Small Cap Value Report (Mon 18 July 2022) - FEVR, TSTL, NTBR, MEX, IQE, CRDL, CRC, RNO

18th Jul '22 by Paul Scott

65 comments 8369 reads

Good morning! It's Paul & Graham here. Sorry about Friday's report not getting off the ground. I took the Govt's heatwave advice, to do as little as possible, rather too literally.

Today's report is now finished. I'm off to mystery shop the Bournemouth branch of Tortilla Mexican Grill (LON:MEX) - will report back.

I have been busy with podcasts though - do please share these on social media, as it might help drum up some new subscribers - although that's probably optimistic, given how gloomy everyone seems at the moment. These conditions won't last forever though, and bear markets lay the foundations for the next bull market.

My weekend podcast, episode 3 - a roundup of last week’s key points from the SCVR (22 mins), with standout shares for the week being, MJ GLEESON (LON:GLE) and Sosandar (LON:SOS) . Lots more covered briefly too. To listen on a mobile device, just click the 3 dots, which brings up a menu with "download" option, over wifi. So dead easy.

Vox Markets Video - Every now and then, renowned investor & analyst Paul Hill likes to chat to me about small caps, in a longer format. Here's our latest discussion (recorded last Thurs, 15 July 2022), including lots of share ideas that we think look good value right now. Plus it might make you feel a bit better, to hear how badly the two Pauls are doing this year!

Agenda -

Paul's Section:

Fevertree Drinks (LON:FEVR) - not quite in our £700m and below bracket yet, but it seems to be putting in a good attempt at reaching it! A profit warning on Friday was heavily punished. Although the factors behind it (logistics, supply chain problems & costs) look fixable. Demand remain strong. This could be an opportunity, although the price is still expensive, and earnings forecasts have been relentlessly falling for over a year now. So for me, it's not cheap enough yet.

Tristel (LON:TSTL) - an in line trading update for FY 6/2022. Small special divi announced. Soundly financed. Valuation looks very high, because I think it includes a big premium for expectations for FDA approval, and entry into the large US healthcare market. Personally I'm not interested in paying up-front for this potential growth.

Tortilla Mexican Grill (LON:MEX)…

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Norfolk'n'Good

18th Jul '22

Re £MPAC

I agree - completely uninvestable and I too have sold out - how can we trust anything else management may say in the future regarding trading/outlook/anything come to that!

TheFloatingInvestor

You two have made my day, that exchange has left me in stiches :-0

Rusty2

My car insurance went down over 10%, I did get a quote from a rival but it was more expensive.

Household insurance up slightly.

jdnthomas

I hold CentralNic £CNIC as one of my larger holdings because the organic growth rate of over 50% is pretty stunning. However, it is also acquisitive and actually they still have net debt of $49m. Indeed whilst gross cash is up $38m, net debt is only down $16m so gross debt is presumably up $22m. I think we'll need to wait for the half year results (this was only a trading update) to see the cash flow and how much they spent on acquisitions and (given cash was increased by the $60m raise Epsilon mentioned) whether they generated much free cash flow. Still, very pleased with he update and for the moment the organic growth rate (assuming it is correctly calculated!) is enough for me.

andrewdb

On £CDGP

You can see from the stocko chart, someone offloaded ~4m around 8 Jul.
About the same time 7 directors bought ~1.1m over 5-11 Jul.

Your timing looks good.

(I hold and deliberately sat on my hands)

davisj99

Concersely, could this trend work in favour of claims management companies such as NAHL & Anexo which have historic claims likely to be setlled at a higher value?

Berksbee

Would be interested if the LOM:MPAC management are willing to respond to this. Clearly a big shock but I've been a long-term holder and have done very well out of them. I've taken an opportunity to buy back a batch I sold a few months back as I read the news as something temporary.

Hi Paul,

Loved your Vox Markets chat with Paul Hill (link above). Recommend it to all.

Harry Hindsight

Looked at By Miles - pay around £250 for parking outside your house and then 6p a mile thereafter. It works out about the same if you do the same mileage as last year, but spreads the cost and may be lower if more circumspect with journeys and petrol prices. Sticks a gadget under the dash to record and you can view on mobile phone. No brainer but as I've got six points got refused :(

Sorry turning SVCR into Which Magazine.

Audioboom (LON:BOOM) - apt name for their share price.

DT Turner

Yep, also been there, done that. I would now expect a quick settlement, although I’m not confident enough to invest in the uninvestible..

andyfwwrench

Well known investor Richard Crow (aka Cockney Rebel) teased about them, an as yet unidentified company, over the weekend on Twitter. Today he went public, which also means he has bought his position. So there will be followers getting in on the action, both earlier as he runs a small subscription message board, and today from the announcement. He also suggested two funds as forced sellers. I have no position myself, nor intend to take one, just letting you know the price moves weren't irrational, you just weren't party to the buying and selling reasons.

Westway001

“In the case of CDGP, it had fallen >20% below by buy price (25p) so was too tempting not to buy, and it turned out to the right call. Several other shares on my watchlist are close to >20% lower than my buy prices, making them close to being too irresistible to buy, in spite of my macro views.”

For which substitute “in the case of the S&P 500, it had fallen 20% below my buy price so was too tempting not to buy/too irresistible (not) to buy”!

Paul Scott

Mystery shop report - I had lunch today at Tortilla, Bournemouth. It's in a good location, in the centre of town, just off the main square, in a pedestrianised area called Old Christchurch Road. A very busy McDonalds is a few doors further up, and this site gets high footfall. So providing Tortilla got it on a reasonable rent, then this looks a good site to have chosen.

It's quite a small site, you can see the lady serving behind the counter in the picture below, so you go down in a line, choosing which items you want for the fillings in your burrito, then pay at the end. There's a small seating area on the left, for perhaps 15-20 people, but most people seem to take them away. Burritos are easy to eat on the go, being in a tortilla wrap, and held together additionally with metal foil. So I took mine into the lower gardens around the corner, and sat on the grass to eat mine, quite pleasant.

Note the ridiculously small menu in the window, next to the entrance. It should be about 5 times that size, to be more readable, and eye-catching.

I visited at peak time, around 12:30, and there were only 2 staff serving, battling with balancing up customers and doing takeaway orders too. Working very hard, but the site was obviously under-staffed, which means they'll lose customers not prepared to wait.

Lots of takeaways in Bournemouth employ European staff with very heavy Spanish or Portugese accents, and what with all the background noise of people talking, and music, I really struggled to understand what she was asking me, re the various toppings, etc. Had to say "sorry?" repeatedly, and even then I was half-guessing at what she was asking me. Maybe they could turn down/off the background music, and give European staff some training on how to pronounce the small number of key English words they need, so that customers can more clearly understand. It amazes me that no businesses seem to bother doing this, when clear communication with customers is so important. I find Spanish staff speak so fast, but with such a heavy accent, it's almost impossible to understand them. And they don't seem to realise, despite practically everyone struggling to understand what they're saying!

The beef & pork looked revolting - it was in liquid, and when chosen for the previous customer, she squeezed some out with tongs, and the gravy dripped off it, as a fibrous lump of strings of wet meat were put in the burrito. Horrible looking! I chose chicken, which looked much better, in small cubes.

It came with rice (2 options, tomato or coriander), beans (I swapped for friend peppers/onion instead), then grated cheese & sour cream (optional, included). Then you have a choice of other toppings, so I had jalapenos, something else pink (I asked her twice what it was, but couldn't undertand her reply, so it will remain a mystery forever!), chorizo (for £1 extra) and guacamole (also £1 extra). Put that all together, and it was a substantial meal, I had the large size burrito - portion size was excellent, this was very filling, and it cost £11.50 with a diet coke.

Overall, I really enjoyed the taste & portion size, so came away with a positive impression, and will definitely be a regular at Tortilla - the product is nice, and priced about right I think. Quite a lot of carbs, with the tortilla bread, and rice, but that's the same everywhere when eating out. You can have it without the tortilla, in a bowl instead.

It's a good format. Although note that in London, there's a lot more competition, with plenty of burrito chains, such as Chipotle (American), Chilango (recently bought by Tortilla, and easily the best I think), Taco Bell (rubbish, in my view), Barburrito, Benito's (strange choice of name lol!!), and loads of others. So my only worry with Tortilla, is that there's little to distinguish it from other, expanding burrito chains. So it might struggle once competitors spot the market opportunity and expand into the same locations, maybe?

For now though, I think Tortilla looks quite good, and it might be worth a punt on the shares.

I can't see why anyone would short the share, it looks fairly priced to me, not expensive.

But as mentioned in the main report, it's not clear yet what the base level of profitability would be, once the Govt support measures have fully washed through. We've only got Liberum's forecast to go by.

I must mystery shop in by deliveroo or justeat too. When I've tried Chilango burritos by delivery, they were horrible - sitting around for 10-20 minutes after being made, until it actually arrives, seems to ruin the taste & texture, compared with eating it fresh, but that's true of so many delivery options. McDonalds is absolutely vile when it arrives lukewarm (at best). So I do wonder if this delivery craze might have peaked?

Regards, Paul.

Boon

Ah ha! So there was a reason. Gotta remember to check all the social media too nowadays. Twitter, Reddit, advfn boards, tiktok....

I know this falls outside of small-cap realm, but having a quick skim today of the Deliveroo (LON:ROO) trading update doesn't fill me with confidence about management ability.

Guiding a 4-12% Gross Transaction Value growth (and this is easier to forecast than say, profits, with more moving parts) for the FY Jan-Dec22. We're already halfway through the year, surely they can be a bit more precise in financial forecasting? Or maybe it is symptomatic that the people running the business don't really know how to run £2bn+ revenue company. In good times, any muppet can do a decent job running a tech company's finance department.

Then there is this: "Deliveroo's balance sheet remains strong". By not giving a number, either cash, debt, liquidity headroom... this is the dreaded statement trying to pretend that one has a strong balance sheet. Or maybe a finance department who don't really know the real figure...?

At least they're getting closer to break-even. Only a -1.5% to -1.8% EBITDA margin (adjusted!). OK, closer to magical, adjusted break-even.

Why am I still looking at Deliveroo? Because GTV per order has to increase, due to inflation, at some point. And when it does, almost all the NTV (the margin per order) falls straight to the bottom line. That's the beauty of a marketplace in inflationary times - the number of transactions might remain static, or slightly decrease, but order values increase and drive the top-line revenue and the bottom-line profit growth.

But there are many other marketplaces out there to buy shares in, and maybe Deliveroo just isn't the right one. Anyone have suggestions of good marketplaces that have listed shares to check out?

yiannos1

I think the simple explanation that Tortilla is still burning cash would have been more useful , than trying to make Spanish speaking staff speak not so fast and with a better English accent.

Anyway , having visited one of their shops up north ( Cheshire Oaks ) , I will personally stay away from this company.

On a Sunday sunny afternoon , and with all the other food restaurants packed , this was hardly busy. I can see this much lower as I am very sceptical about today’s not so informative RNS.

Hi Cleeve,

I've looked at Audioboom (LON:BOOM) this evening - will publish my notes tomorrow morning.

Cleeve

19th Jul '22

Thanks Paul - appreciated

mojomogoz

Tortilla Mexican Grill (LON:MEX) - you must have chosen one of only a few unpopular branches somehow. Living in London I see them around quite a bit and I've visited a number of times. Footfall seems generally decent and food is passable for something easy and quick...that said I do think they need to improve their menu and up their game a bit. Burritos work but the other things they offer are a bit meh as the simplified production system doesn't work well for them.

General understaffing or training/quality may be an issue. The ones I've been to could have tidier seating areas.

I give decent odds on this being a format that continues to grow

Small Cap Value Report (Mon 18 July 2022) - FEVR, TSTL, NTBR, MEX, IQE, CRDL, CRC, RNO

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Paul Scott

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