Small Cap Value Report (Mon 14 Feb 2022) - STU, VLX, UPGS

14th Feb '22 by Paul Scott

76 comments 12228 reads

Good morning, it's just Paul here today, as Jack is busy doing other stuff.

Vox markets discussion - Paul Hill persuaded me to do another interview with him! As it's been such a tough market for small caps, I didn't relish the idea of talking about small caps, and said no initially. But as Paul Hill pointed out, it's when things are difficult that people like to hear how other investors are coping.

Podcast - I'm pleased to say that my audio quality is now much clearer. We've also shortened the format to just highlights of the week, so our latest podcast from Friday is only 14 mins. This link might work. If not, it's on Spotify under "Small Cap Value Report".

Agenda -

Studio Retail (LON:STU) - bombshell announcement that the shares are suspended, and the company intends to appoint administrators. This probably means the equity is now worthless. We need more information, but clearly the problems at the company were far worse than reported. The only warning sign re solvency was on 31 Jan 2022, when the company reported a working capital shortfall.

Volex (LON:VLX) (I hold) - extended borrowing facilities, shows considerable confidence in the company from its lenders. There's also a reassuring trading update. I think this looks a good buying opportunity, given the forward PER is now only 13, and brokers have recently been nudging forecasts up.

Up Global Sourcing Holdings (LON:UPGS) - an in line with expectations update for H1 (to end Jan 2022). Shares look good value. Outlook comments about supply chain suggest there are early signs of improvement - reassuring for many companies.

Investor Social -

My investor friends David & Heather cordially invite everyone to an investor social in London, tomorrow (Tues 15 Feb 2022). The idea being that pandemic restrictions have left many of us missing the company of other like-minded people, and now we can safely meet up again, let's do it! I hope to see you there, and meet investor friends, old and new.

This is genuinely open to everyone, and we also urge investors to arrange your own informal events in your own area, which can be communicated easily on Twitter, etc, and by emailing friends & asking them to publicise things. Details of tomorrow's informal investor get-together -

It's an informal Meet-up Event…

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jules2k6

14th Feb '22

HL shows Evraz as Ex Capitalisation today. Could be due to it demerging its coal assets.

Rusty2

Interesting, I did not do any of that but I have the green button, both on my Win10 pc and ipad.

Simon Rowan

Hi Patrick, I've been invested in CNIC for a while and obviously quite pleased with the way it is developing, particularly since the summer when so much else has been tailing off. I think Jack has mentioned about inflexion points in previous summaries and this would certainly seem to be what has been happening in the last six months after two years of acquisitions. The debt levels is quite startling for a company this size, but with the cash they are now generating this could fall significantly as it accelerates. * analyst expectations of revenue and adjusted EBITDA for the financial year ending 31 Dec 2022 currently range from USD 410.0m to USD 468.2m and USD 48.0m to USD 51.0m respectively. Now they are talking of being at the high end or possibly improving on that.

They haven't ruled out more acquisitions in the near term if its the right fit, but realise that the market doesn't want to see any more debt taken on. The update in November is worth looking at to get an idea of strategy, where they talk about a window in July to reorganise debt on more favourable terms 'with people queuing up to lend them money.' I would imagine that is still the case despite all that has been going on globally in the last 3 months. For a tech, still on a pretty undemanding PER of 14,

There is another Investor Meet Company with CNIC FEB 28TH, afternoon of results where I hope for more news on debt management and growth acceleration.

This is another company in The Kestrel stable of investments who have quite an impressive track record of investing in uk small tech companies and seem to be actively involved as founders and in strategy. GL

Zipmanpeter

Postel1400 - I am also watching £EAAS as I liked the area ("energy management and capital free energy efficiency solutions to reduce their carbon footprint and unlock hidden cost savings") even before current energy crisis. Their focus on schools/public sector with an offer of green capital upgrades with limited capital spend is smart with lots of wasted energy/bad energy procurement to target. I think revenues can grow grow very nicely.

However, Mgt are verbose/complicated on their slides and promise a lot with footnotes explaining eg EV that this is aspiration rather than current capability and practice. There is a big dilution overhang of mgt share options and share count has grown through issuing more shares (now 345Mn !) to fund acquisitions .

So a combination of tech and green stocks downrating AND rapid shape shifting with no proven record as a company that it holding it back.

Net, real risk it is a story stock but ....it could do very well. A bit lower still and I may buy your shares!

JohnEustace

Also the webinar is on YouTube in the Stockopedia channel.

Edit: I have included a link but it isn't appearing - another teething issue I guess.

jonno

Given the present twitchiness of the market I suspect you could short 90% of stocks and make money, if your timing was half decent.

In answer to Rustbucket Volex (LON:VLX) makes cable for all sorts of goods, including to my knowledge mobile phones, tablets and PCs.

Volex (LON:VLX) Yes all sorts of cables, the biggest growth area, reported in the 6 months report, last November was "Electric Vehicles – continued excellent sales growth of 210% year-on-year in electric vehicles market reflecting strong position in grid-cords as well as expansion into other products".

I would have thought cables in tablets is a very small part of their business?

Deegee Eff

Evraz (LON:EVR) It is actually up overall (including what it is ex ) today because it is ex paper in a Russian coalminer called RASP which may be worth about 190p .

JCPr

Bit of an update on £THS. Basically, seems a recent court ruling in RSA has determined that Black Empowerment status of a mine is not lost if the holder of the 26% minority stake sells out. So it seems Tharissa are planning to buy out that stake in exchange for THS shares. So if at the right price it should not be dilution even though the share count will increase.

PS Should've said I hold.

Wimbledonsprinter

From my understanding Apple used to be No1 client in the cables business of Volex (LON:VLX) But that business went into major decline several years ago - and for a long time Volex used to strip out the declining Apple sales - to show better “underlying” sales growth.

This makes me somewhat nervous of the talk around the growing EV business. While there might be growth currently - designs can change and it is easy to get “designed out”.

Postel1400

Thanks Zipmanpeter, please don't say any lower!! Ha. I too really liked the ethos and bought in, in early 2021 and the SP was romping away......and then its been heading south ever since. I'm inclined to hold, especially given the energy crisis that appears to be with us for a good while yet etc, and assumed this would be great for my holding here, but I'm learning quite an expensive lesson (so far) that 2 + 2 does not at all = 4 in the stock market...I suspect that many other more experienced traders would have sold up long ago....or indeed are waiting in the wings....thanks again ;)

Aargh Aitch

Studio Retail (LON:STU) Oh dear, commiserations to anyone who has lost out. I had no idea what Studio did but a quick google search set alarm bells ringing. They were known as Findel until 2019.

Tim Steer's excellent book "The signs were there" has a chapter on Findels cranky accounting in the noughties (p189-195). Highlights- lowlights surely- included: deferral of selling costs, related party transactions, "Often" restated previous years results and the damning "It was an exceptional year that did not include restructuring costs as an exceptional item..."

The message here is, I guess, Stocko figures are the starting point of an investment decision, not the end, do your own "Due diligence" and it must include the last few years annual reports and a background search. If I hadn't read that book I wouldn't have known Findels was bad news, if I hadn't spotted it on Studio's Wikipedia page I wouldn't have made the connection...

Oddly enough the 31st January report featuring Studio also included the report on Cakebox and praise from a fellow subscriber for Steer's book (Which I echoed) in relation to lessons that could apply to Cakebox and all the time the book had a chapter on Studio, hidden in plain sight under it's former name.

rmillaree

Volex (LON:VLX)

I do remember someone in the know (or with some knowledge) commenting on here that they are good at what they do (is that person here?) - so i guess the question is are they an added value wholesaler/maufacturer/supplier who can get away with charging a standard margin on what they do due to their stuff being reliable and their expertese being worth the premium - or are they perhaps potentiually nearer than the bottom of the food chain simply supplying stuff at the bottom end of teh food chain. I remember XPP doing very very nicely by moving themselves slowly up the food chain over time with regard to the products they sell - concentrating on customers presumably who need something that works rather than something that is cheap as chips.

"Today, Volex is a leading integrated manufacturing specialist for performance-critical applications and power products."

Certainly the above comments taken from their website suggest that its now qualifty over quantity perhaps now?

Thankfully they seem to have put the basket case days firmly behind them when they simply didnt make any profits at all - this does apear to practicably speaking be a different business to the one that existed for the 5 years up to 2017 or 2018 - so i am minded to dismiss any comparisons with the bad old volex that used to exist. Even their website if you look at it seems to slight diss the management up to 2015 - and to be fair the prior results were woeful.

"Since 2015, when the current executive management team took over after a series of difficult years for the Company,"

Chriskay

I held Heiq (LON:HEIQ) as I really liked the well crafted story. However as they started to tumble I sold what was a relatively small holding. Would I buy what is still a highly speculative punt in the current market - no way but as always DYOR. You say it's 'Not every day Boss and Lycra pump development money into a small company like this' but for companies like them this is petty cash tea money - if they still have such a thing. For what it is worth I am disposing of the highly speculative, 'will they or won't they' shares, as well as the ones which in my limited view are very unlikely to make inflated PEs, so my cash position is building - the conundrum is where and when I get back in. If I was brave and knowledgeable enough I would be shorting stocks, as I can look at my highest closing positions this evening and almost guarantee a fall back to near where they were yesterday. Sound familiar?

ACounsell

Hi Ben,

Tried this with Safari browser and still no green site messenger. Any ideas?

Boon

Interesting. I was expecting to see some sort of wishy-washy "agreement" that meant nothing, but instead the agreements that Heiq (LON:HEIQ) signed with Boss and Lycra sound like they might actually be quite concrete, with skin in the game.

I've never researched this company before, so it's now gone on my to-do list. Thanks for flagging up!

Its interesting that treasury and gilt yields rose today, despite increased risk from Ukraine which normally would drive Haven seeking behaviour and bond prices up (and yields down). Stock markets went down as expected on the Ukraine news. It looks like there's some pent up momentum for yields to rise even further, faster... would not be surprised with 2.5% 10 year treasuries by end of the month.

IMO further pain to come to shares on high valuations and currently lossmaking.

mojomogoz

Up Global Sourcing Holdings (LON:UPGS)

I think the underlying structural growth remains under appreciated. Covid and subsequent supply chain problems have hit the areas of their business that were experiencing the strongest growth trends - Europe/Germany and online sales. The former as there was more closure of retailers they sell in to and the latter as they suppressed their own direct to consumer business online to ensure they could fulfil the needs of their business customers (particularly it seems supermarkets).

So where are we today? At c.13 p/e it valued like it will trundle on with a mid single digit growth rate. The past reality (obscured by covid a bit) is a higher growth rate and a business that appeared pre covid to be potentially hitting a positive inflexion in future growth.

Covid period has seen them perform for their customers and keep the good flowing despite headaches. Whether this has helped them break even more into supermarkets or it was already happening I don't know...but it probably cemented some relationships and places them positively with this customer going forward.

They've continued to invest in some overseas growth and a return to normality across Europe particularly Germany places them well to surprise to the upside. They've also landed a growing foothold (from very low base) in A&NZ.

Today's TU used unusually positive outlook from a group that has tended to update conservatively since their growth wobble post IPO several years ago...reading the tealeaves I take this to indicate strong confidence and when they believe growth picks up relatively in their slightly quieter H2 I take that as a probable understatement from them (particularly as the share price is already somewhat deflated).

I see the balance of probability for surprise in growth and rating to be good...I believe we can see an inflexion point in growth rather than a modest continuation. Clearly a speculation by me!

As an aside here is a note i wrote re their underlying growth trends looking at data pre covid:

https://www.stockopedia.com/co...

15th Feb '22

I have noticed that upgs currently passes the Zulu principle screen too - not quite as hard a badge of honour to pass as doug’s magic number but normally a fairly decent sign that we are talking about a reasonably solid company here (certainly one of my favourite guru screens)- I am sure doug would approve in the reduction of the shares in issue (or at least lack of increase) since 2016 ** and decent divi and positive retained earnings even if it may not hit the magic number - certainly from a quality metrics point of view growth probably matching that of volex without the dreaded dilution that applies there and much tastIer divi to boot.

** ok looks like the stocky numbers don’t factor in the material jump in shares in issue for the slater acquisition just before year end - so that particular copybook is somewhat blotted when I check the annual report although the slater acquisition should bring with it enhanced earnings going forward - its already a brand they have been licensing so whilst the price paid seems chunky presumably they should know the prospects possibly better than the company they bought it from - looks like sellers timing may have been decent though !!!!
with regard to lack of positive net tangible asset value - the acquisition of slater has probably pushed the pure numbers into negative tangible total - however if we exclude lease liabilities of £3 mill and deferred tax of £6 mill then on an adjusted basis ignoring those numbers the numbers do squeak into positive territory just. Note there is the dreaded material debt here - but based on the recent slater acquisition the reasons the debt existence seem sound - without being sure I guess they will let this business bed in and hopefully the acquisition related debt can be paid down reasonably rapidly. Overall all seems pretty solid to me.

InvestorJohn

interesting indeed!

p.s Salter is their new brand

I was thinking that you meant Slater as in Slater funds (who do have a holding)

Small Cap Value Report (Mon 14 Feb 2022) - STU, VLX, UPGS

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Paul Scott

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