Small Cap Value Report - Mon 16 May 2022 - MADE, OCN, GRG, SRAD, VTU, RWS

16th May '22 by Paul Scott

47 comments 9483 reads

Good morning, we have Paul & Jack here for you today.

Agenda -

Paul's Section:

Made.Com (LON:MADE) - a severe profit warning. Instead of recovering this year, losses are now set to increase considerably. Consumer discretionary, bigger ticket items, are clearly being slammed at present, due to the squeeze on consumers, but that's already been reflected in big share price falls. MADE has a strong balance sheet, so I'm not worried about insolvency risk. Big hitter new CFO joins.

Greggs (LON:GRG) - Greggs is doing OK (for now), and leaves full year forecasts unchanged. I'm looking at this mid cap for read-across to smaller caps, and the retail/hospitality sectors as a whole. A rather rambling section, covering macro factors too.

Vertu Motors (LON:VTU) (I hold) - I've typed up my notes from this morning's webinar. Some really interesting additional points.

RWS Holdings (LON:RWS) - bidder pulls out. I have a quick look to see if there's any read-across, but no clear reasons are given. So I assume it must just be general market bearishness? Looks a very good business, long-term track record.

Jack's Section:

Ocean Wilsons Holdings (LON:OCN) - a fall in volumes is offset by better revenue mix and foreign exchange rates at the operating division. Headwinds remain, with inflation and supply chain bottlenecks. This business is run for the long term so it could appeal to certain investors with its 5.7% yield and perennially high StockRank, but the shares are thinly traded and the share price has not made progress over the past decade.

Stelrad (LON:SRAD) - lower volumes but better mix and improved margins mean the group is trading slightly ahead of expectations. It’s been a very poor period for IPOs but Stelrad is so far doing better than most. It’s a tough backdrop out there and there are headwinds, but this is worth flagging as a potentially better-than-average and neglected new listing to keep tabs on. More research required though, and there's a nasty spread.

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…

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ridavies

16th May '22

Hello JimMcLad. Thanks for the comment on matters which may relate to Angle (LON:AGL) though the reference was to an article back in January. Given the delay, what made you bring it up now?

I was interested to see the $billions tags related to the activity in these markets. However, without FDA clearance, that is keeping the price tag for Angle (LON:AGL) pretty low in comparison, though it would seem from the Angle (LON:AGL) R & D results in so many top class (IMHO) health institutes in the UK, Europe and the USA that the products of these multi $billion competitors is rather inferior!

It is now the anniversary of the fulfillment of the extra data request from the FDA to Angle (LON:AGL) which they supplied in full and on time. I am struggling to understand why the FDA is taking so long - admittedly Covid has continued to i intervene and we have Ukraine,though I am struggling to think what effect that has on the timely response rate of the FDA to reasonable applications.

It is probably a totally different section dealing with the Polarean Imaging (LON:POLX) application but theirs seems to be having more progress from the more specific RNS's that are coming out. After the first refusal, it was forecast that the next final response would be about a year, and it seems that is playing out ok.

If I were a different kind of person, I might start to think about conspiracy theories because Angle (LON:AGL) is not a US company (though has received more shareholder support in the US in recent times). In my worst moments, I could be thinking that there are some heavy players with inferior processes out therein the US who would have quite a lot to lose from a fully certificated and powerful Angle (LON:AGL) and may have some kind of influence with decision makers .....but of course that would be absurd, wouldn't it?

In the meantime, do you have any further thoughts on why the decision is taking so long? Have you had any contact with management / PR people at Angle (LON:AGL) recently?

Thanks Paul S. for your comments on Greggs (LON:GRG) though I have one or two things to add.

One of the things that seems to help the SP and PER being above what is expected is that to date they have plans to open more stores/outlets and the potential to do so. I don't think this should be forgotten. I say 'outlets' because they are quite creative at finding appropriately sized and located 'stores' as I originally chose to call them.

Additionally, their Marketing and R&D people have been very creative, especially in the vegetarian and vegan offerings (which many restaurant chains are still really very poor at covering to their potentially increasing percentage of customers).

GrahamScott

FXC for the Canadian Dollar

FXA for the Australian Dollar

Both are relative to the U.S. dollar, increasing in value when the Canadian / Aussie dollar strengthens and declining when the American dollar appreciates

Chrisfarrell21

Fair points all, thanks Paul. Thinking about it, given all other prices of everything is/will be going up, people will probably look at the price of a bacon roll going up as either:

"this is nothing, gimme the bacon" or
"this is the straw that breaks the camel's back/wallet".

It seems we're going into a difficult (in so many ways) next few years. There are going to be so many people affected in so many different ways and pulled from so many different financial directions, we don't know what's going to happen to individual businesses' demand.

Cheers

Chris

Tommy H

Hi Paul

I had a longer write up on thoughts last week, basically I am doing different things for different family members, and for myself I am actually doing different things in different parts of the holdings (e.g. main SIPP 90% cash, current employer SIPP 100% invested and continuing to buy each month but that is ~7% of total SIPP).

The hardest part is control of emotions, so looking say Legal & General (LON:LGEN) Somero Enterprises (LON:SOM) or £PHNX bargain, but is the rise going to continue, or will it do as before drop back even lower? I know there is no right answer, some things I have sold are up, some things I have sold are down, the biggest thing is I have slept at night :) and right now I am trying to learn to sit out for a few weeks and then make a decision.

I am probably going to end up allowing myself to start to buy small starter positions in some companies as they are just too tempting, but these would be <1% so can build in a rise, or double down on a fall.

I have no stop losses on my remaining holdings but running a manual 10% go to minimum position size and 20% exit and put on watch list.

Good luck!

Tommy

Norfolk'n'Good

Re £VTU

Energy costs - a lot of work being done here (not explained what!)

One thing I picked up from a separate results video is that Vertu are changing out all workshop and showroom lighting for LED. A big upfront capital cost but the long term savings are substantial - particularly in current energy market.

JimMcLad

Hi ridavies

Given the delay, what made you bring it up now?

It was mentioned on another board and although dated Jan it was an interesting bit of info I had missed and assumed others here may have as well. Angle are working with Abbott (and I believe Astra Zen) and whilst Andrew Newman has said they want to stay independent – which I’d like to see – I suspect a lot of shareholders would happily snap up an offer way above the current share price. As you say, the size of the market for many cancer types runs into $billions in the US alone.

I am struggling to understand why the FDA is taking so long

As it’s a de novo submission and a new stream for the FDA a lot of work apparently has to be done from their angle (sorry !). There seems no doubt the functionality of Parsortix has been proved and accepted and as Newman said the FDA are now in the ‘administration’ stage. This submission covers breast cancer and the work undertaken should make clearance of the other 27+ cancer types much quicker.

If I were a different kind of person, I might start to think about conspiracy theories because Angle (LON:AGL) is not a US company....but of course that would be absurd, wouldn't it?

Oh yes ! ………. but a train of thought I’ve read before 8-) Imagine the damage to the FDA (and USA) if they were found to be deliberately holding back a system that would benefit millions of people worldwide.

Have you had any contact with management / PR people at Angle (LON:AGL) recently?

No point contacting Angle (LON:AGL) on this, they would say no more the AN said at the results presentation. We just have to wait. FWIW, I increased my holding last week.

Funnymoney

Totally agree. I think they are so important it would be good if regulars like myself could do it for him when he is away. I don't know how he turns it around in the time but I would be happy to share duties on a particular day(s) to cover for example announcements from companies between A-G. Two or three others could do other parts of the alphabet.

DaviStoVest

Good idea ... but who will take charge in the acerbic dry wit department?

Added myself today.

MrContrarian

On holiday and liking the lie-ins. Back soon.

MrC

Andyin

Enjoy your holiday Mr C. you have been missed.

Boon

On Made.Com (LON:MADE) it seems like Patrick Lewis is part of the founding family that set up John Lewis? I think I saw that correctly in one of the media snippets this morning. If so... did he get the CFO job based on merit? I don't know enough about the JL structure or partnership so something for any serious Made.com to probably investigate.

On Greggs (LON:GRG) the economics looks quite good to survive high inflation.

Gross margin is 63%, so it means there's lots of operational leverage if they can force through price increases to maintain that gross margin.

H2 operating margin was only 13%. So if we take say a 10% price hike this year = 10% more revenues (assuming no loss in selling volumes) and if they can hold fixed costs, that would be almost a double of their operating profits.

However, of course, the fixed costs include staff wages I presume, as well as utilities, transport, etc. But if one was to go digging in that fixed cost line and see how much is really fixed (ie rents, etc) it might be possible to work out whether the operational gearing is positive for Greggs in an inflationary environment where they have pricing power and can maintain volumes.

(moved comment to threaded under another)

On Vertu Motors (LON:VTU) and car dealerships in general, I didn't realise that it takes about 5-10 years from pitching to actually securing the dealership rights for a country etc.

Doesn't that mean there is a bit of a big long-tail risk for Vertu? Lose one of their main franchise brands, and it'll be hard to win back for like 10 years? I haven't had a look but what is their revenue concentration by car brand?

Metatron

I also hold OCN and for me it is a long term play on Brazil with a good dividend thrown in.People have been saying for 70 years at least that Brazil has amazing potential in theory and i hope to be still alive to see the potential realized.

Bunge is another share that one can play Brazil with

illiswilgig

17th May '22

Made.Com (LON:MADE) Interesting point. I'd not 'made' the connection from Patrick 'Lewis' to the founding family.

From what I can see. The John Lewis business started transferring ownership to employees in the 1920's. By the 1950's had transferred ownership to trustees, established an employees council which holds the partnership board to account, elects a number of board members and directly elects the trustees - but with the son of the founder as chairman not owner. By 1993 the chairman of the business was no longer a family member. Patrick Lewis became Finance Director in 2015 - having worked at the company for years. I can see how his famiy ties might have helped him into the company in the first place - but there appears to be no mechanism by which his family ties would allow him to be selected to the board and it seems very unlikely. There is a strong argument for the reverse - I'd expect that the independent board would go the extra mile to establish the merit of the candidate - anticipating that employees would question it and the council if not the trustees would hold them to account.

Even so. In the unlikely event that his family ties played some part in his selection at the JLP it's very hard to imagine that MADE would select Patrick Lewis except upon merit? I have to say that he is not who I would have expected them to appoint and looking axross the whole board I can't see that they would have made his selection easy in any way.

There is also the question of why Patrick Lewis would choose to join MADE? I find that quite intriguing.

thanks for raising it,

cheers

Mark (I hold - a small holding - but with potential I think. Not without risk perhaps but much lower at this price?)

TamzinPiworld

Paul, an excellent write up on Vertu Motors (LON:VTU) FY22 webinar yesterday. Here is the video & podcast.

abtan

Vertu Motors (LON:VTU) (no position)

I've been trying to get my head around why this company looks so cheap.

As Paul mentioned there are significant property assets on the balance sheet, which, net of debt, look to be equal to the current market cap. On top of that there's a profitable and cash generative business, which looks to be thrown in for free.

Aside from the cyclical/inflationary/etc...worries that we are all talking about at the moment, the main risk I think I can see is that the company mainly deals with Honda, VW and Toyota.

I recall that Volvo have a strategy to only sell direct to consumers from 2030 and I imagine that it would be very financially damaging to Vertu if something similar was announced by one of their aforementioned partners.

----

In contrast, Marshall Motor Holdings (LON:MMH) , who were recently acquired at what looks to be a much higher valuation relative to Vertu Motors (LON:VTU) , appear to have relationships with many manufacturers. Presumably therefore if one of those relationships breaks down, there will be less of an impact on the group, which perhaps explains why it was a more sort after target.

I know very little about cars, so I'd be interested to hear from others with more knowledge here. Could the limited number of partnerships be a risk for Vertu Motors (LON:VTU) ? Has this been asked at any of the presentations?

Small Cap Value Report - Mon 16 May 2022 - MADE, OCN, GRG, SRAD, VTU, RWS

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Paul Scott

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