Small Cap Value Report (Mon 19 Nov 2018) - Brexit, JPR, CYAN, AJ Bell, SIXH

Monday, Nov 19 2018 by

Good morning! 

For a few days last week, there was little else on my twitter feed other than views on the Brexit withdrawal agreement.

That's understandable. It's also rather overwhelming. And I much prefer to look at company news and think about my portfolio holdings instead of reading 600 pages of legalese.

The headlines which I really care about are those relating to the value of the pound. When Mrs. May lost another Brexit secretary on a chaotic Thursday morning last week, the pound weakened considerably against the euro.

This chart shows the strengthening of the EURGBP exchange rate (i.e. the weakening of the pound) over the past five trading days:


Let's zoom out. Monthly view:


The truth is that little has changed. Optimism that a deal would be reached led to a strengthening of the pound, but this optimism collapsed as of last week. So we are back around where we started.

The annual view doesn't provide us with much of a trend either:


So there's been basically nothing in terms of net progress for the pound. 

I attended a Jim Mellon talk during my recent trip to Manchester. Among the topics he covered was the outlook for the pound - and I completely agree with him that it is undervalued (granted, I am talking my own book here).

Jim cited the Big Mac Index as evidence for his hypothesis. A Big Mac is cheaper when bought in the UK and this simple metric suggests that GBP is cheap against CHF, USD, NOK, CAD, EUR, DKK and AUD. That's a lot of important exchange rates where the pound could be due for a little bit of strength. The percentage undervaluation that is implied against the euro is 11%.

My stance on GBP has been clear for a long time: I've repeated the mantra that investors hate uncertainty and that the pound will remain "cheap" until there is a resolution to the Brexit negotiations.

Once we have a clear and agreed Brexit outcome, I can see the pound recovering much of its devaluation against the euro. As far as the pound is concerned in the short-term, almost any deal is better than no deal and the continued uncertainty it engenders.

But there are higher goals than short-term currency strength. So…

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All my own views. I am not regulated by the FSA. No advice.

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Johnston Press plc is a United Kingdom-based local and regional multimedia organization. The Company provides news and information services to local and regional communities through its portfolio of various publications and Websites. The Company operates through two segments: Publishing (in print and online) and Contract Printing. Its portfolio contains approximately 190 paid for weekly newspapers, 10 paid for daily newspapers, 30 free titles and over 10 lifestyle magazines. It also has approximately 190 news sites and over 20 other sites, including entertainment site WOW247 and Jobstoday. Its brands include BallymenaTimes, BanbridgeLeader, Belfast News, News Letter, CarrickTimes, ColeraineTimes, Mid-Ulster Mail, Derry Journal, Sunday Journal, TyroneTimes, LarneTimes, LurganMail, Isle of Man Examiner and Yorkshire Post. Its titles span Scotland, the North East, West Yorkshire, the North West and Isle of Man, South Yorkshire, the South, Midlands and Northern Ireland. more »

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The 600 Group PLC is engaged in designing and distribution of machine tools, precision engineered components and the design, manufacture and distribution of industrial laser systems. It operates in two segments: Machine tools & precision engineered components, and Industrial laser systems. It designs and develops metal processing machine tools sold under the brand names Colchester, Harrison and Clausing. The Company designs and manufactures precision engineering components under the brand names Pratt Burnerd and Gamet. The Company's Laser Marking includes Electrox and TYKMA. Its Machines Tools products range from small conventional machines for education markets, Computer Numerical Control (CNC) workshop machines and CNC production machines. The Company operates its businesses from locations in North America, Europe and Australia selling into over 180 countries across the world. more »

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CyanConnode Holdings plc, formerly Cyan Holdings plc, is engaged in the design and development of narrowband radio frequency (RF) mesh networks that enable Omni Internet of Things (IoT) communications. The Company offers a range of support services, from design-in consultancy to training and technical advice. The Company offers solutions, including Ultimesh, which provides a complete network solution optimized for exceptional performance and return on investment; Panmesh, which is an Internet Protocol version 6 (IPv6)-based wireless neighborhood area network (NAN) solution that interfaces with other networks and applications, and Omnimesh, which is the narrowband RF mesh networking solution that allows the integration of its own solutions, as well as third-party applications. The Company, through its subsidiaries, is engaged in providing wireless communication technology for smart metering, lighting and the IoT. The Company operates through the brand CyanConnode. more »

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  Is LON:JPR fundamentally strong or weak? Find out More »

29 Comments on this Article show/hide all

Asagi 19th Nov '18 10 of 29

a lot of 600 (LON:SIXH) debt is 8% loan notes that from February 2020 the holders are allowed to convert into warrants at 20p*. That's why the P/E is so low because there is a lot of debt that will likely convert to equity at some point.

Asagi (long £SIXH)

*that's my reading of it anyway!

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james1n 19th Nov '18 11 of 29

Hi Graham,

Tristel (LON:TSTL) announced an aquisition this morning to bring in-house its distributors for FR, BE & NL which looks interesting. finnCap have raised their target price for the company off the back of this by 7%. Would be keen to hear your assessment of this news.

Thanks, James

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PortsmouthPirate 19th Nov '18 12 of 29

Paul, any thoughts on the Norcros results from last week? Pension deficit down significantly, profits up after the Merlin acquisition. Debt still elevated after said acquisition. Stocko has the PE at 7, yield at close to 4%.

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MrContrarian 19th Nov '18 13 of 29

In reply to post #419919

moneyam has undelayed movers. Risers and fallers in one window:

Shows blank if not logged in though.

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Trident 19th Nov '18 14 of 29

Norcros (LON:NXR) started to look pretty value, as it remains on a low PE of circa 7x, with good performance, a reasonable dividend, and a significant drop in its pension liabilities from over £48m to around £28m due to a change in bond yields. Apparently it is waiting on the outcome of its pension valuation. Once that is done, and with possible future acquisitions also diluting the previous pension hangover, perhaps they will further materially escape its previous shadow.
Norcros (LON:NXR) might never be a market stormer, as its core image seems to prevail against 'sexy' multiples, Stocko rates in the 85 zone which further suggests underlying value.

I am not currently holder but this could be a decent banker.

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Graham Neary 19th Nov '18 15 of 29

In reply to post #419914

re: 600 (LON:SIXH)

Yes, taking a look at that. Thanks for the tip. G

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Graham Neary 19th Nov '18 16 of 29

In reply to post #419944

Andrea, thanks for the suggestion. I'm sorry I don't cover property too much, I don't think I can add value on Sirius Real Estate (LON:SRE).

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Graham Neary 19th Nov '18 17 of 29

In reply to post #419974

Great point re: 600 (LON:SIXH). There are an extra 40 million shares to hit the market if it breaches 20p. Quite a lot (113 million shares currently outstanding).

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purpleski 19th Nov '18 18 of 29

Hi Graham

I am going to ignore Brexit (though of course you can’t really) but I have to disagree with you (even though I am by a long way no currency expert) on:

“Long-term, I don't see why the pound can't recover and be structurally far stronger than the euro.”

Sterling is a currency that is in permanent long term decline. Over almost any time frame one wants to take. I am a James Bond (books not films) fan and back in the 50’s he was getting $4 or $5 to the £. When I started my business in France I was getting Swf3.1 to £ and Frf11:00 : £ (in case you are wondering it is Frf7.35 now), when I first visited Singapore I got Sing$3 to the pound. Continually weakening sterling just seems to be the nature of the beast unless the UK gets off its arse and starts producing.

The rate against the Euro may be a unique case but I would be surprised; there is a political will to make it work and I would be surprised if some how they dont make it work.. That is my, probably controversial, penny worth.


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FREng 19th Nov '18 19 of 29

In reply to post #420049


I agree. When the pound became metric ( a few years after Harold Wilson's devaluation) , there were 2.40 dollars to the pound.

The steady devaluation of the pound against other currencies has helped protect exporters from the consequences of their failure to invest in productivity.

Another 10% down since the Brexit vote and I fear that the devaluation will continue.

When you consider the total value of sterling-denominated assets (which must be many trillions of pounds - just think about the value of the London housing stock as a small subset), the cost of each 1% devaluation is immense.

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WhaleHQ 19th Nov '18 20 of 29

In reply to post #420074

'When you consider the total value of sterling-denominated assets (which must be many trillions of pounds - just think about the value of the London housing stock as a small subset), the cost of each 1% devaluation is immense.'

I'll tell you what's immense; it's impact on the wedding I'm having in Ireland next year.

I know it's a bit like arguing which way the wind is going to blow next week but I'm sure there will certainly be a (short term?) rally in GBP as soon as something tangible presents itself in negotiations. I feel that anytime the negotiations show an indication that they are close to resolution the chart spikes.
I consequently am increasing my UK exposure which is convenient as my sterling is won't buy me as much overseas anyway. I may have to rent a garden shed for this wedding.

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Gromley 19th Nov '18 21 of 29

In reply to post #420084

I'll tell you what's immense; it's impact on the wedding I'm having in Ireland next year.

I know it's a bit like arguing which way the wind is going to blow next week but I'm sure there will certainly be a (short term?) rally in GBP as soon as something tangible presents itself in negotiations. I feel that anytime the negotiations show an indication that they are close to resolution the chart spikes.

I'm not totally sure why your wedding negotiations (sounds ominous) will cause GBP to rally? Surely the potential outflow of Sterling to Euros would have the opposite effect?

Anyway, I hope your negotiations reach resolution and you have a splendid wedding.


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Beginner 19th Nov '18 22 of 29

In reply to post #419989

Thank you to James, shine, Kevlar and MrC. Very much appreciated.

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clarea 19th Nov '18 23 of 29

In reply to post #420019

Hi Graham re A J Bell when you say no new money being raised are you essentially meaning any funds raised will be used to pay down debt or something else ?


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Richard Goodwin 19th Nov '18 24 of 29

In reply to post #420114

I think he means the flotation is only so that existing shareholders can take money out of the shares.

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Graham Neary 19th Nov '18 25 of 29

In reply to post #420124


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DJCP 19th Nov '18 26 of 29

As an AJ Bell customer, I've been waiting for any updates/news re their IPO.

From what I've read, they're only floating around 25% of company, so existing shareholders, directors and employees will still have substantial holdings, which are locked in for a further 12 months after the IPO. 180-days lock-in for Invesco Perpetual, Seneca Investment Managers and ex-employees.

As the IPO is limited to qualifying* Customers and institutional investors, there is the possibility of an initial spike when the shares are freely available to trade.
* Will be interesting to see what qualifying means !

This appears similar to Aston Martin Lagonda Global Holdings (LON:AML) IPO, in that it was for existing holders to sell (i.e. no cash injection for the company), but the general concensus was that Aston Martin Lagonda Global Holdings (LON:AML) was overpriced. I had a £12 target, but have reduced that to a £10-12 range now, at which time I'll investigate further.

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WhaleHQ 20th Nov '18 27 of 29

In reply to post #420099

Where do we start? For the venue she's somewhere between a castle and manor house and I'm somewhere between the back garden and a community hall.

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Samscvb 21st Nov '18 28 of 29

The last I heard the Big Mac Index was when I lived in Russia in 2012. The RUR was significantly under-priced they said...

Go buy some 3X PE ratio stocks while you're at it and good luck

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Graham Neary 21st Nov '18 29 of 29

In reply to post #420614

Yeah, I wouldn't want to use the Big Mac Index as the only piece of evidence for future currency movements, that's for sure..!

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About Graham Neary

Graham Neary

Full-time investor and independent analyst. Editor at Cube.Investments, small-cap writer at Stockopedia. Previously a fixed income analyst in the City and institutional fund manager. I'm a CFA charterholder and have the Investment Management Certificate and STA Diploma in Technical Analysis for good measure. When I'm not talking about finance, I enjoy recreational poker, chess and Mandarin Chinese. more »


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