Small Cap Value Report (Mon 26 Oct 2020) - HSS, AUG, ECK, INL, DRV, UCG, AFN

26th Oct '20 by Paul Scott

91 comments 10889 reads

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

Today's report is now finished.

Agenda - these are the small cap company updates that I've selected to write about today;

Hss Hire (LON:HSS) - discounted fundraising

Augean (LON:AUG) - small tax refund re HMRC dispute

Eckoh (LON:ECK) - Trading update

Inland Homes (LON:INL) - Trading update

Driver (LON:DRV) - Trading update

United Carpets (LON:UCG) - Trading update

Advfn (LON:AFN) - Final results

Re Yourgene Health (LON:YGEN) - I've read through its update today, but I don't have anything to add to it.

Hss Hire (LON:HSS)

Share price: 22p (up 5%, at 09:44)
No. shares: 170.2m
Market cap: £37.4m

Proposed Capital Raise of up to £54m

Ever since this tool hire company floated in Feb 2015, I’ve been flagging that its balance sheet was dangerously over-geared. That, combined with disappointing trading & restructuring, has largely destroyed shareholder value. This is one situation where I don’t have much sympathy with shareholders, because the terribly weak balance sheet was obvious from day one. You just had to look.

This seems to be a preliminary announcement today, giving the outline of the refinancing. Key points;

Firm placing & open offer to raise c.£54m
Priced at just 10p (a whopping 55% discount)
Dilution is heavy, with c.540m new shares to be issued, dwarfing the 170m currently in issue. This means the share count will rise more than 4-fold
Possible covenant breach & serious consequences by end 2020 has driven need for fundraising
Details of the open offer not given, or I might have missed them? £35.5m total, but it’s not stated how many new shares existing holders can apply for
3 largest shareholders are supportive - Toscafund (26.9%) often stands by its mistakes, or even takes them private
Free float of only 13.8% has led the company to explore other listing venues - not stated, but I wonder if this might mean a move to AIM possibly?
Revenues (presumably the monthly run rate?) now hack up to 90% of last year’s
Increase in online penetration
Intending to permanently close 134 branches

My opinion - this deal should avert financial distress, even insolvency, at end 2020. It shows the value of having a concentrated institutional shareholder base, in that they are defending…

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timarr

26th Oct '20

But you must also be concerned that we are in a Nike swoosh recovery rather than a V which would have been possible until the government lost its nerve (again) in September.

No, not really. I'm not exposed to any of the sectors that would lose to another rise in cases. If anything it would probably benefit me financially, although I don't view that with any great happiness given the societal impact and the destruction of the arts. Most probably the economy would recover relatively quickly, although it'll look very different from what we used to know.

My working assumption since last April is that it would take a year for the crisis to ease - it's a respiratory disease which is more dangerous in winter, it's very infectious and, for those people who are vulnerable, highly lethal. No government with an eye to a long-term future would let this run unchecked and getting a vaccine pre-winter was an absolute long-shot. The current low but rising death rate is probably because the virus has mainly been circulating among younger age groups but as it works its way up the generations we'll likely see that rise.

What is sad is that we had an opportunity over the summer to put in place a shielding system that would have allowed us to protect the vulnerable through the winter and would have allowed the rest of society to function fairly normally. That would have needed to include sheltered accomodation for vulnerable people in mixed age group families (hotels would have been grateful for the business), allowing working age people with health conditions to take temporary leave of absence while replacements were funded by the state (which would have absorbed the rise in unemployment at far lower cost) and a rapid testing infrastructure that would allow healthcare workers and family members safely to visit those shielding.

Instead what we got was Eat Out to Spread the Virus and a test, track and trace infrastructure that's world-beating only in the sense of being an astonishing waste of taxpayers' money even by the low standards of UK government IT procurement. I can't even get an NHS test so I can see my very old and very vulnerable parents. Of course, I can afford to pay for a test but many can't.

The Phoenix

Hi Mike its a good trust but the spread is horrible compared to others in the sector.

ken mitchell

doug2500

I agree that now should be a very good time to launch a new small cap Investment Trust. But as has been pointed out, with so many others already trading at quite big discounts to NAV, the chances of that new Trust getting sufficient support are small, unless the Fund Manager has a big reputation like Woodford did. Hence my reminder post this morning that if Trusts want to get new issues away at what should be an ideal time from an investment angle, they need to add incentives like subscription shares.

Trusts find it easier to get new issues away when the sector or market is hot. Then existing Trusts can be trading at big premiums so a new Trust is then more likely to get sufficient support. BUT for an investor it means investing after big gains instead of like now, after big falls!

This website is superb for full info on every Investment Trust (as long as the Trust subscribes to the site).

https://www.theaic.co.uk/aic/find-compare-investment-companies

Just enter the Investment Trust code and then on the page that comes up, after looking at the overview check out the other headings like “performance “ etc.

By the way some Investment Trusts, especially so Property REITs, are exceptional bargains right now and paying big dividends too, and trading on discounts as high as 45% and occasionally even higher.

e.g check out AIRE Alternative Income REIT there. Share 53p. Dividend 8% paid quarterly and discount 36%

AEWU. AEW REIT. 77p. Discount 15% and 11% dividend paid quarterly. Dividend not quite fully covered so small cut is possible. Goes ex the next 2p dividend this Thursday.

EDISTON REIT. EPIC. 50p 8% dividend paid monthly! 36% discount.

SERE. 77p. SCHRODER EUROPE REIT. 77p. 36% discount and 6.5% dividend paid quarterly. One dividend increased after earlier cut and further increase quite likely.

I hold all 4.

aharmer

Paul,

As a newbie in stockopedia: could you please explain where you get the value of £159.6M intangible assets from? The reason I ask is because you say "deduct £159.6m of worthless intangibles, and NTAV was negative £(92.5)m" indicating a weak balance sheet. I would like to be able to see how this was calculated.

Harry Hindsight

Near Stockreport is Accounts where can see the Balance Sheet. Dec 2019 has Net Goodwill and Net Intangible Assets at around £160m. If your looking to put your hard earned in then I always look at the Book Value or Paul calls refers as NAV.

I did not think of looking how much BV contains goodwill and intangibles. They could be valuable assets or just something to er.. 'balance the books'.

Newby too and learning every day.

Paul Scott

Hi Wimbledonsprinter,

I think the reason that musicians & other people in the arts found the retraining message from Government so insulting, is that it demonstrates a complete lack of appreciation of the dedication & skills that people in the arts have built up over their careers. Instead of respecting that these people have dedicated their lives to their work and are super-specialised & talented, the Govt says to them, "Go off and do something else instead", when there is temporary shutdown due to covid.

Would we say the same to professional people in other careers? No, because there is more respect for other professions, that's the problem.

Also, if a professional musician or dancer, stops daily practice, then they quickly lose their standard of performance. For example, my brother has to play his saxophone for several hours per day, in order to maintain his breathing control, pitch, facial muscles, etc.

We know one chap who is the drummer at Lion King live show in London. He's done that job for about 25 years. He can play the drumming part perfectly, whilst watching the cricket on his iphone, he's so practiced at it! So what on earth is he supposed to do now? He can't earn anything like his previous wage doing anything else, and as a society do we want him to throw away his lifelong skills due to temporary problems?

My sister-in-law is a professional harpist. Literally all her work has dried up. So she's now teaching on Zoom/Skype, and arranging live concerts online, but her income is nowhere near what it was, despite these innovations. So she applied to several local supermarkets, just to earn some extra money, but was rejected in all applications. Clearly the supermarkets took one look at her CV, and decided they didn't need someone who had spent the last 35 years delighting everyone with beautiful music.

Therefore I've been told that people in the arts feel insulted, and under-valued, by the Govt's attitude. Some have been able to claim the self-employed support package, which is good. But I'm told plenty has slipped through the cracks.

The arts support announced by Govt is good, but they have tended to send the money to buildings, and organisations, not to people. The danger is that the financial controllers of theatres, music venues, etc, might just pay essential bills, then sit on the remaining cash, as a contingency fund, rather than distributing it to all the desperate freelance people who make those places tick.

It's a very difficult situation in the arts at the moment, with lots of people quietly suffering. A hollowed out arts sector would be a terrible outcome after covid, because it's so good for children & young adults to learn how to play music, act, dance, etc, as these skills all tend to make better, kinder people, who learn how to work as a team with each other, express themselves, lower stress, and improve mental health. It's sad that we really don't value the arts in the UK as much as many other European countries, for its wider benefit to society.

Regards, Paul.

I write off intangibles because they nearly always arise mainly or entirely from acquisitions of other companies.

Hence if company A grew entirely organically, it will have nothing in intangible assets.

Whereas if otherwise identical company B grew by acquisition, then it will have a ton of intangible assets on its balance sheet.

To make company A and company B comparable, we therefore need to write off all intangibles on company B's balance sheet.

As regards the P&L, I also always work on adjusted profit figures, which strip out amortisation of acquired intangible assets. That's normal practice, and broker research is nearly always prepared on this basis too, so it's standard practice.

Capitalising development spend, or purchasing of software, is a different matter. I prefer a prudent approach, to write off development spend as it is incurred. But you could argue perfectly reasonably, that developing software internally should be capitalised. The problem is that companies have such different approaches, from Accesso Technology (LON:ACSO) which capitalised anything that moved, to Quartix Holdings (LON:QTX) and others, which capitalise nothing.

Due to that wide variation in accounting treatment, I find it's easiest to level the playing field by writing off all capitalised spending at all companies.

Everyone has their own view on this, so it's something we can all decide for ourselves, and use whatever approach we personally are comfortable with.

Best wishes, Paul.

Thanks Wimbledonsprinter,

I skim read the RNS for Hss Hire (LON:HSS) but I missed this point about the property restructuring.

Thanks very much for flagging it, a very useful spot! As you say, it does sound like a CVA or similar is in the pipeline before the refinancing happens.

kgb1953

Go to the Annual Report. You will find all the details.

Yes but.. the assets they bought from other companies were the result of this accounting.

But how about Google and Apple? John Authers had a piece on this recently.

Ken you have to adjust for debt levels when looking at the discounts. Net of debt they aren’t quite so high. I have some too like £SLI.

GrahamF

Marigold

The flaw in Mike Yeadon’s argument has already been identified. Can you spot the highly dubious assumption that leads him to his erroneous conclusion though?

Well if you think the intangibles are worth something, then you include them as an asset.

MattH

I wish I could upvote this twice, Paul. Very well said.

2ShedSam

But who are the vulnerable? Who is the arbiter of that definition? People who I consider vulnerable will tell you to do one if you dare suggest treating them differently. Track and trace was always doomed. Too many people either want it to fail or just don't care. I doubt the one in France or Spain or Italy or Belgium works any better. I'm sorry you cannot get an NHS test but do you need one? Will it make a difference? The Uk seem to carry out more tests per capita than any other country in Europe but it seems it's still not enough. I personally have never even tried to get one yet still see my old and vulnerable parents every week. If I don't call and see them, they just come knocking on my door. I guess we all manage and perceive risk differently. If covid does come knocking, I ain't gonna blame Boris or Andy Burnham or anyone else. Everyday we all spin the wheel of life. That Sharp V-Shape recovery you allude to; I am minded to agree with you. Hospitality and the entertainment industry will spring back very quickly once the conditions are right. It is and always has been very transient. Personally, I would let it all stay open 24/7 if it chooses but restrict capacity to some % of it's fire safety capacity to encourage good social distancing. Be ruthless with venue's who don't comply. Same with sport's stadiums and music venues. Good businesses will adapt until something changes. Bad businesses will fail as they always did. I think intrinsically the majority would prefer this approach but alas we pander to the very noisy but extremely significant minority so we end up with this horrible middle ground and live in misery instead. Bit like Brexit where we end up neither in or out. Better for everyone to lose than anyone win : ).

PhilHofGrowYourDough

27th Oct '20

It also gives no acknowldegement to the role of identity that is expressed through one's work which gives meaning to many lives.

Having to give up a career/a profession/a vocation is like giving up on one's true self.

What is the first question we often ask strangers?

"And what do you do?"

FREng

The Government jobs website has some value as entertainment. I tried it just to see how well it worked. Aged 72, after 50 years as a software engineer, I was advised to retrain as a cosmetic surgeon. My daughter, a polygrapher in the justice system, was advised to become a horse trainer or OFSTED inspector.

Thank you Gary

Sorry Garry!

Small Cap Value Report (Mon 26 Oct 2020) - HSS, AUG, ECK, INL, DRV, UCG, AFN

Hss Hire (LON:HSS)

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Paul Scott

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