Small Cap Value Report (Mon 23 Aug 2021) - ZOO, RNO, SRC UPGS

23rd Aug '21 by Paul Scott

38 comments 10365 reads

Good morning, it's Paul & Jack here today, with the SCVR for Monday.

Agenda -

Paul's Section:

Renold (LON:RNO) (I hold) - a positive trading update, ahead of expectations, with strong order intake in particular. Supply chain problems are mentioned, but despite this expects performance to beat market expectations. Don't forget the large pension scheme deficit.

Up Global Sourcing Holdings (LON:UPGS) - another positive trading update. FY 07/2021 ended well, with profits 4% ahead of market expectations. Current trading is in line, despite supply chain disruption. Equity Development raises current year EPS forecast by 3%. Valuation still looks reasonable, despite multi-bagging from the pandemic lows last year. Looks good, providing nothing goes badly wrong with shipping from the Far East - which is a risk, albeit one that UPGS has managed well to date.

Jack's Section:

Zoo Digital (LON:ZOO) - revenue ahead of expectations and conversion of a loan note. Momentum is returning here, but the valuation is high and the group has so far struggled to generate profits.

Sigmaroc (LON:SRC) - impressive update from this highly acquisitive construction company. The pace of inorganic growth is very high and Nordkalk adds to that (although it should pave the way for organic growth as well), but the team has so far shown that they are up to the task of capitalising on the identified consolidation opportunity. The scale of equity dilution and the quality of asset acquisitions going forward are key.

Explanatory notes -

A quick reminder that we don’t recommend any stocks. We aim to cover 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 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…

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illiswilgig

23rd Aug '21

Science (LON:SAG)

(I hold)

'It seems most likely that they will have to do an equity raise of some description and size to fund the c. £30m'

My view differs.

In my view its most likely that they already have a partner on-board to take on the Technology and Engineering (now renamed Atmosphere Management Systems) division - quite possibly the bidder that TP failed to sell to recently. Or they have arranged financing to cover until they sell off this division.

I can't see the rationale for SAG to keep this division - it's relatively low growth and capital intensive with long term multi-year contracts that can make things very lumpy? Which is fine if thats your business, but its very different from SAG's own business model?

All things are possible including an equity raise, but I don't see the point of raising equity and then selling off a division that you largely diluted to buy? Especially as SAG recently made a point of saying that they have self funded acquisitions without shareholder dilution?

Maybe I have misunderstood and the Atmosphere Management Systems division has a high growth future with less capital investment required?

cheers

Mark

gus 1065

Re. Stock Spirits (LON:STCK) there does seem to be a bit of activity in the market. Original bid was at 377p so 393p (another 4% on top) suggests there’s at least some speculation someone else might be sniffing around. Also, some quite large chunks of shares moving to/from Blackrock, M&G and Franklin Templeton have been disclosed in the last few days which could possibly be another bidder building up a stake. This said, trades going so far today (about 100,000 shares) are de minimis so probably more smoke than fire at the moment.

Gus.

truegent

thanks !

donald pond

I'm frankly getting a little concerned about ST and the way his columns are perceived as moving the market. It's not right.

garbetklb

Hi SurreySteve

Burford Capital (LON:BUR) - I've not looked in any detail, but does accrued staff compensation swing if from +$20m to -$90m?? If so, how do I apply for a job.......

ISAallowance

Burford Capital (LON:BUR) (I hold)

"But the paper loss isn’t realised until cash settlement, and is always a percentage of the profits, so in my eyes it gives an overly negative view."

The paper gain isn't recognised until cash settlement either. So booking the paper gain without the corresponding paper performance pay liability painted an overly-rosy view, and was very naughty IMO.

Rambo

In relation to Morses Club (LON:MCL) I hold, could anyone help me out and explain what the announcment today means and what the implication are ?

Correction to Notice of AGM

"Resolution 2 (The Scheme of Arrangement), paragraph (c)(ii)(1), line 6 of the Notice of GM, with reference to the authority under section 551 of the Companies Act 2006, incorrectly references an aggregate nominal value of £132,531 in respect of relevant securities that may be allotted.

The Company confirms that the correct aggregate nominal value that the Company is seeking authority to allot is up to £1,400,000."

They did make the announcement below on the 16th August - are the two related ?

"Morses Club PLC ("Morses Club", or the "Company"), an established provider of non-standard financial services, announces the issue and allotment of 1,102,251 new ordinary shares of £0.01 each in the Company (the "New Ordinary Shares") pursuant to the vesting of awards under the Company's executive share scheme"

Any help appreciated

Bouden54

Basically yes. Just underlines the point that for these sort of businesses, it's the staff not the shareholders who are going to be making the really big returns (similar to investment banking).

Jack Brumby

Thanks Gus,

Hope all's well. I just checked out the passage you quote and see that it's followed by "...but it seems sensible to me in the short term, and I suspect management might be hoping for more in time." so I feel like I just about covered myself there!

On a serious note though it does bring home how quickly 100p has been reached and it's quite something to catch up with Sigmaroc (LON:SRC) after that initial write up. It's crammed more activity into a year or two than a lot of companies might in five.

Chriskay

Although I don't hold Morses Club (LON:MCL) any more, as a relatively new investor, I regularly receive an RNS which to me is complete gobbledegook or at best not clear. In many cases even Google searches do not clarify sufficiently or at all. I wonder if Stockopedia could establish a glossary of these, with some examples and most importantly, the possible implications for shareholders. I am sure it would be appreciated by the many on here who must scratch their heads on reading them.

Wilbraham

Investopedia is your friend? https://www.investopedia.com/f...

Google also shows the excellent explanations in Investopedia Wilbraham which I regularly check, but Investopedia does not show the actual RNS you receive which can be pretty convoluted, or the possible implications for shareholders. BTW for what it is worth Novice, I think the Morses Club (LON:MCL) share issue is to top up or establish the companies reward scheme for their executive management, and it looks like they registered the wrong amount and are having to amend it. That is only my ignorant guess though and should not be relied upon for any purpose including investing.

TP rather sniffy response to Science (LON:SAG) indicative offer at 6.5p. Case of „he said, she said“ etc.. Suspect hard cash will eventually have the final word on this one.

https://www.investegate.co.uk/...

Fair enough Jack. I should have put your quote in in full! Either way, I thought both write ups on Sigmaroc (LON:SRC) we’re very useful.

shamusj

A fair point. In my mind I’d already factored in the performance pay based on what they have published about pay awards in the past.

Tortoise investor

Thanks for the Renold (LON:RNO) write-up Paul. I see Stockopedia computers have caught up with the broker upgrade today and put FY22 at 2.7p, raised from 2.2p, which is a pretty decent uplift! FY23 now on 3.2p (was 3p).

abtan

Burford Capital (LON:BUR) (I hold)

Hi Shamusj

I thought the update, whilst appreciated, was overall quite negative.

2 things stuck out for me:

"In the first half of 2021, based on all the fair value gains in the period, the expense accrual was less than $1 million."

We know that between 4% and 9% of a gain is being accrued for the Carry Plan, so this implies a Fair Value gain in the period of $11m and $25m.

That is the lowest FV gain for Burford that I've seen in many years and implies that there isn't much expectation for high realized gains in the next 12 months. Not good.
I'm not against the proposed change in accounting for pay rewards and I don't think it's material to worry about going forward just yet...but I am against the rising % of the pay awards.

Note the rise from 4% to 9% in the last 5-6 years.

Robert - the IR contact at Burford - has implied that this increasing % is simply due a rise in the # of employees participating in the scheme.

I found this a worrying response as it implies uncapped costs that can be attached to every successful case. What's to stop this % rising to 20% or higher as more employees come on-board?

I assume that there will be a limit and hopefully the company will clarify in future.

----

One beacon of light was the high level of deployments - the highest I've seen in any 6 month period. I'm cautiously hoping that this translates into meaningful returns over the coming years and offsets what seems to be growing operating costs.

Boon

Why am I not surprised that the Accsys Technologies (LON:AXS) new plant is further delayed and also increase in costs... when their last two constructions / expansions were also afflicted. It is as though management do not learn!

In any case, existing shareholders didn't seem like they were bothered by this (potentially extra construction costs 10-15% of market cap) nor the pushing out of revenue and EPS growth as the shares are barely less than 1.55% lower today.

24th Aug '21

Thanks everyone for responses and will follow up on investopedia link, appreciated.

Small Cap Value Report (Mon 23 Aug 2021) - ZOO, RNO, SRC UPGS

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Paul Scott

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