Small Cap Value Report (Mon 15 Aug 2022) - JOUL, PMP, GUS, TET, SEE

15th Aug '22 by Paul Scott

65 comments 8490 reads

Good morning from Paul & Graham!

Weekend Podcast - for anyone interested. I've no idea how many listeners these are getting! It went up on Sunday morning this weekend, as I was out on the razzle on Friday night in Bournemouth, so nothing much got done the next day.

Agenda -

Paul's Section:

Joules (LON:JOUL) (I hold) - good news that a new CEO has been found. I recap on the various issues that have made this share such a disaster in the last year. So it all hinges now on shoring up the balance sheet, and swift action needed from the new CEO to sort out its problematic supply chain & excessive inventories. Could be a good turnaround, but risks remain.

Gusbourne (LON:GUS) 67p up 5% at 08:45 (mkt cap £41m) [no section below] - I’ll keep this brief, as GUS shares are illiquid, given that Lord Ashcroft owns 66% of it. H1 (to 6/2022) revenues are small at £3.0m, but that’s up 108% Y-on-Y. Asset-backed borrowing facility increases from £10.5m to £16.5m, for 5 years, “at a competitive rate”, 2.5% over BoE base rate. GUS is spending £1.6m buying 137 acres of adjoining land from one of its own Directors. Vines will be planted in May 2024, so it’s long-term in nature. I reviewed GUS’s last accounts here in June, and was unimpressed. On the same day I also looked at fellow English wine maker, Chapel Down (OFEX:CDGP) and think that looks a far better financial bet, if you have to own one of these shares CDGP is clearly the better investment proposition - bigger, already profitable, and with a decent balance sheet.

Graham's Section:

Portmeirion (LON:PMP) (£56m) (pre-market) - a very small acquisition for Portmeirion but the new brand “Aromaworks” could have significant long-term growth potential in the hands of Portmeirion (time will tell). I use the opportunity to discuss why companies in administration often make for spectacular investment opportunities for the people who buy up the assets or who buy the debt and wipe out existing equity holders. We can’t take part in these deals ourselves, but we can look for listed companies who are able to do it, and share in the rewards.

Treatt (LON:TET) (£340m) - there’s a major profit warning from this provider of extracts and ingredients. The macro headwinds…

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simoan

15th Aug '22

Then the valuation is not there for your benefit other than to persuade you not to invest! For those interested in potential annuities and undeterred by the price tag, they make more sense!

I’m not sure I understand what you’re saying? I’m absolutely interested in high quality, annuity like investments, just that Treatt (LON:TET) strikes me as a bad example given the substandard margins they enjoy for such a company, and the very high rating (on just about any valuation metric you care to choose). Not exactly Games Workshop (LON:GAW) is it? It’s never struck me as a company with much of a moat for that reason.

Of course, we are probably talking at cross purposes as you seem to be a thematic type investor, and I’m most definitely not.

MichaelFBS

Hi Kevin

I was wondering about PE’s and whether they update in real time but assume that that would put too heavy a load on the servers? Probably need a Bloomberg at £25,000 a year for that. Shame though.

I certainly think that a PE of 22 for £TET is too high when taking in to account the lack of visibility caused, mainly/in part(?) from macro issues to some extent outside of their control.

That said I do think that at some point Treatt (LON:TET) will become a Buffett type stock of a “great company at a reasonable price”. But for now like you I will just continue to watch.

Regards

Michael

Aislabie

I also hold Spectra Systems (LON:SPSY) and have done for long enough to still be well in profit (which tends to dull the proper sense of alarm that you should feel as prices fall). The problem is that this is a curious oddball of a company in many ways:-

As you note, it is dominated by a very few large customers, each in a different field of its business. 2021 showed 73% in 3 customers, 2020 was 60% in 2 customers

It has a rule that an AGM quorum for a resolution requires that 50% of all shares are voted - but they never are, so no AGM ever has a quorum. No votes appear to be registered from the 10.18% held by Close asset Management, nor the 6.47% holding of Herald or the 4.97% of Canaccord Genuity. The AGMs are in Rhode Island !

The CEO is the only Executive member of the small Board. The Auditor is Miller Wachman LLP who have between 25 and 50 employees and do not even maintain a website (a "404" comes up at the moment).

In the SPSY website there is an Investor Relations section which, excitingly, is headed "Reports and Presentations" but....there are no presentations!

It seems therefore that the chances of a smaller private shareholder getting real insight into what is going on in this company is very small, as a $16million annual revenue covers such a range of businesses that the opportunities and risks seem to be beyond calculation without some inside guidance. Can I defend to my wife (key audience!) why I am OK being invested here? Probably not.

£TET

“One disappointment doesn't make something a bad business overnight does it?”

Agreed but it may cause the market to re-rate it permanently downwards, if it thinks that whenever these sort of issues come along, profits will reduce? If the market was assuming profits over five years of say £100m but now thinks that profits are more likely to average £75m then it deserves a much lower PE.

I for one, who has only been investing since 2012 ish, had got carried away with the idea that environment was benign and would be forever so (in the same way that central bankers fooled themselves in to believing they had conquered inflation forever and took their eye off the ball). So I could predict X profits growing at Y percent forever into the future. That was naive of me to say the least.

An example would be Somero Enterprises (LON:SOM), which is, IMO, a great business but persistently trades on a PE the high single digits, when, again IMO, it should trade in the mid-teens.

Further on Treatt (LON:TET), though I no longer hold, I first purchased in October 2014 at 142p so it has still managed to four bag from there. So perhaps in 2030 it will be trading at £22!

Perhaps badly phrased and as you say concentration has to be taken context, and we have no idea what percentage of his wealth is tied up in is ISA. But for me Treatt (LON:TET) is not the sort of no brainier company (it is too vulnerable, as the TU demonstrates, to outside factors beyond its control) on which you would make a huge concentrated bet. But what do I know!

BnB

I’m absolutely interested in high quality, annuity like investments, just that Treatt (LON:TET) strikes me as a bad example given the substandard margins they enjoy for such a company

Are they substandard? Certainly compared to SaaS providers. But not if you compare to its blue chip competitors. At 34% and 17%, the gross and operating margins combined for FY21 are within touching distance of Kerry Group and Givaudan, on a par with Symrise and ahead of International Flavours & Fragrances. But they are all within a certain ballpark. So it’s the sector that’s the issue, not the stock.

And yes, I’m more of a thematic investor than you. Decades in business taught me that, no matter how smart you might be, or how hard you work, the thing that mattered far, far more than anything else was being in the right market. So I bring that learning into my investing.

portugull

Thank you Paul for your comprehensive reply to my post earlier today and in particular to your points on £BOO. One of the main reasons behind my decision to invest in £BOO last year related to the major brands they were acquiring to which I attributed considerable value. It is reassuring to read that you also see great potential from the brands some of which are very well known. I also appreciate your info that "serial returners" are having their accounts closed. This makes complete sense to me. I am going to give serious thought to adding to my position. Next up though is to listen to your latest Podcast.

IMO, yes the Gross Margin is really substandard for a highly rated, highly quality annuity like compounder. Both PepsiCo and Coke have GM's in the mid 50% range, A G Barr (LON:BAG) mid 40% range, Diageo (LON:DGE) over 60%. A 35% GM is little more than glorified distributors like Gear4music Holdings (LON:G4M) and in the Food & Beverage sector is more inline with boring old Tate & Lyle (LON:TATE) (a possible acquirer?).

I agree it is likely the nature of the sector, but as I mentioned before, no-one has to be invested in a sector with average margins and competition that acts to put a cap on them.

All the best, Si

Roger Baron

Agreed, "averaging down" is more akin to doubling up at the race track each time the favourite you backed doesn't win. Very different to buying more shares in a company when it's become more of a bargain price. (Of course both can end up becoming costly if things don't turn out as expected.)

Silver Moon

Could Treatt (LON:TET) be reverting to the mean? To fall-back would be complacent. I don't hold.

Interim results for MTI Wireless Edge (LON:MWE) seem good to me but I missed the Investor Meet Company presentation. Announcement from Tekcapital (LON:TEK) re Lucyd holding looks even better and surprised price hasn't increased further. I hold both and would welcome comments from anyone cleverer than what I am.

Caper4

And I listen to them whilst on the rowing machine in the gym !! Time passes quickly and helps reduce the pain of 30 minutes at level 10 on a Concept2 machine:)

fwyburd

One of my concerns about Boohoo (LON:BOO) strategy with regard their brands is best illustrated by the Debenhams website.

Click on dresses and you find ones from Karen Millen, Wallis, Coast, Principles, Dorothy Perkins next to Boohoo and Nastygirl. I'd bow to someone more qualified about brand marketing (Zipmanpeter?) but it seems to me incongruous to have Boo and Nasty girl next to more higher perceived quality brands like Karen Millen. In addition, I don't understand why their Debenhams retail offer has Nasty girl/Boo/PLT there at all. - surely a very different market?

And that to me suggests they have no idea how to market more up-market product brands and are in danger of undermining the Debenhams retail brand.

Cheers

Francis

raggedtp

Just in case you don't know, you can listen to IMC presentations after the event. Find the company on your My Companies tab and click it to see what's available. Normally takes about 24hrs, and they have a very helpful questions tab, which condenses the Q&A, and has the Directors' answers captured there for eternity....

john2

'there are no presentations!'

A year or two ago, the CEO gave a compelling presentation at a Mello evening. He came across as an academic at least as interested in the technology behind the products that he sells as in the financial performance of the company. I was encouraged to invest, and even though I am currently mildly underwater I am happy to receive the dividends and have no thoughts of selling.

Dragon

Mine goes up to level 11 ;-)

Zipmanpeter

Francis, Thanks for call out on Boohoo (LON:BOO) and its website putting Karen Millen next to BooHoo ! For what its worth, I would say:

i) Debenhams offer an online Dept store conspt not a single brand store experience. So, just like going to Asda, you can expect to see cheap own label next to value offeres next to presteige food brands
ii) to continue the SM analogy, BooHoo have deliberately moved brands like Karen Millen down in price (&quality) - they bought them cheap and hope volume increases offset the brand image hit
iii) they offer several routes in on the website - so if you want to look at a particular brand only, you can search or screen that way but if you want a 'party dress' but are open to trading up or down that route is open to browse as well. Have ever been to the SM, intended to buy a brand then seen a fantastic Value offer or vice versa and diverted

For me (I hold), the jury is still out on whether the boatload of brands they bought a couple of years ago will pay out long term. Debenhams was the big bet but is there a market for an online Dept store? (I hoped they would do really well from getting into beauty products as Denhams was strong there but it’s a risk as the beauty area is notoriously not a pile it high, sell it cheap business.

Furthermore, their overall business has been hit, there is clearly a big transition cost in Mgt time in bedding acquired brands that are then moved in terms of price position in the market and crucially we don’t see profit breakouts by brand.

My guess is similar to Paul’s in that I think the bad news on Boo has either been overstated (ESG governance) or is in the past/being fixed (no/high airfreight to the US, 1 warehouse) or has had capital applied that has not yet had time to pay back (prepping warehouses for bigger volumes, pre-commitments on a US warehouse and I hope buying distressed brands from administration etc).

Net, net, on a 2 year basis, I am quite optimistic. In the short run, fast fashion might be an obvious area to retrench if cash is tight – although the wider range of price points gives them options. Maybe people will trade down? Maybe they stop buying altogether. Maybe Shein will drive on or come unstuck. There seems low risk of going bust so I wait.

So in summary, what do I know, DYOR and place your own bets - my overall portfolio is down this year and maybe I am fighting yesterday's war on Boo (I bought at 23 and sold at 125p several years ago before a period out, buying back in and now being well underwater on my re-purchase.

Humility and patience need to be our watch words currently! At least I am worried by share prices not heating.

JCPr

And they're usually up on YouTube a day or two after that.

Gostevie

Please keep doing the podcasts Paul. I really enjoy them.

Lochinver

Pure speculation on my part but I do wonder if the timing of this announcement is not a coincidence given the fairly recent appointment of a new FD. Any good FD would be all over the areas of risk to the business as soon as he/she got in there to make sure something horrible doesn't come out of the woodwork "on their watch". It sounds like he's done his due diligence pretty quickly. The factors referred to in most of the TU seem to be fairly basic risk management and commercial issues, rather than volume related.

The bombshell that the business has long term contracts with customers that appear to have no or only limited inflationary input cost clauses sounds astonishing to me.

Small Cap Value Report (Mon 15 Aug 2022) - JOUL, PMP, GUS, TET, SEE

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Paul Scott

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