Small Cap Value Report (Mon 17 July 2023) - CTO, MEX, CRW, DNM, UBG, DFS, GHE, BRCK, VINO, CNC

17th Jul '23 by Paul Scott

90 comments 9296 reads

Good morning, it's Paul & Graham here today.

Today's report is now finished. 10 companies today, whoop whoop we're on fire!!

Podcasts - there was only 1 from me this weekend, as I was busy on Sunday watching the exciting tennis final and cooking a roast for Mum, on her 86th birthday! So no macro podcast, but I didn't have much material this week anyway. My main point was going to be the very positive news on rapidly falling inflation in the USA, which I think augurs well for the direction of travel here in the UK too.

So my overall macro/market view remains: nervous short-term, but bullish medium-term, and excited by all the great value shares that the UK small caps market is currently offering us. This seems to me the time to be holding our nerve, and embracing the value in UK small caps, not getting despondent and selling (probably at or near the low).

Also, the main theme we're hearing from individual companies at the moment seem to be -

Supply chains improving, and
Inflation easing.

So despite question marks over demand, and the possibility of a recession triggered by large, and (too) rapid increases in interest rates, there are also nice tailwinds which could offset the negatives for some companies.

Mello Monday - starts at 5pm online this evening. Renowned fund manager Christopher Mills will be doing a presentation, and I'll be on the BASH twilight session (when most people have probably nodded off!) at the end, giving an update on strong performance from Renold (LON:RNO) (I hold), which we covered in the SCVR last week 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 £1bn. We avoid the smallest, and most speculative companies, and also avoid a few specialist sectors (e.g. natural resources, pharma/biotech).

A key…

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Harry Hindsight

17th Jul '23

Rose around 51p to 60p area but then pulled back to the start. One of those where need Level 2 to see whats going on.

The non-prescription erectile externally applied cream works in 10 mins as opposed to Viagra and Cialis pills which take half hour and some side effects - so more spontaneous.

Huge market of course but their patent runs out in Europe 2030 and 2028 in the US - but can be extended. Maybe just get bought out.

yiannos1

Both scary then but it was all there in the accounts!

The first one the valuation never made any sense , and the second one after claiming to have so many millions in cash he then listed in the US as well to raise more cash to just buyback shares!

gmtrader

Hi Paul, I don’t hold Brickability (LON:BRCK) but I am watching it. Still clearly in a downward trend but it does seem to be getting cheap now. Regarding the company doing well despite the sector down turn, maybe it is to do with the fact that this country imports so many bricks to keep up with demand. With the current costs increases, import bricks are now down 40%. So is it possible demand for uk made bricks are not being affected as badly as imported brick manufacturers?

Monty Carlo

No Yiannos1, that is not the answer we are looking for.

a) You've moved the goalposts - we are after evidence that "90% are ramping their shares and trying to con investors" as you claim so confidently, not the survival rate which is a different matter entirely.

b) If it is a "fact" that only 1 in 10 small listed companies survive then I think everyone reading here (myself included) would be interested in reading the source of that statistic and any report it is in, or at least which index is used for reference (Hoare Govett/Numis? AIM?) and over what time periods that 90% failure rate applies to.

Please share. No sarcasm intended whatsoever on point b), genuinely interested. AIM during the period of Chinese frauds perhaps, or IPOs below a certain Mkt Cap, but I struggle to see how the FTSE SmallCap generates a positive return with a 10% survival rate.

That’s the answer you are getting though.

This is my personal opinion that 90% of the small listed companies do not survive or they just listed for no reason and about the same percentage they are just ramping their shares.

Sutters

Hi Caper4, I know what you mean about Belvoir (LON:BLV. Solid, dependable, reliable type of thing. Reminds me very much of Bloomsbury Publishing (LON:BMY). Both management teams appear very grounded and modest. In both cases though, the directors hardly have any skin in the game. Around 1 to 2% from memory which limits my enthusiasm (and position size) for them. Although having a significant holding then opens up management to talking it's own book maybe? But isn't that part of their role, after all??

Olly Daney

Hi Paul if you get a change in the future would you be able have a quick look at tissue regenix as it a really exciting company with great products. Would love to know you thought on the financial picture.

thanks in advance

garbetklb

But in your post of 7.01pm you told us it was a fact. Now in your post of 9.14pm you say it's your opinion.

I'd be surprised if it's correct, but I'm quite happy for you to hold that opinion. I'm less keen on being berated by things as "fact" when they are opinions........

Kaboom

18th Jul '23

Next (LON:NXT) make sofas in Doncaster. They certainly have market penetration if not dominance and a safe balance sheet…

It’s a factual opinion.

Some people are trying to turn this useful forum into another ADVFN.

Paul Scott

Hi Olly,

I've just had a very quick look at Tissue Regenix (LON:TRX)

Its trading update sounds upbeat, and says its in line with expectations. Cash is "sufficient to support the current business growth plans", but doesn't give a figure, which is crucial for assessing a heavily loss-making, cash burning, equity issuing company like this. That's because dire market conditions mean any further funding needs could be punished with a deep discount, which seems to me that main risk. It had $5.9m cash at Dec 2022, plus an extended $10m borrowing facility to 2028. The cash was more than offset by borrowings of $6.3m, so checking out the terms of those loans is very important.

H1 revenues up 19% to $14.1m, a record high - so something interesting seems to be happening here. Although huge losses in the past, but it seems to be moving towards EBITDA breakeven, and reckons it will make an EBITDA profit in H1 2023.

$2.6m loss after tax for FY 12/2022 doesn't look disastrous.

Balance sheet is OK-ish, with about $15m NTAV at Dec 2022. Inventories looks very high - possible write-offs maybe?

Overall, I'd say this looks potentially interesting. The next step would be properly understanding its products, and markets, and growth potential, which is beyond my pay grade. But as requested, I've just done a quick review of the numbers for you!

Regards, Paul.

Sounds plausible, re imported bricks. We would need to consult someone in the industry. That would be a very good question to ask Brickability (LON:BRCK) management, if anyone talks to them.

Reporting back, my chicken burrito at Tortilla Mexican Grill (LON:MEX) Bournemouth was delicious, although slightly soggy (liquid dripping out of the bottom). I highly recommend paying £1 extra for the chorizo pieces, gives it loads of extra flavour. Pleasant staff, although shop was empty (although it was in between meal times at c.16:00) - this is the big problem with fast service food outlets - their business is all crammed into quite narrow time periods, where they have to serve super-fast, but then have to pay staff to stand around doing nothing for the other times. Although strangely, MacDonalds seems to be busy (and with very slow service) all day.

I also mystery shopped Revolution Bar on the way home, so was slightly tipsy by the time my BASH session on Mello got going, hopefully it wasn't too obvious LOL!

Tommy H

And I will bring round some panes of glass to help repair their house, and a bucket to put all the stones in too so we can make a nice rockery!

From the survey of one, they are also right in front of the door as you go into Boyes in Northallerton, well the right hand door, the left hand is bird seed.

I will have to go into Superdrug and see where they are at the weekend.

Zipmanpeter

Re Brickability (LON:BRCK) - both Ibstock (LON:IBST) and Forterra (LON:FORT) have large CAPEX projects coming to market with new capacity equivalent to 5-8% of GB brick demand in next 2 years. Being new, they will also be very cost efficient. Depending especially on your assumptions regarding UK vs European energy prices £:Euro, they will probably be able to displace a lot of brick imports - still Brickability's core business. Imports have been at record highs. On top of that there is a short term demand gap from fewer house starts from the 'Truss shock'/planning reform debacle. Brickability seem to have traded nimbly but I think they are a peaking and the UK-based vertically integrated oligopolistic brick players will win out in the end and which now represent the better/less risky opportunity over the 2-3 years period I want to invest over. The need for more building, housing & other, is only growing. Despite all this and the the CAPEX spending seeming to have gone OK, Ibstock (LON:IBST) is now trading close to pandemic lows (Disc. I hold Ibstock (LON:IBST)).

Silver Moon

Hopefully not, I got shot of ADFN years ago.

Hi Paul

Thank you very much for taking a look over this, it’s a massive help. Is there any particular way you would go about putting a value on this business.

thanks a lot

Olly

jamesalastair

19th Jul '23

rwh3ue

Having just watched the Investormeet presentation, it was made clear that companies like ibstock prefer to use BRCK as a distributor because they get a better price than dealing direct with house builders and are guaranteed the agreed take up of production. BRCK for its part has agreements with house builders to supply what they require despite completion or lack of availability elsewhere.

So far as importing is concerned, my understanding is that the type of brick imported differs from what is domestically produced in appearance and texture.

It was also stated that bricks is now just 45% of BRCK's revenues and that General construction is assuming a greater level of importance. The pipeline of acquisitions is also designed to increase diversification.

Small Cap Value Report (Mon 17 July 2023) - CTO, MEX, CRW, DNM, UBG, DFS, GHE, BRCK, VINO, CNC

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Paul Scott

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