Small Cap Value Report (Mon 26 Sept 2022) - PDG, MMAG, DEVO, SAAS, CNC

26th Sep '22 by Paul Scott

63 comments 8882 reads

Good morning from Paul & Graham.

The big news continues to be sterling's rapid descent, with it having been given another kicking overnight, now down to £1 = $1.057 (at 07:01) . It will certainly be interesting to see how this pans out - no predictions from me, I'll leave that to others! Oh well apart from the obvious - that more takeover bids from the USA, for UK companies, are now looking likely, and UK companies with dollar earnings should hold up OK. That's all I can come up with at this time of the day. Let's have a coffee first.

Podcast - I'm relentlessly pressing on with my weekly audio recaps and macro commentary, no matter how bad things get. Episode 13 went up on Sunday lunchtime. It's available on podcast platforms (search for "Paul Scott small caps"), or using the link at the start of this paragraph. I've introduced a new mystery shares section, with a bespoke jingle, to hold back each week's best ideas just for Stockopedia subscribers, following some complaints about me giving away too much free content to the internet, that you lovely people are paying for, so point taken on that. About 500 people are tuning in each week, so it's well worth doing, I feel.

Mello is back! 5pm tonight, plus another show on Thursday looking at company results. Good news, as long as we have wifi, we can watch from our bunkers or under the kitchen table! More details here. We need to support things like this in the tough times, otherwise they may not be around when the good times return.

Agenda -

Paul's Section:

Pendragon (LON:PDG) - its largest shareholder has revived a previous bid approach, slightly higher, at 29p this time. The board are considering it. With huge property assets, sector consolidation looks highly likely.

Musicmagpie (LON:MMAG) - another profit warning. I've reported negatively on this recycler of mobile phones before. It now looks uninvestable to me, given profits have evaporated, and bank debt is set to increase. Definitely one to avoid, in my view.

Graham's Section:

Devolver Digital (LON:DEVO) (£354m) - this is an independent video game designer and publisher that floated on AIM back in November 2021. The game titles it released in H1 2022 have performed badly and today’s H1 results are financially very poor.…

Unlock with Email

Unlock with Google

Already have an account?
Login here

Camtab

26th Sep '22

Good post Tommy. Have to say though I wish people would just get on and embrace renewables. Best investment I have made was Solar Panels in 2009, coupled with a ground heat pump. Bit of a kerfuffle putting it in but getting over 55p index linked per kw/hr and regular payments for GHP offset price ages ago. Appreciate this is because Govt were trying to attract people in but I remember reading utter crud from Papers telling me do no good whatsoever towards environment. Actually makes hell of a difference. For 6 months a year I am totally carbon neutral. Anyway got that off my chest!!

MiserableJacktPotato

It's a good idea, but humans pack animals and tend to come to similar decisions based on common factors. So, the results days are aligned based on things like, holidays, disinclination to have a heavy day on a Monday or Friday, even random stuff like, is there a big football match on. Means everyone tends to be busy at the same time, is also why things like almanacs and data science (how Tesco already know when next year's busy barbecue days will be).

Kieranj077

Afternoon Paul,

The podcast is great so please keep it up! :)

I don't think you're giving too much info away. I'd personally prefer it if you just said the companies and details. Otherwise, I find myself having to take notes to go back into the reports (I usually listen on the tube or while walking where it's not easy to read the SCVR).

Your reports on Stockopedia are far more detailed than what you can provide on the podcast, so we're getting fantastic value here already. Ignore the complaints and do what you feel is best :).

Cheers,

Kieran

carmensfella

Here is the full programme for the Mello show tonight...

5.00 pm Company presentation by The Property Franchise Group

5.30 pm Karin Schulte presents investing educational content
5.45 pm Company presentation by DSW Capital
6.25 pm Steve Clapham goes Behind the Balance Sheet
6.45 pm Company presentation by RBG
7.15 pm Company presentation by Plant Health Care
7.55 pm Mello BASH with Kevin Taylor and Mark Simpson

If you would like a half price ticket, use code MMSTOCKO50. https://www.tickettailor.com/events/melloeventslimited/753448

Chrisfarrell21

Afternoon all,

Anyone want to talk about Gulf Marine Services (LON:GMS) ? It's a bit of a special situation / value share. It rents out specialised vessels to oil companies in the Middle East on day rates, for varying charter lengths. They are coming out of longer-term charters on cheap rates, with new management, hoping to obtain higher rates (possibly of shorter duration), in a more positive business environment (for them).

Today's market cap is £60.5m, but has USD341m of debt, at the half year. Sales of USD115m last full year, hopefully about USD120m-USD150m this year, going on the half year revenue increase announced today.

They have profit after tax for H1 of USD13.1m. Not sure how that annualises as last year is marred by losses. They are forecasting USD70m-80m of EBITDA for the full year, and are intent on using it to deleverage. Assuming significant deleveraging, the rating on the shares (currently PER of less than 3), should raise significantly, although it's unlikely to happen for the next year or two (or just until the next bull market).

There is a lot of history, and the above is a very brief snapshot. The fly in the ointment, caused by the massive historic debt, is that a condition of their bank facilities is by the end of 2022 they are likely to have to do one of either:

raise equity of £50m; or
issue 136m warrants to the banks, raising USD7.9m for 11.5% of the company, so quite a bit of dilution. Banks would then presumably be more aligned than as simple debt holders, although it's a mug's game trying to understand a banker's mindset.

They say it is more likely than not at the minute that it would be option 2, but won't commit. Presumably no one wants to try and raise that much equity in the current markets.

I am trying to work out the precise effects of the equity/warrants issue, and can't really, but on balance it still looks like good risk/reward to me, unless client demand collapses and they'll pretty much certainly go bust. I think that looks unlikely.

Anyone have any better opinions?

Thanks

Chris

raggedtp

Lucky to have a garage, but I have never used a public charger on our EV. AND, when we moved house and realised we wouldn't get another free fast charger, we used the 13A socket for a week. That was enough to make us realise we didn't need a fast charger. Just put it in, charges at 10mph. Battery at 32,000 miles @ 98% State of Health. Seems simple.

abtan

Hi Planetx

When you say Hargreaves do you mean "Services" or Lansdown?

---

There probably isn't much read across to Belvoir (LON:BLV) (which we both hold), but if it's of interest I listened to this podcast episode from the MD of Foxtons (from August 17th, 2022.)

https://open.spotify.com/episo...

He commented that they had just had 3 record lettings weeks in a row. I thought the market might be cooling down by now, but clearly not.

There was also a worrying comment that completions were taking so long that some mortgage deals were expiring.
Of course many will not be able to get mortgage deals at the same rates as 6 months ago, so I wonder if this will be another driver behind a fall in transaction levels?

On Somero Enterprises (LON:SOM) (which we also both hold) I listened to the recent piworld interview and noted that whilst demand for their equipment was still very high in the States, there was a big problem sourcing concrete, which was delaying projects - a possible short term concern.

Thank you for taking the time to share your thoughts.

ACounsell

Yes but inflation is unlikely to persist at current levels for 5 years or more - if it does we are in deep trouble!

yiannos1

Yes I have.

A plc with a market cap of £50m loaded with a debt of $350m is just a silly gamble for any serious investor. Sooner or later the creditors will take control of the company , and when they do you will be left with almost nothing.

Silver Moon

Agree, the use of the ticker is most apprpriate.

I was talking about EV.

Berksbee

Chris, for my sins I hold, but not much and am in the black. I cant see the demand for Middle Eastern Oil collapsing anytime soon, even with a quick resolution to the Ukraine situation. I agree its a good risk reward but still something of a gamble if that makes sense.

Thanks Berksbee and Yiannos. As Yiannos points out, I'm clearly not a serious investor :)

The debt was loaded up by a previous board, who have since departed, so the mistakes are being rectified by new management and major shareholders.

Like I said, a special situation, and I realise the risks. There's a clear route to major deleveraging, at which point it could be worth a lot more (although there's the one minor point as to what has happened to the world economy at that point).

Cheers

Good evening all ,

It seems that the boys are back in town:

PS. To those who haven’t realised , I am talking about Hostmore plc.

Joe Turner

I hold. Key for me is if day rates increase significantly cos operational leverage should see most drop to bottom line. Slightly disappointing that not increasing much so far so looks like slow burn but today's update still in line. Customer concentration is high. ADNOC (Abu Dhabi National Oil Co) are their biggest client & they recently bought their biggest competitor in Middle East (Zakheer Marine) to take offshore vessel services in house. I'm bit worried that ADNOC may use GMS alot less going forward. Basic investment thesis is this is classic cyclical play - years of underinvestment in upstream O & G and cycle is now turning. Fingers crossed but recession would throw major spanner in works as oil demand would likely reduce. Only smallish position for me cos risk of wipe out is high. Quite complicated set up : debt mountain, potential dilution, banks in driving seat & role of one of major shareholders - Seafox International. They tried to buy out company on cheap last year and failed but still have big say at board level, current CEO is their man, and who knows what they might do - let fall into admin and do a Mike Ashley ? I can't say that I fully understand what's going on with this co or is likely to happen in future bit I invested partly cos I'm quite intrigued by the story and how it will play out.

DaviStoVest

Still confused, Yiannos. What exactly is going on at Hostmore (LON:MORE) that you think we should already be aware of? ... Haven't a clue.

27th Sep '22

Right, my comment is about EVs. Paying per mile is nothing new - if you look at car reviews you'll often see "cost per mile" figure. Nothing changes, people are prepared to pay a discrete amount for personal transportation. Nothing changes in that equation just because the fuel source changes.

Roger Baron

I believe Paul Scott is an investor. Always assumed he was serious!

marigold

28th Sep '22

There is a shortage of rental property as many landlords are leaving the market due to Osborn's Clause 24 tax. Hence shortage of properties = too many people chasing the same product = higher prices.

Belvoir (LON:BLV) Foxtons (LON:FOXT)

Hi Marigold

Yes, I understand that prices are higher, but I thought volumes would be lower, and therefore overall lettings revenues might drop.

The comment by Peter Cowgill (Foxtons MD) in the podcast episode implied that there were either record volumes or record revenues in August 2022 (he wasn't clear which).

Because of my expectations for low volumes, this comment surprised me.

Small Cap Value Report (Mon 26 Sept 2022) - PDG, MMAG, DEVO, SAAS, CNC

Agenda -

Unlock the rest of this article with a 14 day trial

About the Author

Paul Scott

63 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...