Small Cap Value Report (Mon 19 Aug 2019) - IXI, GNK, RBG, BVC, MTI

Revolution Bars (LON:RBG)
Branch closure in Swansea for any holders out there:
https://www.walesonline.co.uk/whats-on/whats-on-news/two-bars-swanseas-wind-street-16857149

Ive been a holder/buyer of Marston's (LON:MARS) for some time now. Just as a solid high yield stock with a low PE and a strong brewing business. Underpinning are the high % of freeholds that they have (although they have quite a debt pile).

Been content to let the divis roll in whilst the brewing business grows.

The outer was, in my mind, a separation of the brewing business or the property angle.

Also held Greene King (LON:GNK) but not in such large quantity sadly.

As far as the general UK market goes, it is hugely under-owned by institutions on a historical basis and all the interest is in the international UK names not domestic. That sort of scenario always gets my contrarian nose twitching.

Hi Paul regards to builders,and Persimmon is in your report today. I have the great misfortune to live next to the new devon town of Cranbrook. I do mean next door ,this past year they have started in the fields next to my country lane way in. The relevance of my comment is to explain that they,and their close partner TW continue to build unabated,and only yesterday were suggesting upping the original 3000 dwelling idea to 18000 long term.I would further add,since they 'moved' in over the lane they have been working 6 SIX days a week,and sats are 7.30am to 4.30pm. So there is DEFINITELY no sign of any slowdown here. Tony

Paul

I feel Revolution Bars (LON:RBG) is more the "ugly duckling" in the sector at the moment.

The only Corporate consolidator in the sector is Stonegate and after their approach for Revolution Bars (LON:RBG) was previously rejected (which I thought was a reasonable offer), they went on to buy Be at One (a far better business imho) instead and now have their hands full with integrating EI (LON:EIG). Revolution Bars (LON:RBG) is now far too small to move the needle on their returns so will probably be left on the shelf unless it gets into difficulties and they can pick it up out of administration.

So who's left to buy £RBG?

Private equity could be an option but any business reliant on discretionary spending with the current macro risks are out of favour. The PE pipeline of casual diners and multi-site retail roll-outs has well and truly been turned off. As one mid-market consumer focused PE house mentioned; they can't invest in the space as how will they manage to get a successful exit ?

I hope that something comes out of the blue but I feel you could be waiting a bit longer yet to get your Revolution Bars (LON:RBG) payday.

N

"Let's take back control".
That was the war cry of the Brexiteers.
So we will leave the EU (or maybe we won't). But meanwhile we are busy selling off our businesses to foreign organisations. We are now seeing Greene King go to Hong Kong and BRITISH Steel has also just gone to Turkey. The only British owned car company is Aston Martin and there is the potential for the car industry to be wiped out.
The irony.

Hi Ken

I hope you are well.

I’m with you on UK focused companies - some (including those you mention) are looking exceptional value. Selectively, my current focus is to buy more of these, especially where the dividend outlook is strong. At some point, money will flow back into UK assets and high yielding shares in a low interest rate environment will be a compelling proposition.

Cheers
Simon

Folks, this article really does bear repeating. If I have read it correctly it affects all of us.
Published by Reuters
The final five minutes of trading have become the busiest time of day for stock market traders in Europe.
Aside from an initial burst of activity after the open in the morning followed by a brief flurry when Wall Street opens, a growing portion of the daily equity volumes is now concentrated into the five-minute closing auctions at the end of the day.
The growing popularity of passive and index-tracking funds and tougher regulations are driving the shift, which is draining liquidity in the $11.1 trillion market and raising concerns about big price swings and possible disruption to price discovery.
The trend is also fracturing the industry as rivals look to take a slice of the action by launching their own post-close trading products. If sustained, it will likely stir the debate about whether there is even a need in the long term for an elongated trading day.
Products like exchange-traded funds (ETFs) and hedge funds typically use end-of-day prices set during the closing auctions for their daily pricing.
Equity ETFs in Europe have ballooned in recent years and are now worth about 500 billion euro. That's up more than 8% in the first half of the year and a whopping 38% from January 2017, according to Morningstar data.
With their rise, the five-minute window between 1530 and 1535 GMT each day is capturing a bigger portion of daily volume, which averaged about 70 billion euros in June.
Closing auctions across Europe's major bourses have on average accounted for 20% of daily average volumes in the first half of this year, and hit their highest on record of 23% in June, according to Rosenblatt Securities which tracks volumes.
That's up from just 13% three years ago. There is a similar trend in the United States, where activity is also clustering in the auctions.
Activity typically spikes in the final month of each quarter, as funds scramble to participate in the auctions that set the value of their investments for the quarter.
This year though, there has been a pronounced and steady rise each month as banks, brokers and asset managers find the auctions provide the deepest pool of liquidity.
"The rest of the day is meaningless and you can't see flow," said Andrea Vismara, chief executive office at Italian boutique investment bank Equita.
The jump has been particularly noticeable this year as overall trading volumes have slowed amid tighter regulation and rising costs and as investors have in general shunned equities even as prices have soared.
Onerous paperwork imposed by the EU Markets in Financial Instruments Directive (MiFID II), which came into force early last year, has also helped drive the shift. The reporting process for regulatory purposes is simpler if trading is executed at the closing auction.
The trend has drawn the scrutiny of the French market regulator Autorite des Marches Financiers (AMF), which warned last month that lower liquidity may distort price-setting mechanisms and increase price swings.
Closing auctions on Euronext's Paris blue-chip CAC 40 stock index <.FCHI> account for as much as 40% of volume, it found.
"The associated risks are a deterioration in price formation and liquidity during trading sessions, not to mention the operational vulnerabilities at the end of the day given the volumes concentrated in the closing auction," the watchdog said in its report.
Liquidity begets liquidity
While it's not clear if it has yet disrupted price formation, interviews with a dozen traders and senior executives at international banks, brokerages, wealth managers and exchanges show that the trend is upending how they do business.
For a start, liquidity begets liquidity - as more traffic goes through the closing auction, it has a self-amplifying effect.
"In many cases, volumes in the closing auctions are so significant they cannot be ignored," said Derek McCole, head of equity dealing for EMEA at Aberdeen Standard Investments.
He has adjusted to the new norm. He tends to place a percentage of an order at the settlement price in the closing auction and then opportunistically trade the rest of the order if a certain price is hit.
But some executives say it is getting more difficult to do big block trades during the day, forcing many to save large transactions until the end of the day. That leads to even lower liquidity during the remaining 8-1/2 hours.
"The market opens, nothing happens and then the U.S. come in. It's busy for the first hour and then it quietens down," said a senior executive at a global bank.
"People are struggling to get orders done. If people are looking for blocks, they wait until the closing auction."
Rare source of revenue for exchange operators like Deutsche Boerse and the London Stock Exchange , the rise of closing auctions provides a rare and much-needed source of revenue.
The exchanges often charge higher fees to transact in the closing auction compared with intraday levels. Each bourse has a different fee structure so it's hard to pinpoint an exact premium.
But signs have emerged that the financial industry is divided over the trend, with CBOE Europe and Aquis Exchange launching rival platforms to break the exchanges monopoly.
CBOE says it will not charge customers until the end of the year to use its 3C product, while Aquis charges a fixed 10,000 pound subscription.
Aquis Chief Executive Alasdair Haynes said he wants his company's Market at Close product to provide competition to the exchanges. He estimates the fees for closing auctions are costing the industry an extra 75-100 million pounds each year.
The product got UK regulatory approval a few years ago, but it has only seen volume pick up in recent weeks, a spokeswoman said.
That rise in interest has come as banks aim to slash costs due to razor-thin margins, which have been eroded by the burden of extra regulation and lower volumes.
"There is no doubt there is a correlation with banks trying to save money and the interest in our product where there's a serious cost reduction for the banks," Haynes said.
But the Aquis and CBOE foray has, in turn, stirred worries about drawing liquidity away from the main exchanges.
"There's a perception that the exchanges exploit their monopoly position for the closing auctions, so the lower fees offered by alternative products may be attractive for brokers," said Rosenblatt Securities' market structure analyst for Europe, Anish Puarr.
But "there may be a danger in fragmenting" liquidity in the auctions, which provide a vitally important official closing price, he said.
Investors like Equita and Aberdeen are also worried that alternatives could attract volumes away from closing auctions, distorting price creation.
"As these different ways of trading the close appear, that could potentially weaken the existing closing structure if liquidity gravitates away from the primary market onto these other mechanisms," said McCole.
(Reporting by Josephine Mason; additional reporting by Simon Jessop in LONDON and Inti Landauro in PARIS; Editing by Hugh Lawson)
Copyright (2019) Thomson Reuters. This article was written by Josephine Mason from Reuters and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to legal@newscred.com.
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Key points about markets so far not covered in comments today:-

1. US market. Some shares (especially big tech shares) ARE on exceptionally high PE ratios and that's making US markets look very overvalued.

e.g Facebook PE 70
Netflix 109
Uber.... will it ever make a profit?...... off the scale overvalued imo

YET cash rich Apple a more sensible PE 17. 

US market has looked overvalued for many years,  and I’ve avoided for years too, yet with hindsight the US has often been THE best place to invest. But risk is that soon reality will hit, and those highly rated shares could be very vulnerable. 

2., UK market.

It's FAR better to look at UK sectors to see where and what is oversold or overbought rather than this blanket heading of MARKETS.

And right now a lot of UK focus shares look extraordinarily good value and at bargain basement levels not seen for many years, with PE ratios in single figures and sometimes huge dividends.  BREXIT no deal fears are one reason why they have fallen so far. A chaotic no deal outcome, if it happens, might not be fully priced in but surely at these levels, not far off being priced in. And while waiting there are those big dividends to help compensate for any further falls.

Usually 8% and more dividends are a warning sign. Yet some now paying 8% and more are confident of increasing their dividends!

imo anyone buying high quality dividend paying shares now, the more so where those Companies are confident of continuing to increase their already huge dividends, will not go far wrong, even if those shares go even lower short term. Shares often overshoot both on the downside and up.

My own portfolio is now full of these bargain basement shares.

e.g currently 33 FTSE100 shares are paying dividends of 5% and more. That's extraordinary with inflation and rates on savings accounts  so low.

Here are just a few examples, both FTSE100 and smaller Companies.

AVIVA. 363p. PE 6. Dividend 8% AND progressive dividend policy too. Currently at year low and lower than in last December's rout.

LEGAL AND GENERAL. 227p. PE 7 and dividend 8% with increases every year and likely to continue. The only time the shares has been lower than now in recent years was the crazy overdone drop to 170p immediately after the Brexit vote.

(Worth a reminder! I was on holiday in France that day but read Paul Scott's report before going out, where he covered shares that had fallen to crazy prices that day. Some (e.g housebuilders) were down nearly 50%. Thanks Paul as I bought several following that advice.. It soon proved a great time to top up. And current big falls for similar shares for similar reasons surely likely also to prove a great buy opportunity).

ITV. 104p. PE 8 Dividend 7.5% though unlike AV. and LGEN with a cut a possibility. But also chance of a bid.

IGG. 555p. PE 14. Dividend 8% and they say will be held until market conditions improve. PLUS results recently were well received and share has gone up a lot. IG a better quality Company (e.g more Professional clients where ESMA regulations irrelevant) and if PLUS over the worst then maybe next update from IGG will say the same.

GALLIFORD. 550p, PE JUST 4. Dividend if held 12%

Their construction business (like others in the sector on wafer thin margins so vulnerable to even modest cost overruns) seems over the worst and increasing focus to be on much more successful housing business.

NEW RIVER REIT. 154p. PE 7 and dividend if held 14%. A modest cut seems likely though.

Retail and pubs are arguably the wrong sectors to be in at present. Against that the share price fall, perhaps made worse by big Woodford stake, has been relentless. So yet again a lot of bad news now priced in,.

BT. 168p PE 6. Dividend 9%.

VOD cut their divdend to a still reasonable 6.5% at share price when news of that cut. It meant more to invest in the business and market reaction has been a quick 20% share price gain. So if BT cut theirs the same could happen. Share has been falling non stop since at £5 in 2015 and is now down nearly 70%.

New CE a plus and others raising their prices decreases price pressure on BT. Telecoms sector has been a terrible performer for ages and big investment needed for 5G .. but in time that could also bring big profits.

CENKOS. 40p PE 9 and DIVIDEND 14%. BUT these might change for the worse with next update. Yet as Graham Neary pointed out Cenkos has never made a loss and cash more than covers the current share price.

Hope my thinking is not too way out as I hold all these shares.

There are many more where similar case about them currently being great value can be made.

Paul says that the bidder for Greene King (LON:GNK) is a property investor.

The RNS says: The Cash Consideration under the terms of the Acquisition values the entire issued and to be issued share capital of Greene King at approximately £2.7 billion on a fully diluted basis and implies an enterprise value of approximately £4.6 billion.

The most recent a/cs show freehold land and buildings are valued at £3bn. and I would suggest that is what attracted this bidder. So if you are looking for 'Who is next?' check freeholds!

Perhaps the intention is to separate the business from the freeholds - something an activist fund is trying t persuade Whitbread (LON:WTB) to do.

Well for me it's gold, silver and more gold ! Gold and silver miners in particular. Oh and cash.
To many negatives around for my liking.

Some of you gold bugs may be interested in Kinesis Money, assuming one is not already aware of this; It goes live the end of this month. -

https://kinesis.money/en/#/

I think Woodford is right about the UK, though it might take a year or two post-Brexit to see it. More attractive than Europe full stop and looks better on price than the US.
Doesn't mean I'm convinced by his share selections.
And delays and uncertainty just detract from the potential value.

I still see risk in the UK market, yes Brexit priced in generally, but not in full, in FX the USD-GBP rate was trading 150-160 in the years pre-referendum, now 121 with discussion of 1:1 if hard Brexit occurs. Oh dear.

Myself, my largest holding is silver, which has provided a hedge.

However, some UK domestic shares have really been taken out back of the woodshed.

Some of this looks overdone. In particular, property shares are selling at recession level NAV discounts, especially if they hold the twin bogies - UK property and retail exposure. At some point they are too cheap, and a hard Brexit might provide an opportunity to buy, if there is further capitulation selling. Have to pick through the rubble though.

Neil Woodford - who was one of the most famous fund managers has come undone in recent years, in part because he thought British companies were priced very cheaply and that once Brexit had past, their true valuation will be reflected.

Question remains for the future - did he call it wrong or did he call it right, but timed it completely wrong?  

It's very hard to value a business if we don't know major macro events that will affect the businesses we're trying to value in 6 months, let alone 5 years away. Tariffs? Supply Chain Issues? Sterling collapse? 

Difficult, yet fascinating few months ahead of us.  

Interesting rns out by £bids the story is certainly developing there.  Not sure if it would be of interest to you Paul, still a bit blue sky however it’s signed an agreement with appnexus and epic games.  This in theory should allow them to increase revenues at scale.  

There has been a nosedive in £CSSG in the past few days with no news. Does anyone have a view? (no position)

No interesting RNSs, so let's discuss macro.

It feels uncannily calm, with Brexit just 10 weeks away. Can it really be that the short and medium term damage has been fully discounted in the markets - even in small cap companies that will benefit less than the large caps from a further fall in Sterling?

We seem set to have major political turmoil this Autums, as parliament tries to force Government to avoid a disorderly Brexit.

The dispute between the USA and China seems likely to continue and get worse before it is resolved. "America First" is likely to contine at least through the 2020 US election, so any trade deals there won't be on good terms for anyone else. The US market is at an extraordinary valuation by all historic comparisons and theirs an inverted yield curve.

What have I overlooked?

Do you feel calm? If not, what are you doing to protect yourself?

Paul

I think HQ is right. It's good to know your timings.

Thanks

Steve

My morning smallcap tweet: Quiet day

IXICO (LON:IXI), PHSC (LON:PHSC), Dev Clever Holdings (LON:DEV)

IXICO (IXI) guides FY materially ahead of market expectations.
PHSC (PHSC) moves to FY EPS breakeven from loss on rev down 25%. Outlook - Brexit concerns.
Dev Clever (DEV) 3-year commercial agreement with Toshiba Global Commerce Solutions (UK) to offer gamification platform to Toshiba's retail customers. No numbers.