Small Cap Value Report (Mon 18 July 2022) - FEVR, TSTL, NTBR, MEX, IQE, CRDL, CRC, RNO
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) - an interesting trading update from this expanding chain of burrito casual restaurants/takeaways. I like the potential for this roll-out, but haven't yet got enough information to go on. Remember that Govt support schemes have been a big boost to profits. Many sector cost headwinds too. So I'm on the fence at the moment, but think it could have good longer term potential maybe.
Renold (LON:RNO) - FY 3/2022 results from last week. Look very good to me, it's doubled profits, and seems to have shrugged off supply chain problems that have harmed many other companies. Bank debt is now modest, and the pension deficit is large, but manageable. Overall, a thumbs up from me.
Graham's Section:
Northern Bear (LON:NTBR) (£10m) - this building services group reports an excellent result for FY March 2022, as expected. However, it also offers caution for the current year, as it faces the twin challenges of supply chain issues and price inflation of raw materials. I remain intrigued by the prospects of this “Super Stock” with a perfect StockRank. Most value shares are boring, and can drift for years in the absence of a catalyst. The NTBR Chairman, however, has overseen the company’s (temporary?) abolition of dividends, as it considers its acquisition strategy and other ways it might drive shareholder value.
Iqe (LON:IQE) (£316m) (-2%) [no section below] - While there is no editorial line at the SCVR, it’s fair to say that we have produced plenty of sceptical commentary when it comes to IQE. I’ve argued that it’s a capital-intensive manufacturer, and does not deserve to be valued as more than that.
Today, the company announces it is filing a lawsuit in California to protect its IP. The other party is an Israeli company that trades on the NASDAQ: Tower Semiconductor (TSEM). TSEM is roughly ten times the size of IQE, and is in the process of being bought out by Intel.
IQE shares are lower on the news, for obvious reasons: if IQE loses this case, it will be clear that Intel/TSEM controls important IP (to be used for 5G and other applications) that IQE previously assumed that it owned. That would likely be a heavy blow for the bull case at IQE.
Cordel (LON:CRDL) (£11m) (+2%) [no section below] - this previously traded under the name “Maestrano” (ticker: MNO). It’s a startup providing data systems (images/LiDAR) for railways. The idea is “to automate inspections and surveys of assets across entire networks in near real-time”.
This full-year update shows the company’s revenues rising by 35% to £2.3m. Costs also increase, so that the pre-tax loss is about the same as last year (loss of £1.4m, versus a loss £1.2m in the prior year). The news around new customers and contract wins is positive, however the current combined balance of cash and receivables (as of end-June) is just shy of £1m, i.e. not enough to cover a year of losses at this rate. In common with many “Sucker Stocks” (per Stockopedia), I assume that shareholders will experience further dilution here.
Circle Property (LON:CRC) (£70m) (+0.6%) [no section below] - this is an investor in UK offices. In February 2022, due to “limited liquidity in its shares” and a “structural discount to NAV”, it made the decision to gradually sell the rest of its portfolio.
The March 2022 NAV per share is £2.81 (net assets £79.6m) and the company has eliminated its borrowings (net cash £5.8m). The CRC share price has been very strong over the past year but might still offer shareholders decent prospects from the current level, depending on the success of the disposal programme.
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 £700m. We avoid the smallest, and most speculative companies, and also avoid a few specialist sectors (e.g. natural resources, pharma/biotech).
A key assumption is that readers DYOR (do your own research), and make your own investment decisions. Reader comments are welcomed - please be civil, rational, and include the company name/ticker, otherwise people won't necessarily know what company you are referring to.
Paul's Section:
Fevertree Drinks (LON:FEVR)
867p (down 28% last Friday)
Market cap £1.01bn
At the rate things are going, Fever-Tree looks as if it’s heading towards being a small cap again. Is this an opportunity for a second bite of the cake, or is Stockopedia’s assessment of Falling Star more accurate?
As you can see below, the chart has collapsed in the last 6 months down to the same level as when the pandemic originally hit. Are things really that bad again? Note the big & rapid rebound which brave investors enjoyed after that previous low -
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Here’s the latest update for H1 -
Fever-Tree, the world's leading supplier of premium carbonated mixers, announces a trading update for the first six months of FY22 ending 30th June 2022, ahead of reporting its Interim Results on 13th September 2022.
Revenue guidance maintained at £355-365m for FY 12/2022.
H1 revenue growth was 14%, with Europe being the best growth region at +27%.
UK & US growth don’t look great, at +6% and +11%.
Gross margin guidance is lower, at 33-35%.
Cost headwinds have hurt the business -
The impact of logistics and cost headwinds prevalent across the industry have significantly worsened in recent months, and we now anticipate gross margins of c.37% and an EBITDA margin of c.14% for the first half. We expect this to continue to impact the business during the second half, resulting in a revised EBITDA guidance of between £37.5 million and £45 million for the full year.
Specific problems mentioned, e.g. -
- US production hampered by labour shortages.
- More expensive sea freight, to supply US from UK production.
- Glass availability “severely restricted”, and “double digit” cost increase expected for H2.
- “Continued logistics cost increases & disruption”.
- Expecting that some cost impacts “will be transitory in nature”.
Demand - is described as “strong” 9 times in this update, so I think they’re keen to get that point across. I think logistical and temporary (if they are) cost pressures can be forgiven, because they should be fixable. Demand remaining strong is more important, as it means the company’s performance should recover in time.
Broker forecasts - annoyingly, I can’t get hold of any research notes, so it looks like the company isn’t interested in having private investors buy any shares.
The Stockopedia consensus data has picked up recent reductions in forecast EPS, which has dropped from 39.2p to 33.9p over the weekend. As you can see, this is a further reduction in forecast EPS in a downward trend that has been expectations almost halve from 60p. No wonder the share price has been under pressure for a while -
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Valuation - as you can see below, somebody seems to have knocked over a bottle of Fever-Tree blood orange soda all over the Stock Report - nearly 2 quid for a 500 ml bottle, from Waitrose, which strikes me as too pricey.
It’s difficult to get excited about this valuation, unless you think the company can recover, and beat the current depressed forecasts -
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My opinion - perhaps FEVR is suffering supply disruption because it outsourced everything? That looked clever when everything was functioning well pre-covid, but with supply chains still disrupted, it sounds as if FEVR is struggling to supply customers at a reasonable cost.
That said, strong demand is more important to me than temporary supply problems which can be fixed over time. So providing strong demand remains the case, a recovery in earnings in 2023 or 2024 looks fairly likely, which is a good bull case.
The growth trajectory in revenues looks intact, and it should be able to rebuild margins as supply chain issues are fixed.
On balance, I can see a good case for buying for a recovery in supply chain. Although the valuation doesn’t really appeal against existing forecasts - it’s arguably gone from extremely expensive, to just expensive now.
Stockopedia is yet to be convinced too, with a low StockRank -
Overall then, I can’t see any particular rush to buy this share., until there are clear signs of supply chain easing.
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Tristel (LON:TSTL)
343p (Friday’s close)
Market cap £162m
The share price for Tristel has almost gone back to where it was 3 years ago. Is this just a general market move down, or company-specific? (or a mixture of both). Is it a bargain?
Trading update & special dividend
Tristel plc (AIM: TSTL), the manufacturer of infection prevention products, provides a trading update for the year ended 30 June 2022 and declares a special dividend.
Special dividend - is only 3p, so barely worth mentioning.
Final dividend - flat vs last year, at 3.93p.
As you can see below, TSTL has paid small special divis before (Aug 2015 & Aug 2016). The standard divis have grown nicely, but bottom line is that the dividend yield doesn’t excite, at only about 6.55p (interim + final) yielding 1.9%, or 9.55p yielding 2.9% if we include the special divi (which we probably shouldn’t, as they’re one-offs).
Nice to have, but the divis are not a strong reason to buy this share.
Trading Update -
H2 activity in hospitals increased, so revenues rose as expected.
Non-core activities wound down in H1.
FY 6/2022 results in line with market expectations: £28.4m revenues, and £4.5m adj PBT - doesn’t seem a lot, for a company valued at £162m.
Net cash of £9m at end June 2022.
Balance sheet check - last reported at end Dec 2021, and it’s very good - £18.5m NTAV, and a very healthy working capital position. No worries here at all, Tristel is securely financed, and has no bank debt, and plenty of surplus cash. Hence no risk of dilution or insolvency.
Director commentary - this excerpt struck me as a strong statement -
During the year 15.7 million disinfection events took place with a Tristel medical device disinfectant, which is 31% higher than in the year ended 30 June 2019, before the pandemic struck.
FDA Approval - this is an absolutely key issue for Tristel, because I reckon probably about half (or more) of the current market cap rests on expansion into the US. If that works, then great. If FDA approval is not forthcoming, then the share price would take a very big dive, I reckon.
So investors need to be fully aware of this risk. Is risk:reward favourable? IS the 5-year timeframe to develop the US market exciting enough for investors?
Regulatory approvals are not always as straightforward as people expect - a good recent example being Polarean Imaging (LON:POLX)
Today Tristel says -
"The Company achieved a major milestone event at the end of June by making its De Novo submission to the United States Food and Drug Administration for its Duo ULT product. A decision from the agency is anticipated within the coming year.
Within the next five years we have high hopes that America will be a significant revenue and profit contributor to the Group.
"We are emerging from the disruption caused by Brexit and the pandemic with a highly focussed business, the prospect of entering the largest single healthcare market in the world, with an exciting pipeline of new product innovations, and a strong balance sheet. The outlook for Tristel is positive.
My opinion - Tristel still looks far too expensive to me. I wouldn’t want to pay up-front for US expansion which is not guaranteed. It can take a long time, and cost a lot of money, to persuade US organisations to switch to an unknown foreign supplier.
The way I look at this share is a hybrid. It has a small, niche business, with high gross margins, selling small amounts in lots of countries. That’s a decent, cash generative business. It’s also seeing a recovery, driven by hospitals doing more procedures now that covid has receded somewhat.
What would I value it at? Maybe £50-60m might be reasonable? Therefore the current market cap of £162m contains a premium of c.£100m (the way I look at it), for hopes for US expansion. That seems a lot, but it is a big market.
Obviously you can amend those figures to suit your own assessment of things, you might think the existing business is worth more or less than my estimate.
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Tortilla Mexican Grill (LON:MEX)
125p (up 3% at 08:58)
Market cap £48m
Tortilla Mexican Grill plc ("Tortilla"), the largest and most successful fast-casual Mexican restaurant group in the UK, provides a Trading Update for the half year ended 3 July 2022 ("H1 2022", the "Period").
PR headline -
Further strong sales growth and continued strategic progress
I’m keeping an eye on this share, but have yet to be convinced. As Jack mentioned back in January, MEX was still benefiting considerably from Govt support measures (e.g. reduced VAT & business rates), so it’s not yet clear what the performance of the business will be like when all the support measures have ended, plus of course multiple cost headwinds face the sector too (e.g. wages, utilities, and food/drink inflation).
On the plus side, city centres seem to be returning largely to normal now (as indicated by J D Wetherspoon (LON:JDW) recently, as work from home wanes).
Plus MEX seems to be doing well from the increased interest in delivery. Although looking at the weak update from Deliveroo (LON:ROO) today, I am utterly perplexed as to how they got ROO's IPO away at such an insane valuation, for a business model that is still not making a profit (and seeing slower growth).
Tortilla made an acquisition recently of 8 Chilango sites (in London), which in my experience produce the best burritos, and could teach Tortilla things about speedier service, and product quality. I’ve mystery shopped Tortilla twice, 2 different sites and both times the service was slow/chaotic, with far too many options making the whole line grind to a halt & backed up due to the weakest link in the chain of people. Plus the meat is soggy & stringy. Chilango is far better, which is why I go there almost every day for lunch when in London.
Back to Tortilla.
Its like-for-like (LFL) revenue growth of +19% compared with pre-pandemic is excellent, and well ahead of the industry average. That sort of growth is necessary though, to absorb higher costs. We saw the same thing last week, with J D Wetherspoon (LON:JDW) unable so far to beat pre-pandemic sales, hence moving into a loss. Whereas Loungers (LON:LGRS) is strongly up on pre-pandemic sales, and is profitable. None of this is rocket science!
Rapid growth means MEX now has 84 sites - becoming a decent-sized business, if management can stay in control - not easy when expanding fast. This is a good time to be expanding, with good sites available on favourable terms. Hence why I think the hospitality sector is quite interesting, if we can identify the future winners.
Net cash of £3.1m, so the hope is that expansion can be self-funding.
New sites - quite a rapid roll-out, and I like that MEX is trying different approaches -
During the Period the Group opened a further six sites: Bath, Cheshire Oaks, Bournemouth, Portsmouth, Birmingham New Street, and a delivery kitchen in Maida Vale. SSP Group also opened a Tortilla site in Bristol Airport and the Group commenced a franchise partnership with Compass Group with four sites trading.
All new sites are performing well and in line with expectations since opening.
This is giving me increased confidence that MEX (a) know what they’re doing, (b) seem to be good at site selection (vital, as just one mess up can wipe out the profits from lots of decent sites), and (c ) have a good mass market format that is suitable for a nationwide roll-out.
On the downside, there are loads of competitors, with not a lot to choose between them in terms of product. So this space could get quite crowded, and that might erode MEX’s margins. Also they tend to see big spikes in demand at mealtimes, then little going on in between. Staff turnover tends to be very high in this sector.
Outlook - mentions increasing cost pressures. Also expects an H2 weighting.
Steps taken to mitigate cost increases.
Concluding -
Notwithstanding the macro-economic backdrop, the Board remains highly confident that Tortilla is well positioned in the competitive landscape, underpinned by its reputation for great value, strong delivery proposition, and successful roll-out strategy.
Broker forecasts - many thanks to Liberum, for providing an update today on Research Tree.
They’ve pencilled in £62 revenues for FY 12/2022, and a PBT of £3.9m.
That’s 8.1p EPS, with a slight decrease to 8.0p in 2023. That looks sensible to me, the last thing we want right now is aggressive forecasts, and then a profit warning.
At 125p per share, that’s a PER of just under 16 - which looks about right to me, given the growth potential from the store roll out.
My opinion - I haven’t got enough financial information to make a proper judgement, and the numbers are still skewed by Govt support schemes phasing out. There are so many moving parts at the moment with hospitality - especially big wages cost increases, and other cost headwinds.
Therefore it’s very difficult to anticipate who the winners will be. You have to sell a large number of burritos, to cover the fixed costs. Let alone the small army of staff needed to make them quickly at peak times. I’m not convinced MEX is slick enough operationally, from mystery shopping. Think I’ve talked myself into wandering into Bournemouth to sample another one for lunch. Last time it wasn’t a patch on Chilangos. So I hope the acquisition of Chilangos results in its better quality product lifting up MEX, rather than MEX pulling it down.
Overall, I’d say MEX shares are coming into view of a potential buy for me, but I’d be much happier paying under a quid a share, to skew risk:reward more in my direction.
It looks a fairly good format, and a potentially interesting self-funding roll-out, so it’s on my watch list. There’s no rush to get involved here yet, in my opinion.
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Renold (LON:RNO)
25p
Market cap £53m
Renold (AIM: RNO), a leading international supplier of industrial chains and related power transmission products, announces its results for the year ended 31 March 2022.
PR headline -
Significant revenue and earnings rebound…Record order book…Continued net debt reduction
We like Renold here at the SCVR - it’s a decent (albeit slow) turnaround, and I think the business is higher quality than a lot of investors realise - e.g. premium products, with good pricing power, and repeat purchases due to customers’ maintenance schedules.
The main downside issue is the pension deficit. Despite that, Renold managed to get through the pandemic, maintain deficit recovery payments, and reduce debt, without needing to dilute shareholders.
Some key numbers for FY 3/2022 -
Revenues - a decent bounce here, at £195m (up 21%)
Profit before tax is healthy, at £12.4m (double last year’s £6.1m)
Adj EPS 4.3p, almost double last year’s 2.3p
PER very low, at 5.8 - but remember this is due to the pension deficit, and the cash outflows to finance it.
Order intake is very good, up 32% on last year, and the closing order book of £84m is up 57% on a year ago - that should mean decent performance continuing.
Outlook - seems encouraging to me -
Throughout the reported period the business performance has been on an improving trend and our order books have continued to grow in the early part of the new financial year.
We are cognisant that there remain considerable Covid-19-related challenges in some parts of the world; supply chain issues are still prevalent and inflation is high.
However, we have entered the new financial year with good momentum and a belief in the excellent fundamentals of the Renold business upon which we are building.
Balance sheet - is OK, quite good actually, until you get to the pension line, an £87.1m deficit, although it is down by £15.3m in the last year, helped by bond yields rising.
Working capital is healthy, with a current ratio of 1.7.
Long-term bank debt is £22.8m, and the overall net bank debt position is quite modest, at £13.3m. The going concern note is fine, with no issues.
So overall, Renold’s finances look fine, apart from the fact that it has a large, long-term liability to keep funding the pension scheme - that’s why the PER is so low. It’s a cash drain that could otherwise fund dividends, so it does make the shares worth a good bit less than if there were no pension deficit.
Renold has clearly demonstrated that it is capable of funding the pension deficit from operational cashflows.
Cashflow statement - looks pretty good. Note that a substantial £4.9m was spent on buying its own shares. Bank debt was reduced a lot this year, and last year.
Capex is not excessive, and I seem to remember from a previous call with management that it has modernised its factories, so future capex shouldn’t be as high as in recent years.
A notable absence is dividend payments, which haven’t been paid for years, due to other more pressing requirements for cashflow.
Today’s commentary says there are better uses of the cash to invest & acquire other companies, than paying divis.
Pension scheme - remains a major issue, but everyone knows it’s there.
I’m not happy with the way Renold discloses its all-important actuarial deficit, because it (bizarrely I think) includes agreed future deficit recovery payments as an asset, offsetting most of the actuarial deficit. That reduces the actuarial deficit to only £9.1m. But this figure includes £49.1m of future deficit recovery payments, payable over the next 16 years! I’ve never seen any other companies report their pension schemes like this, and it doesn’t look even remotely realistic to me.
The only thing that matters, is how much cash the pension schemes are consuming. This was £4.8m in FY 3/2022, and £2.1m prior year (when I think the trustees allowed some leeway due to covid).
Hence I’m working on the basis that c.£4m cash is needed each year in future, to put into the pension schemes. That’s a considerable drag on cashflow, but it looks manageable to me.
My hope is that Renold should continue growing, and hence dilute the pension scheme to a smaller problem as time goes on. If it can bolt on some decent acquisitions too, which don’t have pension deficits, then that would also be positive.
My opinion - this looks good to me. It’s a lovely, cash generative business actually, that is now emerging well from years of restructuring, then covid. I think management here are good, with a solid strategy, that is clearly now working.
Bank debt has been paid down to a relatively modest level, and the pension scheme looks comfortably manageable now.
What’s just as impressive, is that whilst everyone else is moaning about supply chains & inflation, Renold seems to have steered its way through with barely a scratch.
Overall then I think this looks very good, and it gets a thumbs up from me.
I’m not currently holding, but I like this share. It’s a good business.
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Graham’s Section:
Northern Bear (LON:NTBR)
Share price: 55.5p (-3.5%)
Market cap: £10m
I covered this building services group for last month’s trading update.
As noted then, Northern Bear was on track to release better adjusted earnings than it had earned both in the previous year and in the “pre-pandemic” year which came before that.
The company guided for adjusted operating profit of £2.5 - £2.6m, and today announces that the result was indeed £2.6m. Cash generated from operations wasn’t too far behind at £2.2m.
In the context of a company with a sub-£12m market cap, you can see why this is considered a “value” share by some!
Many value shares drift for years, unnoticed by investors. Northern Bear, however, has a potential catalyst in the form of an enterprising Toronto-based investor, who owns over 25% of the shares and is non-Executive Chairman of the company since 2021. I’m curious to see what plans he might have, to unlock shareholder value here.
Let’s get back to the results for FY March 2022. I’ll compare them to FY March 2020, the most recent comparable year:
- Revenue £61.1m (FY 2020: £54.4m)
- Adjusted EBITDA £3.6m (FY 2020: £3.2m)
- Adjusted Operating Profit £2.6m (FY 2020: £2.2m)
- Operating Loss £0.7m (FY 2020: operating profit £2.1m)
You can see that there is a wide gap between the adjusted operating profit and the actual operating loss.
Northern Bear is a group of building services companies, with many acquisitions under its belt.
Over the last two years, it has had to write down goodwill associated with these acquisitions, and these charges were material: £2.8m last year (FY 2021), and then £2.6m this year (FY 2022), plus some costs associated with a legal claim.
The impairment charge this year is blamed on supply disruptions and a “challenging industry outlook” at its materials handling business.
Companies tend to argue that goodwill impairment is a “one-off” and “non-cash” expense, but goodwill impairments do represent a loss of value relating to cash that was paid out for an acquisition. And for some companies, they tend to happen on a semi-regular basis!
However, Northern Bear argues that its remaining goodwill might not need to be impaired any time soon:
The large majority of goodwill relates to acquisitions made in the Group's early years between 2006 and 2008. These acquisitions were completed at a time when different accounting standards were in place… resulting in a higher goodwill balance than would be likely under current standards. Notwithstanding this… the remaining carrying value of goodwill is comfortably supported by current trading levels.
Northern Bear’s balance sheet shows £15.4m of remaining intangible assets. In general, because of the difficulty of converting intangibles back into cash, I ignore them completely when it comes to valuing balance sheets. Balance sheet values for Northern Bear are:
- Net assets £21m
- Net tangible assets £5.6m
- Net cash £2.2m (this is a seasonal high - cash movements are lumpy and “can move by up to £1.5m in a matter of days”.)
On the balance sheet I also note very high receivables of £12.1m, larger than the company’s market capitalisation. This looks like an all-time high for receivables.
But I’ve double-checked the 2021 report, and no single customer is responsible for more than 10% of NTBR’s revenue. Sales are said to be “high volume, low value”, and revenues are attributable to “a large number of customers”. So the receivables balance should hopefully be low-risk.
Outlook
This company like many others, is facing supply chain issues and price inflation of construction materials. This outlook section sounds like a mini profit warning:
…we have seen some impact on our results and expect this situation could provide a short-term headwind to operations until industry supply and demand revert to more typical levels.
The company also warns about short-term visibility: despite a strong order book, it remains true that “the timing of Group turnover and profitability is difficult to predict”.
Strategy & Dividend
The new Chairman has been leading a strategy review, and as a consequence the company has not declared a dividend for FY 2022 (previously Northern Bear paid a dividend every year from 2014 to 2019). Instead, the company studied some potential acquisitions “of a more substantial size than those we have made previously”.
A simple conclusion is that the new Chairman wants to turn NTBR into a more ambitious growth vehicle, instead of merely a stable dividend payer.
My view
As I’ve said before, NTBR operates in a highly competitive, accident-prone sector. Things can and do go wrong, and valuations should be cheap.
The good news is that NTBR is cheap, by most quantitative estimates.
Stockopedia computers also find lots of quality, and momentum, and give the shares a perfect StockRank of 99. It is classified as a Super Stock, and these metrics have even improved slightly since the last time I checked them:
A perfect StockRank is no guarantee of success, of course. Companies with excellent StockRanks can still do poorly. But I genuinely do think that NTBR is worth a second look. As I said last time:
So whether as part of a diversified StockRank-based portfolio, or as a speculation on what the new Chairman might achieve, or simply as an investment in a company that is cheap relative to potential earnings, there is a lot to be said for this one.
The only point I would add today is a word of short-term caution: we should not be surprised if NTBR suffers another mishap this year. This might not be goodwill impairment but it could be a contract going wrong (e.g. because the raw materials can’t be sourced) or it could be a customer failing to pay them.
While the receivables balance as a whole might be low risk, NTBR operates on low-ish margins (the adjusted operating margin is 4%), and one customer who doesn’t pay could take out a large percentage of the company’s profits for the year.
Arguably, this is all priced in at current levels. A long-term owner of this company would expect a few mishaps over a ten-year period. What matters is the overall result.
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65 comments
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?
“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”!
Hi Paul,
Loved your Vox Markets chat with Paul Hill (link above). Recommend it to all.
An example of how illiquid, and irrational prices can be at the moment, throwing up some big opportunities.
Chapel Down (OFEX:CDGP) has moved from c18p to c28p, a gain of more than 50%, in just two trading days. On no RNS news announced, nor any public rumours in the press.
I am definitely seeing some very depressed pricing at the moment. However, I think there is more macro pain to come; many USA companies will be announcing Q2 results this week and next week, and I think the forward guidance is going to look ugly, triggering an indiscriminate sell-off globally. Have kept by S&P500 short position for now, but looking to close out after the Q2 earnings bloodbath. This is all IMO of course; you might have a different crystal ball to mine! :)
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.
(I hold in the Boon Fund)
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)
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.
Ah ha! So there was a reason. Gotta remember to check all the social media too nowadays. Twitter, Reddit, advfn boards, tiktok....
RE Mpac
I have today sold all my holding in MPAC following what can only be described as complete lies and misleading statements having been included in the AGM statement dated 4th May when compared to the Trading update dated 11th July.
On 4th May the company released its AGM statement reassuring investors "mitigation measures have been implemented and the groups prospects remain positive due to the strength of the orderbook and the end markets that we serve.
Tony Steels CEO commented favourably and finalised his comments "I continue to be confident that the results for the full year will be in line with expectations."
Since the above AGM statement was issued after completion of 4 months of trading It could only be misleading due to 2 reasons. 1) The company purposefully mislead investors or 2) They had no real feel for the trading situation.
Under either of these two options MPAC is no longer investable in my opinion. I would be interested to hear other investors thoughts
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!
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.
Iqe (LON:IQE
One point that might be interesting
They have filed a lawsuit against a Nasdaq listed company that is in the process of being acquired by Intel .
This could play in their favour and maybe they’ve timed their lawsuit at a great opportune time ?
Filing a lawsuit against a company being acquired is pretty savvy time to pick a fight,
I experienced this once before when I was Powerbar distributor in the Uk. I was having a long protracted painful end of a very long relationship and ended up filing a lawsuit against them in California. Unbeknown to me they were a ctually in the final stages of being acquired by Nestle for a very large sum.
Of course a lawsuit popping up would result in Nestle seeking a provision on their buy price and following 12 months of empty promises the issue was duly settled 2 weeks after I filed suit .
So Intel and the Nasdaq co may well just pay the money to “make it go away” and then conclude Thor much bigger transaction.
Just a thought and I know absolutely nothing about the issue at hand between the parties, but possibly it’s s very smart move .
Yep, also been there, done that. I would now expect a quick settlement, although I’m not confident enough to invest in the uninvestible..
I know Direct Line Insurance (LON:DLG) is not a small cap (I do not hold) but I have been watching it for a while, and there was a trading update today.
There is an interesting comment in there in terms of the macro outlook:
"Whilst the Group has been pricing claims inflation over the last 12 months,
experience has been in excess of the levels assumed. The Group now estimates
overall motor claims severity inflation for 2022 of around 10%."
From what I understand, they live on the small gap between premiums and claims and the increase in the cost of claims has basically wiped out half the year's profit. and
"In the light of the current market environment, the Board has decided not to
launch the second £50 million tranche of the £100 million share buyback
programme announced earlier in the year."
So they are down (only) ~13% at time of writing.
My take is that this is a one-off event and next year profitability will recover. Also, as long as they do not stuff up, profits will naturally rise with inflation (of course I am not an accountant and DYOR etc etc)
RE: Direct Line Insurance (LON:DLG)
Sabre Insurance (LON:SBRE) reported a similar issue last week:
https://www.investegate.co.uk/...
The issue is that their underlying costs are soaring - stuff like replacement vehicles and spare parts, car hire, etc. In theory we'll see these warnings repeated across the sector and repricing will drive a turnaround next year.
Two issues with all of that. (1) How much confidence do we have that they'll accurately price in inflation going foward? (2) Given the new rules around not locking existing customers in there will be a definite advantage for the lowest cost providers - only, they may well be the companies that are least good at estimating costs. The companies that are better may have to accept lower earnings while that washes through.
There's a significant skill in pricing product in an inflationary environment and if you get it wrong then it can take a long time to adjust prices. Nearly all experience at managing this has now retired, so a new generation are having to learn this anew - we can see the effects of this across lots of companies and sectors right now.
But we're definitely going to see motor insurance premiums rise sharply this year, just to add to the inflationary woes.
timarr
Hi Andrew and Timarr
I am waiting for our car insurance policies to come through, my car has gone up by 10% and the company has not picked up the claim made by my wife on the other part of the policy, I cannot access her policy online so waiting for paper documents to turn up now, but imagine it has gone up slightly more, but what is the betting that they will not have picked up the claim on that too? (Churchill).
Similarly seen the house policies go up last month, (Tesco) when I did the whole price comparison, it was within a couple of £££ so just not worth changing.
I will have a look later on taking down to single policies rather than the theory of one policy covering both cars.
Tommy
My car insurance went down over 10%, I did get a quote from a rival but it was more expensive.
Household insurance up slightly.
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.
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?
Tortilla Mexican Grill (LON:MEX)
Thanks for flagging, I've not come across this company before. I've been searching for a decent burrito for years, they're pretty rare in the UK, but as a fast food I think they're amazing. Moderately healthy (full of veggies and not too much carbohydrate), easy to eat and most importantly, tasty. I don't get why they haven't taken off in a big way.
Shareprophets have it as a short.
I meant burritos generally, not this company specifically. I have no position but am looking forward to coming across one of their outlets.
You two have made my day, that exchange has left me in stiches :-0
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.
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.
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
Hi Paul, are you able to cover last week's results of Renold (RNO) please?
Many thanks and ATB
DH2.
Hi DH2,
Yes good idea, I'll look at Renold (LON:RNO) next.
Regards, Paul.
Hi Paul many thanks for your Renold coverage, much appreciated. I need to listen to their Webinar next when I have a moment....
DH2.
Paul
Any chance of having a look at #BOOM latest figures - understand 3rd largest podcaster but the share price not moved on the announcement- your thoughts would be most appreciated
Audioboom (LON:BOOM) - apt name for their share price.
Hi Cleeve,
I've looked at Audioboom (LON:BOOM) this evening - will publish my notes tomorrow morning.
Regards, Paul.
Thanks Paul - appreciated
Hi Paul
Thanks for the podcast. Very useful catch up whilst in the gym.
Listening to your review of Sosandar (LON:SOS) got me excited so I decided to DYOR. I was dismayed to see that Stockopedia does not like the company at all.
So I’m in a quandary. I’ve vowed not to only buy on hype but I liked what you said.
What are the high street brands they sell? I’m going to do more research by asking my wife and her friends what they think of the products as that seems to be crucial to the growth.
To Revs8.
Re Sosandar (LON:SOS)
I am not making a comment on whether SOS is a good investment.
Stockopedia ranks are not much use for companies unless they are reasonably mature as much of the data used is historical.
Many companies I invest in are also early stage so I ignore Stockranks.
You need to concentrate on revenue growth, are they generating cash, do they have enough cash and when do you think they will turn profitable.
Stock ranks play catch up.
Michael
Hi Michael
Thanks for the reply.
The predicted forwards sales growth is significant ( if it is realistic).
As things stand this brand seems to be one of the survivors and I like the area of the market they are targeting. I might start with a modest position.
Hi Revs8,
We've got loads of stuff in the archive here about Sosandar (LON:SOS) - I've been covering it since it was listed. Also the company does very good webinars, so the latest one would be a good place to do some research on it.
Regards, Paul.
Any AJ Bell platform users may want to check their account this morning as the platform is showing completely erroneous prices for a large range of equities. I logged in to see my SIPP marking down my investments by about 10% this morning ! For example £VUAG is down 25% this morning (that's an S&P 500 tracker!).
I've sent them a suitably worded complaint...
My Yahoo Finance app is showing no LSE data today. The heat must have melted the wires
Melted the roads from the seaside to home more likely.
It's cooler on the coast.
Hi
Google Finance for UK is presenting weird data as well. Started yesterday.
Looks like a key data feed to these platforms is broken.
Regards
Howard
I'm the same, fair nearly gave me a heart attack.
Thanks for the heads up. I’d noticed something seemed amiss.
If AJ Bell are showing incorrect stock prices it seems a very good reason for me not to waste time checking my portfolio! Thanks for the info
CentralNic (LON:CNIC) (I hold) announced 1H results this morning with organic growth in revenue of 62% and non organic growth of 92%. EBITDA was also 85% up so a lot of the revenue flowed down.
Cash less debt went from -$25m to +$29m so cash flows look very strong also.
Maybe its just the bear market but was expecting a much bigger reaction to this than +5% this morning. What am I missing on this as it seems cheap, is it just the uncertainty in this area at the moment?
CNIC - I was also surprised at the lack of reaction, huge growth on offer here on a single digit p/e,
Large recurring revenue, debt reducing and due to be refinanced at lower rates (mentioned in a previous RNS). Added a few this morning.
Re CentralNic (LON:CNIC)
"Cash less debt went from -$25m to +$29m so cash flows look very strong also."
I think we need to remember that the company raised $60m in February 2022 via an Equity issuance, which accounts for all of the move in net debt that you mention above.
Thanks , that might explain it so basically its getting close to cash neutral which at this stage I will take. Will be interesting when the full accounts come out the adjustments from EBITDA - Actual Profit - Cash Flow works out. Up 14% so that seems a more normal reaction
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.
Up 13.6% now. I hold and have great hopes for £CNIC.
Morning Paul/Graham - would be great if you took a look at the MTI Wireless Edge (LON:MWE) contract win and how this affects the investment case.
Been an holder of e MTI Wireless Edge (LON:MWE) for nearly 5 years and I don't read to much into there order wins overall as they never announce whether they were in their original forecasts or not. To me though they are n industries that are growing and they will continue to grow at the 5-15% for the foreseeable future and I suspect based on that the share price will be higher in 5 years time than today but it'll jump around a bit on the way.
The stock price was some 60-70% higher than now last year but a lot of that was froth from the 5G opportunity they have. At the moment I think its valued about right as profit will be impacted no doubt on inflation short term
RBG Holdings (LON:RBGP) trading in line. Convex Capital, its sell side M&A seems to have the wind at its back. The narrative indicates the M&A should be a beneficiary of current economic conditions. I hold together with K3 Capital (LON:K3C) to which there is a read across regarding M&A.
Both shares appear inexpensive, but so do many UK small caps. It is a buyers market, the difficulty as always is finding the right companies and avoiding the profit warnings
Paul/Graham do you have a view?
Best wishes to all
IMO K3 Capital (LON:K3C) >>> RBG Holdings (LON:RBGP)
Both have margin/profits...but K3C has that with a plan and a very coherent identity about what they are and how they do things as a business (sales lead, systematic processes...a sort of data lead business in a relationship field)...whereas RBG collect profits with not much plan and get annoyed the market doesn't price it higher.
Great trading update from £MEX - I wonder if this sector will be hit by reductions in peoples spending? Tortilla £mex
with regards to your comment in the VOX video regarding AO World (LON:AO.) about most people would not regard the thought that there is a risk buying from AO World (LON:AO.) Going bust and not receiving their product, this is certainly not something most people would not think about and I’m glad you highlighted this.
Is a PE of 14 still too high for you with Marks Electrical (LON:MRK) ?
Hi gmtrader,
It was Paul Hill who suggested that adverse publicity over AO World (LON:AO.) finances might put off customers from ordering products, in case it goes bust. Personally, I'm not worried about that, because not many consumers would even think about the solvency of a supplier, of anything.
Yes, I think Marks Electrical (LON:MRK) is good, and apparently well managed, but still too expensive for me personally. Electrical retailing just isn't a sector that I want to invest in, unless the valuation was stupidly cheap.
Regards, Paul.
Does Paul Hill ever stop smiling?
can you explain how to post a link. It just doesn’t work for me. It shows the link when I create a post but when I publish the link is not there. Sorry if I’m a little stupid.
Use the green blob - bottom right - to get help from the support team.
As far as I can work out, none of the ticker links on this page are working on Android mobile. So it may not be you.
maybe it is a mobile problem. I will have to test it out on the desktop.
maybe it is a mobile problem. I will have to test it out on the desktop.
No. I had the same problem trying to post a link to a YouTube video of Buffet & Munger last week and gave up. Didn't work on desktop running W10 or iPhone.
Are you using the link icon above the text in the box? It works for me. I highlight the text I want linked, then click the icon and add the link in the pop-up.