Small Cap Value Report (Mon 28 Feb 2022) - MCLS, TSTL, OTMP, CNIC, MTEC, SFE

28th Feb '22 by Paul Scott

48 comments 12850 reads

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

Agenda -

Paul's Section:

Tristel (LON:TSTL) - I reviewed interim results from a week ago, over the weekend. Despite halving in share price, I still don't see this share as a bargain.

Mccoll's Retail (LON:MCLS) - Ominous press coverage over the weekend suggests to me that this share is probably worth zero, with insolvency looming. Too much debt, and supply chain problems look set to overwhelm equity, leaving debt holders in the driving seat, and equity holders probably wiped out in an imminent administration. I would get out while you still can, at any price that's high enough to cover the stockbroker's selling fees.

Onthemarket (LON:OTMP) (I hold) - a reassuring (in line) trading update for FY 1/2022. It's profitable, and has cash in the bank. It remains to be seen if the updated strategy of CEO Jason Tebb will work.

Made Tech (LON:MTEC) - my first look at this IT company addressing the public sector. Stellar growth, but I wonder if it might be expanding too fast, and struggling to control its staffing costs? Today's interim results come with a profit warning due to increased costs, shares down by a third. Overall, I don't know enough about it, so will sit on the fence.

Jack's section:

Centralnic (LON:CNIC) - I hold - final results and another acquisition announced. Organic momentum is strong and this has continued into the new financial year. The group remains loss-making on a reported basis though and, while revenue and profits are up impressively, the per share improvement is more muted. The rate of acquisition activity here suggests an ambitious company, but one that remains tricky for investors to pin down.

Safestyle Uk (LON:SFE) - trading update and cyber attack. H1 earnings are expected to materially reduce as a result. The group retains its second half guidance though, and says that the operational recovery is underway. Momentum had been promising here, but this remains a turnaround and sentiment has taken a knock, with increased short term uncertainty.

Explanatory notes -

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

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jamieswain

28th Feb '22

another one for Lord Lee, first offer received 3 weeks ago

simoan

Putin must be deranged if he thinks that attacking Strix (LON:KETL) (See rns today) will intimidate the West.

Oh, I don't know. The Russians only need to attack Taylor's of Harrogate now, and I for one would be totally demoralised...

Seems I wasn't the only bright spark buying Concurrent Technologies (LON:CNC) first thing today.

All the best, Si

Roger Baron

Our local Mccol's has just become a Morrisons. Much more likely to pop in there now

Pete112

From another site but, I believe Kazakhstan has politely declined Putin's request for military assistance. Kazakhatom that have a deal to supply Yellow Cake (LON:YCA) are based there.

codefluence

Probably related to Germany considering the extension of their nuclear plants life-span.

davidjhill

Just noticed this interview for Oncimmune Holdings (LON:ONC) today on Vox Markets. Oncimmune Interview with CEO It seems the expansion to 40,000 capacity has been completed ahead of schedule, which looks to be excellent news as it means the ramp up of profitability into next year should be easier to manage. Also, noted that their market segment is currently £100m p/a and growing at 27% p/a so even at 15-20% market share that backs up revenue projections.

Importantly balance sheet doesn't need any funds so unless they find a good piece of M&A that is compelling there is no need for any raise. I might have to be patient for a year or so but risk/reward looks to be favourable.

Giuseppe Caruso

Hi,
Do you know any news about Renold (LON:RNO)? I have purchased it for 29p end of January and it has gone down to 23.50p since then? I have almost reached the stop loss and I am not sure if it is related to the Ukraine situation or there are other internal problems as well, just thinking if it is worth cancelling the stop loss and thinking more long term or moving away.

jamesalastair

U3O8 trading spot at USD 46.65 / llb at 14:21 GMT. It has not moved much since September 21.

Revs8

Hi Giuseppe.

I don't have news about Renold (LON:RNO) but your comment made me take a look. From a chart point of view the price is at a low point. Personally (now that the price is low) I'd use the strong support at 22.2p as my stop loss. If the price breaks below here then it could drop below 20p.

Note that the Relative strength is also at a low not seen for some time so the selling might become exhausted or buyers might appear.

Search for any O&G company that has no exposure to Russian assets. Most of the major British, French and Norwegian O&G plays have extensive exposure. Good bets are Baytex, Tourmaline, CNQ, Sandridge, Deveon Energy, Range Resources, or if you prefer UK assets, look at Serica and IOG. Avoid Kistos .... robbing bast*!ds. Look for gas tanker stocks as the German government have just approved financing for two new gas terminals (RWE will benefit). Look at the decent off shore drilling contractors like Diamond Offshore and Valaris. Valaris is out of bankruptcy and has a very clean balance sheet.

Paul Scott

Hi Funnymoney,

Mccoll's Retail (LON:MCLS) The director who bought £3m shares had previously made £22m in the float, so not such a huge loss as it would be to the rest of us.

Thanks for flagging this, very interesting. I'm wondering if this might motivate the MCLS Director to back newco in a pre-pack administration, putting fresh money into newco, and writing off oldco? That would enable him to take a decent sized stake (say 10% for £5m [hypothetical figures]) of a £50m fundraise to buy oldco from the banks, minus the debt, and ditch all the loss-making sites and renegotiate rents down on everything else, leaving a much more attractive business going forwards, rather than pouring money down the drain in the old business.

It will be interesting to see who MCLS pans out but the existing equity now looks so high risk, it's highly likely to be worth nothing.

I note MCLS didn't say anything about the press reports saying some of the bank debt had been sold to hedge funds. That means the banks are already resigned to taking a haircut, and of course hedge funds tend to play hardball, so probably wouldn't be willing to waive covenants again.

At some point, the law on trading whilst insolvent kicks in, and forces Directors to place a company in administration. Otherwise they become personally liable for the company's debts, which tends to focus minds.

The upside case is that the store conversions to Morrisons Daily is delivering >20% improvement in store sales, which is very significant. So there could be a reasonable business that emerges from this, but the big question mark, is who will own it?

Regards, Paul.

Howard Adams

Hi BnB

This Tweet from Dan Ives a little while ago ref Cybersecurity US names might interest you.

Regards

Howard

BnB

Thanks Howard. Dan Ives is a big cyber bull so you have to take his announcements with a pinch of salt. That said, I have owned the first five on his list for some time!

Revs8, thanks a lot for spending your time looking at this. Yes, my stop loss is set to 22p (-25%). This company has good fundamentals but after I had big losses with Joules (-43%) and Studio Retail (-46%)I don't think that I can rely on fundamentals for Small Cap anymore and go over than 25% loss.

I like Renold (LON:RNO) as a potential turnaround and it has exposure to defence and mining. Very different to the retailers you mentioned. I have owned previously and I am tempted to dip back in on evidence that the heavy selling has stopped.

I also note that Ocorian Limited as trustee for the Renold plc Employee Benefit Trust we’re buying shares until 24th Jan which would have been supporting (inflating) the price. If they have now stopped buying it might explain the recent lack of support.
If this is why the share price has been week then the good news is that it has little to do with the health of the company.

Ponzy Mad-Hoff

I hold all of these, bought Chemring , Avon & Thales this morning. Also rotated into SAAB & Rheinmetall last week. Previously bought BAE when the Aussies binned their French submarine deal. Given what is happening, it seems inevitable that European defence companies will be “ESG re-rated”. The tragic reality is that deadly advanced weapons are much needed insurance against tyranny. Germans have doubled their defence budget overnight and have declared that most of this is going on new kit. For too long now they’ve gamed the NATO 2% GDP target by including veterans pensions etc and even then were well short. Other Euro countries will be expected to follow their lead.

galois

There are a couple of defence ETF's listed in the US. I hold Invesco Aerospace and defence (not a pure play).

G Morris

Serica has issued a RNS today. Production halted from Rhum for at least two weeks, faulty parts need replacing. Good hold otherwise.

1st Mar '22

With the company around the inflection point for profitability, the operating leverage is so great that it is hard to value based on profits. However, I believe after today's adjustments it will be on a PER about 50x FY23 and 20x FY24. Looked at on an EV/revenue basis however, the shares get much more interesting on roughly 2x FY23 and 1.4x FY24. This is less than half the price of competitors for a business growing at a very significantly faster rate.

The continued sell-off is potentially creating a great opportunity here.

On an EV/revenue basis, Made Tech (LON:MTEC) is now valued at only a quarter of the multiple commanded by closest competitor £KNOS. This for a profitable business guided to grow at 5x the rate - Singer forecasts 50% from FY22 to FY23, much of which is already contracted.

My updated calculations deliver FY22 (May) PER of 27x and FY23 19x (Kainos 39x and 36x). EV/EBITDA 21x and 13x respectively (Kainos 30x and 27x).

Of course the market is in a punishing mood at the moment and has no tolerance for profit warnings, so a discount to the premium valued leader is entirely justified at the moment. But the secular drivers of growth in DX and government digital services are powerful and Made Tech (LON:MTEC) has a strong reputation for quality and delivery as well as strengthening order momentum.

Small Cap Value Report (Mon 28 Feb 2022) - MCLS, TSTL, OTMP, CNIC, MTEC, SFE

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Paul Scott

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