvest

I think its worth considering who the main shareholder is at PCF. It's Somers Group or UIL - they are actually quite conservative value investors and wouldn't have backed PCF unless management know what they are doing and similarly conservative. I suspect this is not a business built on sand, but with a firm foundation and sensible lending criteria. Not that investing in banks is a great place to be at the moment or at all really.

Well F1 could tell shareholders to sell to them at a lower price, or they can take the higher price from EA, but then they won't renew the F1 license in 5 years.

Would EA then still go through with the offer? I would guess not, but perhaps I'm misunderstanding how the licensing works.

Robert Middleton

Codemasters Group (LON:CDM) - I hold and definitely concur with your advice. Good things may come to those prepared to wait.

Glorenfeld

15th Dec '20

Hi alpha2, it's not that the price spiked because of that RNS announcement, but rather that announcement was triggered by the price spiking beyond a certain percentage above the last automated execution of the trading session. I'm not sure about the mechanics behind it, but price monitoring extensions are a regular feature when stocks shoot up or down in a session.

You could well be correct, though, that the price rise, on heavy volume, is indicative of someone acquiring a large stake. If that's the case, we might expect a notification of holdings in the next few days. However, I think that's unlikely. Given the RNS today, it appears that yesterday was another example of the (literally) criminal behaviour at many AIM companies that allows for insider trading. Assuming it was insider information, I doubt anyone, even on AIM, would been gung-ho enough to build a stake large enough to require notification off the back of that information!

I have a strategic view that finance, banking, credit is not dead and it's unlikely that 'fintech' will disintermediate this activity to anywhere near the degree hype says it will. This may sound a bit obtuse but I see the 2010s as a sort of depression for low finance (ie mundane stuff) whereas we know it was a boom for high finance (aided by central bank policies to prevent a debt deflation)....I see the 2020s as the reverse

In addition, banks were always going to be dogs for a period after 2008. Bank crises are common events through history and rule of thumb you should wait 10 years before entering sector again. This decade hiatus is the capital cleansing process.

In my view 'low finance' financials are a great capital cycle play. Investing contra to capital cycles is a good source of return IMO...ie invest where capital has abandoned and mgts have had to clean up their acts to survive. I believe there is a high probability that where banks have been cleaned up its likely that they now perform well. I expect banks to be one of the hot areas for this decade.

I accept the above will be a minority view. Here's what I have. DYOR!

Conviction standalone positions:

S&u (LON:SUS)
Time Finance (LON:TIME) (ex 1pm)
Mercia Asset Management (LON:MERC) (stretching elastic here but its finance to small and regional businesses)

S&U and Time are very good at credit mgt IMO, well and conservatively run, high margin and with ample upside in both growth and multiple. In fact, I think Time is near ludicrously priced with an under appreciation of how profitable and durable its simple franchise is. It has experienced some headwinds from brexit and covid that has suppressed earnings.

Thematic bank basket (together they make a bit more than one conviction position):

Secure Trust Bank (LON:STB)
Lloyds Banking (LON:LLOY)
Barclays (LON:BARC)
Natwest (LON:NWG)
First BanCorp Puerto Rico

TBH I thought about making Secure Trust a standalone position but just didn't do the work and have a bit of lack of conviction in some aspects of business. The other domestically focused UK banks are not going to excite anyone but I think they are no brainer buy and hold for multiple return on capital (I bought around lows). I'd like to get into more regional US banks but haven't done work - Puerto Rico is interesting as had its own crisis plus its a real outsourcing and relocation hub for US (particularly around pharma).

I only owned Time and Mercia pre pandemic. Too early on both but a combo of buying low pre pandemic and buying more during it means I'm above breakeven on both. All the other were bought in pandemic panic around their lows.

I do bore myself with the above! However, I tend to look for things I can triple my money in so that's my aim with the above and I like it if its out of consensus too. That target is perhaps a stretch with Mercia but NAV of portfolio was underpin and I do think they may generate more upside value than is visible right now and could become a more exciting and rerated franchise too.

(Time are doing presentation on InvestorMeetCompany platform today at 1pm re TU and name change....if they bored you before then I doubt this will excite you)

I think this is a complacent and rather hopeful perspective.

Pcf (LON:PCF) may make high return from here as they took the risk and it did not bite them. But they are not conservative.

Somers get a very cheap growth option. They bought a stake at low valuation and then got value created in their stake through PCF raising money from outsider investors to grow its lending book. If PCF were to overstep and find that they need capital for solvency then Somers would step in and give a little money to take the whole bigger empire....win win either way. Nice!

PhilHofGrowYourDough

Re: Codemasters Group (LON:CDM) their customers (the simulator racing community) are saddened by this move. Their fear is that EA will seek to increase the monitisation of the products as opposed to being able to pay a flat fee for content.

Maybe a good deal for shareholders in CDM but I suspect bad news for their community and by inference EA.

No position ... or usually at the back of the grid

alpha2

Thanks Glorenfeld, I lucked into TSG when I first signed up to Stocko as it was rated 99 and although was a hiccup early in this year with a production forecast reduction it has been a great stock to hold in terms of divis and capital appreciation.

DMG2305

1st Feb '21

Hi all,

Would it be safe to assume that the takeover of CDM by EA is as good as done at 604p? The Court hearing to approve the Scheme is to take place on 3 February at the Company's campus. Sorry for the crysat bal type of question but if anyone has any tittletattlle to share it would be appreciated.

Des

Small Cap Value Report (Mon 14 Dec 2020) - FOXT, FCCN, CDM, LSL, UPGS, OTMP, BOWL

Mello Monday

Foxtons (LON:FOXT)

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Paul Scott

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