Small Cap Value Report (Mon 24 Feb 2020) - CWD, RCH, CALL, JDG, LOOP, TSTL, AXS, RTC

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24th Feb by Paul Scott

52 comments 8722 reads

Good morning, it's Paul here.

Please see the header for the company announcements that I'm covering today.

Estimated time of completion - 1pm mainly, but I might add extra bits after that.
Edit at 13:25 - it's cold & rainy, and I have nothing else to do, so will carry on writing - revised completion time: 4pm
Edit at 15:03 - today's report is now finished.

Worsening coronavirus spread

It looks like we're entering a choppier phase, with futures down heavily overnight. Hardly surprising, given the coronavirus is not being contained, and a global pandemic now looks a distinct possibility, or is already starting.

For this reason, I remain very cautious, and am not thinking about opening any new long positions right now - unless the buying case is compelling. Still, we need to keep up with the newsflow, to keep the archive up-to-date, so it's business as usual.

I think we need to be braced for further share price falls (and possibly some buying opportunities), as the coronavirus spread worsens. Although buyers can only buy if they have cash on hand. It's all very well people saying that it kills fewer people than normal flu, but just look at the economic impact of counter-measures in China - they all but halted economic activity in affected areas. We don't yet know whether the resumption of economic activity which is underway now, is likely to cause infections to increase - but that seems likely to me, based on common sense.

For anyone who missed it, I published a very interesting audio interview last week, with Andy Gossage, MD of Up Global Sourcing Holdings (LON:UPGS) - here. It's a non-commercial thing, with no fees or ads. I just did it for general interest, and to help inform readers on a topical subject. The conclusion seems to be that there will be disruption to China supply chains, but that this can be mitigated. Also, it's temporary.

Another aspect to consider, is that I imagine companies needing re-financing might possibly find it harder to do so, if this situation continues to worsen. It's essential to look more closely than ever at balance sheets, for companies which might be affected by coronavirus-related economic problems. I wouldn't want to be holding highly geared transport or holiday companies right now, for example - how would they service their debt,…

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Snoo

24th Feb

Wonder if some psychology wisdom could be apt for today, how to mentally deal with it?

On paper anyway there must be investors whose losses in one day are way into the four figures. And the futures market looked benign for much of Sunday in the day.

Easy to be upset and chase some stupid trades to try and make some money back. Probably going to not look at the market for the rest of today.

The outlook seems scary at the moment but the probability seems overwhelming that it will not get out of control and this time next year (or even in a few months) it will be largely forgotten.

Irritatingly while many of my shares have plunged nearly 10% like Ramsdens Holdings (LON:RFX), some on my shortlist that I would buy if they fell 10% which you would think may have supply chain issues somewhere ie (£SCS) have not budged at all.

Nick Ray

I'll use some of Herbie's questions to illustrate the kind of data they collect.

I agree about running out of people to infect however millions of people are travelling on flights all over the world, even the Chinese are not restricted by many countries.

What is the probability that an individual has COVID-19 given that they travelled from China? (Looking at the most recent situation report the probability is still low unless you came from Hubei itself.) There are protocols to manage points of entry.

I don't think it is highly contagious, if it was why have not more people been infected,

Some cases have a longer than 14 day incubation period. 14 days may catch most but not all.

There are a set of protocols to collect the data to understand the key epidemiological features. This data would be used to calculate the infection rate, the incubation period and different methods of spread (such as "do air conditioning filters stop the spread?").

There is also a short video on the main page which covers transmission, groups most at risk, symptoms, diagnosis, treatment, and prevention which is aimed at the lay audience.

Berksbee

Hi Paul, I know you can't do everything, but I for one would also appreciate your view of Finsbury Food (LON:FIF) Finsbury Foods, who've also reported today. It's on my new "blame Stockopedia portfolio" - which I only started at the beginning of the month and as a whole is roaring along!

herbie47

Yes I agree this will have an effect for quite some time, I did have some long term Carnival (LON:CCL) shares, I got rid of the last of them about 10 days ago. I think airlines will also get hit but should bounced back more quickly, have sold my Wizz Air Holdings (LON:WIZZ) as well.

davidjhill

Well, the company itself regularly addresses this point and updates the market and currently has a £21.1m contingent liability up £11m yoy, which reflects its expected risk based liability. Why Winnifrith and Co. are conjecturing something a magnitude above that I have no idea, but you'd imagine if there were any real substance to that the company would be obliged to say something about it, especially since the final results RNS come after these allegations.

What has historically held the shares back is nothing to do with this. Essentially threefold.

Firstly everyone thought the print business would very quickly become unprofitable and the company would be in a spiral of declining revenues and profitability. That hasn't turned out to be anywhere near the case, though I'd say management strategy has had a lot to do with that.

Secondly the pension deficit. If you assume profits are going to fall off a cliff and there is £300m+ of pension liability that wouldn't make for a good investment case.

Thirdly the lack of compound growth in digital to offset (1). However, this has also now started ramping up with revenues exceeding £100m and growth in mid teens.

In reality this business is a big cash machine that if managed properly can throw off large chunks of cash for years to come. Because of that the company can make big inroads to its pension deficit whilst at the same time moving from net debt to positive net cash and paying a decent dividend.

Some were from Hubei and were infected, there were still 224,000 chinese visiting Thailand this year, numbers about half due to restrictions imposed by China. There are no restrictions entering Thailand apart from some airports have a thermal imaging camera to check temperatures, even that only seems to be the largest airports. I was very surprised there was no checks when I arrived at Heathrow.

Susan123

For anyone who likes pharma, the FT is reporting an interesting angle on this.

To date in this virus story, overall the pharma sector has been seen as a buy because a vaccine maybe developed. But the FT is saying today 'The price of many pharmaceutical ingredients has spiked for Indian drugmakers following panic buying and Chinese raw material shortages caused by the coronavirus lockdown.'

Increase in raw materials will be a headwind for the sector.

kendal

Tristel has been thought overvalued for a long time now, but the shares, driven by Company performance, continue to rise!

portugull

Snoo don't you mean "way into five figures".

john652

Best to view P&L as %, 4,5 or 6 figures will just drive you to insanity .

Beginner

Just for info, I have worked for Cordant and Staffline (LON:STAF) . The set ups are very similar. I wouldn't put money into either.

Ted Johnson

Anybody aware as to why SDI (LON:SDI) dropped 11.5% to 72.5 today. I don't think it has a connection to China that would cause such concern?

JonBirdy

Possibly investors reading the the £jdg announcement today and just selling up anything else in that sphere

Paul Scott

Hi Ted,

At times like this, you cannot make sense of small caps price movements.

It's supply & demand for the shares, in very low volumes, and prices can go all over the place.

If someone is desperate to sell, then the price falls to whatever level attracts buyers. But often in tiny volume, so the published prices are often completely illusory.

Regards, Paul.

paraic84

A key issue tomorrow for Innovaderma (LON:IDP) will be to what degree they are continuing to capitalise customer acquisition costs – especially as little amortisation is occurring. This is the main reason the share price looks superificially cheap in my opinion. As Graham previously commented on its 2019 results 'Profit before tax was £1.4 million, but it would only have been £500k if they had expensed their product development costs and purchase of
intangibles.'

Stockopedia labels the earnings manipulation risk at Innovaderma (LON:IDP) as 'high'.

Gromley

wrt Reach (LON:RCH) and the potential further phone tapping liabilities.

A couple of weeks ago Simon Cawkwell was apparently peddling some rumours about having "a paper" indicating that there were £100s of millions of liabilities yet to arise.

He still seems to have something of a reputation with his 'Evil Kineviil' but when I had an online interaction with a couple of years ago regarding a share which he was trying to ramp that I knew something about and was cautiously positive; I found him to be quite clueless. (But maybe that was part of the carefully crafted persona?)

Anyway it is probably therefore no surprise to find Tom Winnifrith two weeks later peddling exactly the same rumoured risk for Reach.

I very much doubt that they have any information of substance here.

However, it might have been three years ago when I commented on their latest increase to historical legal provisions and said something along the lines that I hoped they had now provided enough. They have increased the provision several times since. This has been in the single digit or low double digits each time,; so scarcely material when compared against profits and cash-flow. Nevertheless, it remains a risk factor that will and should continue to drag on the share-price until they can really draw a line under the issue.

Anyone that strays into dangerous territories might observe that the rampers are out in force, suggesting that Reach (LON:RCH) should be viewed as digital media stock on a PE of x20-30. Much as I would love that to be right (it would be a 10-bagger over a comparatively short period), it is utter-nonsense.

I do think there is more upside to come here, but one needs to recognise that Reach (LON:RCH) has been seriously Marmite to investors over the last decade and we a definitely at a phase where the market has lost it's hate for Reach, so there is definite downside risk here.

I should just point out that the high point PE ratio in that chart arises from taking the current share-price [P] against the 2018 earnings [E] which were not typical, the 2019 EPS is nearly 4x 2018 so Reach (LON:RCH) is still not expensive on earnings (and importantly cash-flow) .

Personally, I still think there is substantial value here and I continue to hold, but we are now in a place where there is ample ammunition for both the rampers and the derampers - perhaps though today's presentation can deliver renewed II interest to deliver renewed share-price stability.

I am oversized here as a result of the gains over the last year, but totally disinclined to "top-slice" - I'm almost inclined to regard this as one of my "safer" investments now.

WDWombat

25th Feb

V useful comments for a relatively newish investor in Reach. Thanks.

I sold this a year ago at £2.9/2.9 as I felt the directors were being excessively greedy and the ratings excessively high. A quick glance at yesterday's release suggested the latter still to be true but perhaps the former has eased?

John McArthur

By the way, for what it's worth I think RTC is a good business that operates in a quality niche with management that can be trusted. I know Andy Pendlebury a little bit (that is to say we've met several times to discuss the rail industry) and I like the quy and how he presents RTC. He is a no nonsense, straight talking CEO and not out to mislead investors.

I won't comment on valuation other than to say the market cap seems low when you consider the myriad companies on AIM which are absolute basket cases and yet continue to command market caps ranging from £30 - 250M whilst destroying shareholder value by consistently raising new money and/or cooking the books.

When looking at AIM companies I add a significant discount or premium based on management track record versus market expecation i.e. did they do what they said they were going to do?

RTC has consistently grown its top line in a meaningful way for many years with negligible dilution and pay a respectable dividend. How many other AIM companies get that badge? IMHO at some point it is bound to get bought by a larger player and the current market cap is so small that even a >50% premium to the prevailing share price would be relatively 'cheap' given the strategic position they hold with key clients.

(PS - I hold a long position in this company albeit very small!)

1st Mar

There was recent comment here about the financial problems at the family-run Cordant Group, and comparison was made with Staffline (LON:STAF) . I have received an e-mail telling me Cordant has just been taken over by Twenty20 Capital, a private equity crowd. Read into that what you will. (Posted this elsewhere on Friday)

Small Cap Value Report (Mon 24 Feb 2020) - CWD, RCH, CALL, JDG, LOOP, TSTL, AXS, RTC

Worsening coronavirus spread

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Paul Scott

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