Small Cap Value Report (Mon 24 Dec 2018) - Bear markets, GAMF, GRC
Good morning folks,
Shares are likely to be low on the list of priorities today for most, and the exchange closes early. For whatever it’s worth, we’ll be keeping an eye out for interesting company announcements.
All the best
Graham
The NASDAQ is in a long-overdue bear market after falling 3% on Friday. I've been saying for some time that this is the most overvalued major index.
Its median ratios, as measured by Stockopedia, are as follows:
This suggests to me that there is (selectively) some value to be had within this large index.
Note there is a big discrepancy between the above table and the corresponding table for the NASDAQ-100, which is restricted to the top 100 non-financial companies.
The NASDAQ-100 has a higher valuation, lower growth and a lower dividend yield. People are paying a big premium for big tech companies:
I would expect the other major US indices to follow suit and to become technical bear markets, too (20% down).
Bear markets typically last a little over a year. However, after one of the longest bull markets in history, perhaps we can expect the subsequent bear market to be longer than usual?
Gamfook Jewellery Plc (GAMF)
- Share price: 15.5p
- No. of shares: 100 million
- Market cap: £15.5 million
Curious to see that a Chinese company has listed on the NEX Exchange. It sells bespoke jewellery online and in Shenzhen and Fujian.
After all the failed ventures on AIM, are Chinese companies finding that NEX is a more suitable home for them now?
Some things I've noticed:
- The corporate advisor is Daniel Stewart, who brought us the fraud Naibu (NBU).
- Coincidentally, the Executive Chairman and Head of Sales at Gamfook both have the same surname as the Naibu Chairman. Both also have connections to Fujian province, which is where Naibu was founded.
- Scrolling through the Director biographies, I see that the token Westerner on the Board currently lives in London and does not speak any form of Chinese. He owns no shares in the business.
- There is one other NED who speaks Chinese and English, but none of the Executive Directors speak English.
- The company is registered in Jersey, with one Hong Kong subsidiary and three Chinese subsidiaries. As the Admission Document says, "The ability of Shareholders to bring actions or enforce judgments against the Company or the Directors may be limited."
- Following Admission, the Executive Chairman is a 73% shareholder.
- The company claims to have 4.6% market share of the custom jewellery market in China, with revenues and profits growing at incredibly rapid rates over the past three years.
- It uses the same set of accountants ("Crowe LLP") as Naibu used ("Crowe Clark Whitehill LLP").
Conclusion
Regardless of the value of the business in China, this particular IPO is dripping in red flags. The shares are uninvestible.
GRC International (LON:GRC)
- Share price: 117p (-2.5%)
- No. of shares: 57.5 million
- Market cap: £67 million
I covered this stock when it IPO'd in March.
My conclusion at the time was that it would probably continue to grow revenues very well in the short-term, due to the sector it's in (cyber security & GDPR compliance). But at the same time, I said I would be cautious about investing since it's essentially a consultancy/training/professional services type of business (i.e. a "people business").
Today's results show organic revenue +54%, heavily weighted to GDPR-related work back in Q1.
GRC thinks that GDPR-related work can pick up again:
We believe that the current slowdown in GDPR billings will be short lived as we estimate that 70% of organisations are yet to be fully compliant and the Information Commissioner's Office (ICO) has indicated that the imposition of fines is imminent
GDPR is one of the worst pieces of legislation ever written, if not the worst (it's in close competition for that title with the EU's "Cookie Law").
To maintain the post-Brexit regulatory framework, the UK government passed the Data Protection Act 2018, which means that GDPR-type rules will continue to be imposed on Britain even after Brexit.
And even without the DPA 2018, British firms would have had to comply with GDPR when processing the data of EU citizens.
So yes, there is going to be an ongoing need for compliance work by firms, not just in Britain but internationally (GRC has offices in Ireland and New York).
But I can't avoid the conclusion that this work is going to die down to a much lower level, sooner or later. At some point, most firms will be compliant. Eventually, it will only be new firms and a small number of non-compliant ones which continue to need work done.
It's also possible that these rules will be scrapped some day, to get rid of the unnecessary burden of compliance.
So I don't think that this is the kind of niche that I'd want to put money into as a long-term investment.
The financials
Nearly all revenue is generated by the labour-intensive activities of consultancy and training.
The company generated an H1 loss of £2.2 million on revenues of £8.9 million. It reckons that if you exclude one-off spending on various growth initiatives, there was a small cash inflow from the core business for the period.
Losses and investment spending have continued so far in H2, and the company has resorted to a bank overdraft and a Director loan to fund itself.
My view
Very unattractive as an investment: a barely profitable/loss-making consultancy whose main business is linked to compliance work for a recently introduced piece of legislation.
This is not a share to hold for the long-term, in my view. And the market cap at £67 million makes little sense.
Not much Christmas Cheer in today's report, oh well!
I had to visit the doctor today, who diagnosed me with a viral infection and fatigue. I have four drugs to take for the next week. Time to put the feet up and rest for a while, as recommended by a wise person in the comments!
Thanks for all of your support. Paul will be back when the markets re-open.
Cheers
Graham
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30 comments
Hi Graham, many thanks for all the hard work you and Paul put in, very much appreciated.
Just looking at the FTSE there is a case that we've been in a bear market for 6 months already as the drop started in mid summer. Who knows where the bottom may be, as ever we will only know after the event.
Seasons greetings to you and yours
BBD
The Nikkei is down over 5% as I type this around 1pm, Christmas day.
Hussman always has a credible, detailed view of the past and its lessons for the future: https://www.hussmanfunds.com/comment/mc181128/
Best wishes for the New Year everyone.
Below is the performance data for the "Hussman Strategic Growth Fund"
Average annual total returns for periods ended 30 September 2018
1 Year -5.46%
3 Year -11.71%
5 Year -9.47%
10 Year -7.60%
Since Inception (07/24/00) 0.25%
18 years and he is delivering annually 0.25%; over the past 10 boom years an annualised -7.60% (yes that is a negative). Hussman is currently charging 1.13% annualy (nearly 5 times the performance he has delivered over 18 years) for his efforts.
Buyer beware.
Merry Christmas everybody and lots more fun and games in 2019.
Bonitabeach
I've been seriously distracted from the markets again for the last couple of weeks so haven't been able to add much constructive.
But I would like to add my heartfelt thanks to both Paul (who has been enriching my experience for many years now) and Graham (who I only encountered much more recently) for a great year of reviews and comment.
Also thanks to Ed and the wider team, both for enabling this blog and for providing truly excellent resources here on Stockopedia.
Wishing everyone seasons greetings and a prosperous new year.
Regards,
Gromley
As I write it's just after 10am in New York on Christmas Eve and the S&P is down nearly 1.5%. If this does turn into a major correction it will of course affect the UK . Under these circumstances I would be very interested to read a bargain hunting survey of the UK small caps.
Thanks for all your excellent analysis Graham and do take the time to recover fully. And have a Happy Christmas!
(I wonder if they'll call it the Christmas Crash or possibly the Trump Slump)
Oh but it can't be a Trump Slump. Trump is solely responsible for all the good things that happen. Any problems - he'll find someone else to blame.
I know, that's why he's on top of my Christmas tree.
Hi Graham
Thank you for this report and all the others. Sorry to hear about the viral infection. I hope you get some rest over the festive period.
My Christmas present to myself this year is going to be a subscription to Cube.investments and maybe your seminar if the future dates fit
Merry Christmas
Michael
Just wanted to say "Muchas Gracias" to both Paul and Graham for all their hard work this year alongside the numerous regular fellow private investors who are regular contributors to this board. I have been a full time private investor for more than three years now and so visit this forum on a daily basis; an invaluable resource and very much appreciated. Merry Christmas all from a warm sunny Mallorca!
Good afternoon Graham
I loved the incisive analysis of Gamfook. I wonder if the name is an intentional pisstake? And a Gamfxxk to you too:
* all fraudsters out there conning unsuspecting investors with fake accounts
* those advisors, regulators, auditors, Nomads, etc. (clearly not all of them) who shut their eyes, pocket the money and in so doing allow fraud to happen
Lots of thanks to you and Paul for the superb service you provide to us private investors. Enjoy your rest, get well soon. Looking forward to lots more gems in the new year
All the very best for Christmas and the New Year to Graham, Paul, and all the very valuable contributors here. Thank you to everyone, and best wishes to you and yours.
Merry Christmas Graham, Paul and all at Stockopedia , big thanks for all your efforts this last year. Feet up now and rest!
Happy Christmas Graham (and Paul), thanks for all the hard work providing these reports.
Andrea
Thanks Andrea! I'm sure we both appreciate your regular comments & feedback. G
Graham and Paul.
Thanks for all your reports on the SCVR. Its been great to read since I joined and it is now part of my daily routine.
All the best for Xmas and have a great NY.
Cheers.
Thanks for another excellent report Graham. Objective statements on another crock can be be very amusing.
Thanks Jason, appreciate it. G
No Santa rally this year, is that an indicator of what will happen in the next few months?
I did come across this article about bear markets and recessions: https://www.ft.com/content/d747821a-ef1f-11e8-89c8-d36339d835c0
It seems bear markets in the UK last longer than 12 months.
Morning Graham,
Interested in your assertion that "Bear markets typically last a little over a year" which reminded me of another email commentary that I appear to have signed up for that popped in yesterday setting out what "typically" happens following terrible quarters. This relating to the American markets but possibly some comfort to be gained (assuming the data is factual) for Stock Markets generally.
https://awealthofcommonsense.com/2018/12/buying-when-stocks-are-down-big/?utm_source=Daily+AR&utm_campaign=08834f27b7-RSS_EMAIL_CAMPAIGN&utm_medium=email&utm_term=0_c08a59015d-08834f27b7-144117721
Morning Laughton,
Excellent article and thanks for posting. My only worry is we havent gone down far enough. But the good news is this down trend I believe will play its self out in first half of 2019. So not long to wait. One strategy is to start using half your cash to pick up stocks and then you still have some funds if it goes lower.
Scisys (LON:SSY) is a solid company with competent and conservative management (I have held for years). Mike Love must be considering his exit strategy - perticularly as the IHT relief on AIM is looking anomalous now and must be an attractive target for the Traesury. SSY's sp is at a low point from which it has risen sharply twice in the past 6 months, and the decision to move HQ to Ireland, plus the strong presence in Germany, should make it Brexit proof and a beneficiary from a falling pound/Euro.
Morning Graham
Devotion to duty Christmas Eve and still at your post.
If you can find time I would be interested in your thoughts on Scisys (LON:SSY) who have recently announced a number of contract wins. Also from a contrarian perspective I would be interested in any thoughts you may have on Walker Greenbank (LON:WGB). It has been rising steadily in what has been an awful market especially for UK small caps.. I hold both.
Regarding the latter it issued a profit warning in the summer and the share price got battered falling to a low of 59p. The investment case at that time look enticing subject to a stabilisation in trading. The share price is now around 92p, up about 50%. As to why is anyone's guess. Possible corporate action, the company is yet to appoint a new CEO. Maybe trading has held up better than expected or it is still seen as inexpensive given the inherent value of its brands?
Thank you, Paul, Ed and all the team at Stockopedia for you advice and expertise over the year and providing a great website and discussion forum for the retail investor.
Happy Christmas
I second the above request, as I too hold both shares.
Hi jonno, Happy Christmas to you too and thanks for the comment.
There are too many moving parts at Scisys (LON:SSY) for me to understand so I have no opinion on the company, sorry! G
what happened to the report on ideagen? did I miss it?
I'm sure Paul will be updating on Ideagen (LON:IDEA) when he writes again in a few days. G
Playtech (LON:PTEC) note an increase in Italian gaming tax, which will cut their profits by c10%. There may well be a bit of panic here!
Tip of the iceberg?
I wonder how many other jurisdictions are looking at gambling revenues as a tempting source of new taxes to fill public sector coffers.
Along with fags and booze, it is the old perennial treasury milk cow. However it now has a 7% yield, covered x2, even with the cut in profits.
My morning smallcap tweet: A few scraps before the post Xmas turkeys.
Gama Aviation (LON:GMAA), Scisys (LON:SSY), Westminster (LON:WSG), £C21
Gama Aviation (GMAA) Two significant contracts, over 11 years and 5 years. Overall expected to be neutral to earnings in 2019 and accretive after.
SCISYS Group (SSY) receives €3m initial orders for Galileo Ground Segment work.
Westminster Group (WSG) progress on sanctions workaround on Iran contract. Contracts drafted on African Managed Services contract.
21St Century Technology (C21) guides rev up 10% and underlying operating profits line with last year. No F/C. Rev growth down from 14% in H1.