Small Cap Value Report (Mon 18 Nov 2019) - HAT, IQE, CMH, MIRA, LWRF

18th Nov '19 by Graham Neary

40 comments 8781 reads

Good morning!

Today, I'm provisionally looking at:

H & T (LON:HAT) - FCA review of unsecured lending business
IQE (LON:IQE) - trading update
Chamberlin (LON:CMH) - interim results
Mirada (LON:MIRA) - interim results
Lightwaverf (LON:LWRF) - strategic review

H & T (LON:HAT)

Share price: 275p (-26%)
No. of shares: 40 million
Market cap: £109 million

FCA Review

(Please note that I have a long position in HAT.)

What an unpleasant way to start the week! H&T has been one of my largest positions for a long time. It reached 25% of my portfolio before I finally reduced the size of the position in August 2017, selling coincidentally at around the current share price.

Thankfully, I had no plans to sell any more H&T shares, so this news doesn't bother me all that much - I can continue holding it until the costs of this FCA review have been digested.

The FCA has singled out H&T for a review of its unsecured loans business:

This review is focussing on H&T's creditworthiness assessments and lending processes for HCSTC loans, in light of changes to the Consumer Credit Sourcebook (CONC) rules regarding affordability assessments implemented in November 2018 and the Dear CEO letter issued to all HCSTC firms by the FCA in October 2018.

Background

Some investors avoid this sector entirely, for ethical reasons. Personally I don't think that bank overdraft charges or credit card fees are any better from an ethical point of view - but perhaps that's a debate for elsewhere!

From a practical point of view, and considering the sector as a whole, it has been wise to avoid the short-term lending space. The regulatory environment is making it almost untenable.

Normally, if a borrower defaults on a loan, this is considered to be an unfortunate situation for both the borrower and the lender, who have both miscalculated what the borrower was able to achieve.

But when this happens in the world of short-term unsecured lending, borrowers are considered to be the victims of predacious lenders. This is reflected in huge legal liabilities on lenders, who can be chased for compensation for seemingly trivial…

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SundayTrader

18th Nov '19

re IQE (LON:IQE), I don't think the new FD is kitchen sinking. The largest part of IQE's revenue and profit comes from Gallium Arsenide wafer for the smartphone market, this is at the bottom end of the supply chain and historically has always been hit hard and late by industry destocking. In the current cycle this has been exaggerated by Trump sanctions - i.e. US chipmakers have stopped ordering, but there has been a time lag as tools have had to be qualified for Far East chipmakers, with a consequence of heavy overall destocking. At least, that is the story the FD is telling, and it sounds plausible to me. It doesn't change forecasts of something of the order of £200m revenue for 2020, and at a market cap of around £550m is starting to look reasonable value.

(fwiw, have held this for a long time.)

TamzinPiworld

Thanks Graham and others, for your thoughts on H & T (LON:HAT).

Separately some videos! piworld are starting to release company presentations from Mello. This page will be updated as they are published.

For now we have the Belvoir (LON:BLV) presentation by the CEO, Dorian Gonsalves. This franchise throws off a 6% dividend, has various revenue streams, (letting, sales and more recently financial services). Dorian has aspirations to get it to £100m market cap. Let's hope the market agrees as the story progresses.

And, Polar Capital Global Financials Trust (LON:PCFT) presentation by Fund Manager, Nick Brind. An excellent overview of the financial sector, and why Nick thinks it is currently undervalued; towards the end he outlines Polar Capital Global Financials Trust (LON:PCFT) as a potential investment to benefit.

Finally, NOT Mello! Tremor International (LON:TRMR) has been somewhat of a marmite company. Here is their tech demo given at finnCap last week. Now, we are able to see under the bonnet of what Tremor International (LON:TRMR) offer to advertisers, their demands, and how the tech delivers; hence, what drives TRMR's revenues. If you follow Tremor International (LON:TRMR) or are interested in Ad Tech this is a must watch

cmpeckham

Anyone thinking that this Labour leadership has anything in common with previous versions, or thinking that it would be amusing to see their ideas implemented is making a big mistake. Labour is now dominated by genuine believers in Marxism (read some of the material from Andrew Murray, lifelong member of the Communist Party, now special advisor to Corbyn). They despise the centrist approach of previous Labour leaderships. Many of them were expelled by previous Labour leaderships.

They have been trying their whole lives to "break capitalism". Why give up when they finally gain power? I don't think markets would hang around to see if their policies are limited to their manifesto.

The plus side is that this risk is already partially reflected in prices, so this offers scope for potential gains.

pj8

Before anyone gets too hung up on the 10% "expropriation" of all UK companies with more than 250 employees as envisaged by Labour's Inclusion Ownership Fund, bear in mind that part of its announcement in September had a let-out: the proposal would be subject to consultation (and so presumably suitably amended) before anything is presented to Parliament.

As proposed, it contains a number of practical and legal difficulties - but its aims of increasing productivity and social justice are something that all political parties agree with.

In fact, these aims could be achieved within structures that already exist. A bit like Brexit really - coming up with what sounds simple, but which hides a lot of complications that could prove damaging...

intuitive6191

Wonga is long gone. The Money Shop collapsed this year, under a pile of compensation claims. Albemarle Bond has shut down. And QuickQuid is gone, too, under the weight of compensation claims and with its owners citing "regulatory uncertainty". The compensation payouts will have been welcomed by many customers, but the firms which paid them out are now finished, and won't be back.

You might also have added Cattles to the list. Not a great sector for investors?

ricardow

Hi Timarr,

Thanks for the Clifford Chance article which is very good and exceptionally clear.
I appreciate that it is the Tories who want to change the HRA but I doubt they would repeal it in full. Nor are they likely to implement expropriation of property - I hope!

Graham Neary

Indeed - not a great sector. Thanks for adding Cattles to the list!

jonno

H & T (LON:HAT) may well be a bargain at current levels, but the uncertainty created by the FCA investigation, in terms of financial and reputational risk and the time it may take to resolve makes it difficult to make a positive investment case. There is also the volte-face regarding the need to implement changes to policies and procedures in respect of HCSTC as highlighted by Graham that saps ones confidence in management.

So all in all I have decided to sell my holding at a small loss and will look to deploy the funds in other stocks where I have more confidence. All best to Graham and others who continue to hold

jonesj

Thanks for the report Graham.

I'm a former holder of H&T, having sold in the summer. I never liked the unsecured lending, particularly the impairment charges below. The impairments amounted to over 50% of the revenue. If I understand this correctly, it's NECESSARY to charge a fairly steep interest rate in order to cover all the impairments. So if the regulators want to stop the high interest rates, then they will most likely deprive consumers of access to loans in this segment.

Regulators should ensure they get the right balance between protecting the consumer and ensuring freedom of choice. I've been on the wrong end of too much regulator interference with issues like pension transfers and spread betting accounts.

The pawnbroking business seems way better than this.

Thanks for the input, jonesj. I'm in H & T (LON:HAT) primarily because of its extremely strong position in pawnbroking, which is still responsible for nearly half its gross profits (H1 result). And then the gold purchasing, scrap and retail segments (which have very strong synergies with pawnbroking) are responsible for another 17% of gross profits.

The other segments are a bonus, but in my view are not the main event.

rmillaree

Consort Medical (LON:CSRT)
Recommended offer for this company today at a decent premium to the closing price on friday (40% ish)
The price now sits at 1040p compared to the offer price of 1010 - so i am guessing the market thinks there is the chance that someone else may also bid for the company.
Note although the price is at a decent premium to the friday share price - the price friday was pretty much at a 5 year low - so it is kinda just putting things back to where they were before the earnings trend started to take a nosedive.

On the basis that the company had a low valuation pre today i kind of think if this offer does fall through i guess the shares will be back down 20%+ - so i am minded to sell up albeit i think i may give a few days for a counter offer to turn up.
anyone any thoughts on this one?

ACounsell

Apparently in this mornings Times newspaper Corbyn ‘will seek to soften the blow of moves to make companies put 10% of their equity into “inclusive ownership funds” by pledging that a portion of the £700 million raised in dividends’ to train apprentices. A quick look at some numbers behind this proposal demonstrates that this is typical Labour party obfuscation. Under the proposal Employees get a maximum £500 in dividends, though shares held the “inclusive ownership fund” can’t be traded so are effectively worthless, apart from the future cash flows of £500. The balance of any dividends goes to HMG. Assuming policy fully implemented and looking at just one company, that XR hated high yielding oil company BP, the numbers look like this (based on Stockopedia information)

Current shares in issue: 20.3 billion (US billion Shares)
10% = c. 2 billion
Estimated dividend per share per annum = £0.30
Total dividend paid = £0.30 x 2bn = £600m

Dividend available to employees £500 x 73000. (approx employees) = £36.5m.
Balance taken by Corbyn/McDonnell = £563.5m per annum! - and this is just one FTSE 100 company.

Even allowing gradual introduction of 1% pa this would be £56m for HMG in year 1. Multiply that by all the listed businesses with over 250 employees and the number must be way over £700m in year 1. By year 10 it will be many billions going to HMG. Except it won’t be because the end result of this lunatic policy if ever implemented is that companies will not pay dividends and seek relisting in other jurisdictions which in turn will damage the ‘workers’ pension funds. That’s after their existing shares in any employee share schemes have dived in value because of this Marxist theft of 10% of company shares. Not to mention the damage to their pension fund. Quite simply it is yet another tax on business dressed up as a bung for employees.

bobsandy12

Thanks for your candid view on HAT. I have added to my position on the basis the fall is overdone for the potential impact of such a small % of the total book........................Let's see.

I do agree with the conflict with the statement 3 months ago.trust you will be having a word with them.

Boon

I think the analysis by Graham on Iqe (LON:IQE) is a bit unfair, in the part where he asks why should we buy a company in a middle of a supply chain?

You buy if that company can be a market leader in component and have pricing power to eek out a decent margin.

Example is Volex (LON:VLX) all they do is make power cords, the type you plug into your laptop, kettle, etc. Unsexy? Yes. Just a supplier to big companies? Yes. But look at their financial performance over the last few years.

Jonno, agree with your strategy - have done exactly the same. No smoke without fire as they say and I can't face any more conflagration in small cap stocks!

Hi dahokolomoki

I have no knowledge ofIqe (LON:IQE), but know a little about £VLX.

Yes they do make power cords, including power connectors for electric vehicles where Tesla is currently the largest customer. However they also make complex wiring assemblies for various applications such as date centres, medical equipment, factory automation and vehicle telematics. Operating margins in complex assemblies are currently some 3.5% higher than the power cords division and revenues are growing quickly; up 33% over the last half year.

https://www.investegate.co.uk/volex-plc--vlx-/rns/half-year-report-of-volex-plc/201911140700083470T/

Albertos

Volex (LON:VLX)

Jonno - I agree - seems to me that Volex is managing it's position in the supply chain whereas IQE (LON:IQE) is not - and may well not be capable of doing so.

I would really like to see IQE succeed, but, when they succeed seems to be forever pushed out into the future.

19th Nov '19

Hi Henry, I am considering this approach but I am finding it difficult to figure out the best way of buying such an option. There seem to to be various brokerage platforms but these don't seem suitable for a straightforward purchase of an out of the money PUT options. Any suggestions welcome.

shipoffrogs

"Example is Volex (LON:VLX) all they do is make power cords, the type you plug into your laptop, kettle, etc. Unsexy? Yes. Just a supplier to big companies? Yes. But look at their financial performance over the last few years."

Isn't the financial performance over recent years dire? Net earnings over the last 6 years is negative, as is free cash flow. And the latest profit margin is very thin, suggesting they're price takers and reversion to previous poor performance not something in their control?

pka

Here are Edison's comments on IQE's trading update:

https://www.edisongroup.com/wp-content/uploads/2019/11/IQE-Continued-impact-from-supply-chain-disruption.pdf

"IQE’s reduced guidance for FY19 revenues of £136–142m (vs £140–160m previously) reflects primarily the greater than anticipated disruption to its major US wireless customers as a result of the US/China trade war. There is good evidence to support a recovery in the medium term:the qualification of products and tools in the Asian supply chain for both 3D sensing and wireless RF is encouraging, while exposure to 5G remains attractive. However,the timing of a recovery is difficult to gauge and with Q120 expected to be seasonally quiet we downgrade our FY19 and FY20 revenue estimates by 5.3%and 15%respectively, with FY19 EPS reduced from a 0.5pprofit to a 0.8ploss and FY20 EPS reduced from2.3p to 0.3p."

Small Cap Value Report (Mon 18 Nov 2019) - HAT, IQE, CMH, MIRA, LWRF

H & T (LON:HAT)

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Graham Neary

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