Small Cap Value Report (Mon 22 June 2020) - MNZS, GDWN, SAGA, SCE, MTC

21st Jun '20 by Paul Scott

69 comments 11052 reads

Good evening/morning, it's Paul here with the preamble for Monday's SCVR.

Estimated timings - it's a quiet news day, so I should be finished by 1pm.
Update at 12:57 - we're mostly done, but I've got 2 more sections to add, so revised finish time now 2pm.
Update at 15:08 - today's report is now finished.

Subscribers seem to like me preparing some general macro thoughts on Sunday evenings, and then feeding it out gradually during the week's SCVRs. I've tried out this idea, and it's worked well for me too, taking off a bit of the pressure on weekday mornings, so let's carry on with that.

PIWorld podcast about corporate bonds

I really enjoy the weekly podcasts or videos from PIWorld. Tamzin has such a natural interviewing style, asking concise, intelligent questions, and letting the interviewee reply without being interrupted.

The most recent interview was fantastic, I enjoyed it immensely. Paul Hawkins gives a masterclass in corporate bonds, and is successful in making potentially dry material very interesting.

I’ve been meaning to branch out into corporate bonds for a while, and this superb podcast explains everything very clearly. Well worth a listen. With stock markets generally so expensive, and lots of downside risk around, it could be a good time to shift some of my portfolio into safe, decent yielding corporate bonds, possibly?

Remember that bondholders rank ahead of equity, so if there is a deep recession, then it's divis that get cut, but bondholders normally get paid interest without fail (unless the company goes bust of course). Hence owning bonds can be a good way to protect capital in a market downturn.

Here’s the link - very highly recommended. Remember I only flag things that I genuinely think are excellent. That link is for the video, but personally I prefer to listen to the audio on podcast on my earphones, so I can go for a brisk walk at the same time.

Wirecard

I recall in 2016 seeing a damning shorting dossier on Wirecard, a German finance company. It seemed highly convincing. If I remember correctly, the main accusation was that Wirecard seemed to be facilitating online gambling transactions in countries where such gambling was supposed to be banned. It's a long time ago, so I might have mis-remembered, in which case I'll happily correct this.

The kerfuffle all…

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peterthegreat

22nd Jun '20

Hello OsullivanB. This is in In answer to your question about the difference between traditional and novel vaccines. Most traditional vaccines are made by growing the disease-causing organism in culture and then killing, inactivating or attenuating it so that it can be used in a vaccine to elicit an immune response without causing significant symptoms. Novel vaccines are more difficult to exactly define as there are so many different approaches being used, but any vaccine which uses a genetically engineered adenoviral vector, such as the COVID-19 vaccine being developed by the Oxford group, would certainly be regarded as novel as it is at the forefront of vaccine technology. However, it is not the first vaccine to be made in this way. The Oxford group developed a vaccine against MERS using a similar approach.

Mark L.

Regarding excessive gearing, why not reduce or eliminate the ability of companies to deduct interest payments from corporation tax?

Albm7

Elliot Mgmt, an activist hedge fund owned just over 5% bought June/July last year. According to filing on 9 April they have now gone below 5%.

Paul Scott

Yes, good point. I started googling for SAGA bonds, but got distracted. If anyone has a link to prices & yields on saga's corporate bonds, then I'd be keen to see it.

FREng

In the PI World video interview Paul linked to above, Paul Hawkins said you have to phone your stockbroker. (He also said that whilst stockbrokers say they are experts in the bond market, in reality they are not).

IMHO, It's a really informative interview for anyone who invests in corporate bonds.

@hawkipa

Thanks for the really informative interview Paul,

I'd welcome your views on the current prospects for index linked corporate bonds. I think you said you had been buying them this year.

catalogue

Now we know why Paul has put off replacing his car. He has been waiting for the right time to buy a Koenigsegg Gemera.

Many Government decisions can be analysed to calculate an implicit value that is being placed on a life (or sometimes a Quality Adjusted Life Year, QALY). I really wish they would use the same value consistently.

ACounsell

Hi andrewdb,

Couple of questions re this wisealpha site which I haven't come across before:

The Yield to maturity % seem quite high for companies with a decent credit rating (e.g. BP and Virgin Media) - is this correct?
The status column indicates an available amount - is this the amount you can buy or sell? If so we are talking pretty high numbers unless you can buy smaller amounts subject to a minimum.

Their site also states: "Our investments are only available to registered investors who qualify. To qualify and view this content, you need to be a High Net Worth Investor, Self-certified Sophisticated Investor, Advised investor or an Investment Profession". Consequently not sure it would be suitable for all investors (though I know anyone can self-certify!) and guess any bond purchases would be be outside ISAs or SIPPs. The investment platform I use (AJ Bell) will buy/sell corporate bonds over the telephone and charge the same commission (max £9.95 depending on your trading volumes). As Paul Hawkins alluded to in his excellent presentation bond trading involves some very large volumes and outside the Retail bond market the minimum denominations are probably beyond the means of most private investors. In the Q & A I asked a question about the minimum volumes but I'm not sure I got an entirely satisfactory answer other than looking at sites like http://cbonds.com. However, unless you subscribe there is a limited amount of information you can get for free on there.

andrewdb,

Think I just answered my own question with a bit of DYOR reading on another site. An investor doesn't actually own a complete bond but rather 'fractional bonds' in much lower denominations. I think I would rather own the bond per se though I recognise that this precludes a lot of the market due to minimum denominations, or the risk of a hefty investment in one companies bonds

andrewdb

1
yes. Note that any ytm > ~7 implies the bond market thinks you are one or more of a) risky b) unsecured c) the assets used for security are not that great.
2
that is the amount you can buy. The min is £1 I think.
3
not tried selling and disinvesting yet.

Basically (disclaimer I may be wrong) it seems bonds are issued at 100,000 face, they buy one and sell it on in fractions. The bond lives with an asset custodian. They cannot run off with it.
They charge ~1% of AUM.
They offer a normal account, an IFISA (Innovative Finance ISA) and you can get a SIPP to put money in here (I do not know how that works).
They do offer some basic info on the company - some ratios / accounts / credit ratings.

The warnings are there because it is a bit different, and you can lose all your money.
From memory I had £200 in New look bonds and now have £70 and £40 in new look shares

Some of the yields are amazing, the ytm of pizza express august '21 bonds was > 100% recently and that tells you something about the bond market's view on their survival chances.

Interestingly looking wider there is (according to Alphaville last week) a link between the bond price and equity returns - seems if the price > 90, returns are positive and otherwise negative.

doublelutz

There is a restriction for companies paying more than £2M in interest where they are restricted to a deduction of 30% of the company's or groups UK taxable profits before interest, taxes and capital allowances. Whether this is much of a disadvantage depends on the level of profits but I suppose it could hit some of those currently not trading who have high interest payments.

Momoko Miyamoto

I've gone long on Newriver Reit (LON:NRR) today as it seems likely the govt will soon announce significant measures to help shops e.g. social distance reduction to 1-1.5m, VAT reduction, extension of business rates relief and employers NI reductions etc.

The shops don't need to make bumper profits, just to break even and pay the rents.

On the pub side of things I think there is significant pent up demand for people to visit pubs and the staycation theme of this summer will help. I cynically suspect that our mad travel quarantine policy is actually a domestic consumption stimulus policy in disguise.

OsullivanB

Thank you.

intuitive6191

“I cynically suspect that our mad travel quarantine policy is actually a domestic consumption stimulus policy in disguise. “

I thought this. I think our outbound tourism spend is about 48 billion versus 28 billion inbound. Theoretically we would be a lot better off if more people did staycation. This doesn’t however consider negative factors like loss of aviation revenue and jobs etc.

Not convinced about retail rents. Whilst there is an imbalance in supply and demand rents should fall. Our local Shoezone has moved at least once with its old site now a charity shop. I would expect landlords of both sites suffered reductions in rent.

pd613150

Below is a link to an article showing my local city centre re-opening to shoppers in Newport, Wales for the first time. It is a stark contrast to the images of frenetic shoppers trying to get in the nike store last week.

Draw your own conclusions what the consequences will be on high streets that are not destination shopping venues and the knock on effect for landlords etc.

https://www.southwalesargus.co.uk/news/18533956.scene-newport-shops-re-opened-today/

Laughton

Apologies if I've already posted this, or words to this effect before, regarding re-opening (I think I must be suffering from lockdown fever).

So much talk about the 2m rule and it’s impact on the hospitality sector in particular.

But in reality it’s only guidance. Everyone has already admitted that it’s not a “rule” or a “law” that is enforceable by the police so what would happen if pubs/bars were to open with no enforcement by the licensed premises operator?

As it’s not a law, what could be the comeback?

Could the licensing authority revoke the license and if so on what basis?
Could the business insurer cancel cover and if so on what basis?
The police have already said that they could not become involved?

OK, the clientele might decide that they don’t want to enter a premises without social distancing but that’s a risk many operators might be prepared to take and in a way this would be good as it would help keep numbers below capacity..

Looking at what’s happening generally. I think a lot of people, especially the younger generation, don’t care all that much, they just want to go out and have a good time.

Even a 1m “rule” is going to be a joke once premises do open – give it five minutes and nobody’s going to take much notice and if it was enforceable then a lot of licensed premises are going to go out of business.

hawkipa

23rd Jun '20

Hi @FREng,

I haven't traded in any index linked bonds this year. If I was looking at them I'd probably want corporate index linked. If you think inflation is coming down the line, then it makes sense to almost hold your nose, forget valuation and buy.

The reality I always found is that there aren't enough linkers to satisfy demand, so the market is always extremely well bid. I never ever once shorted a linker as I knew I had 5 buyers lined up for every issue. Quite a few utilities issued them as they have inflationary liabilities and that might be a good place to start with something like that. But in all honesty its an esoteric market at the best of times.

That takes you back to government index linked. I'm afraid I have no view on breakevens there. All I know as of today, is that you will pay a high price for that protection, so its worth having a very strong view on inflation before pulling the trigger.

Regards

Paul

Cockerhoop

Hi muckshifter,

Regards Goodwin (LON:GDWN), Avingtrans (LON:AVG)

Been pondering this. As you'll be aware Darchem and Metalcraft (AVG subs) picked up the original Tranche A contracts. AVG stated in the interims that any further tenders had been delayed until late 2021 whilst what I believe to be this contract had an projected announcement date of 30th June 2020 so i'm not sure they were in the running for this one.
When I spoke to AVG at an agm a couple of years ago they suggested at least 1 other participant would be involved in producing the 3m3 boxes due to the large size of the contract.

Small Cap Value Report (Mon 22 June 2020) - MNZS, GDWN, SAGA, SCE, MTC

PIWorld podcast about corporate bonds

Wirecard

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Paul Scott

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