Small Cap Value Report (Mon 29 Nov 2021) - BMK, MMH, AMGO, BAG, CRC

Good morning! It's Jack & Roland here with the SCVR for Monday.

Agenda -

Jack's section:

Benchmark Holdings (LON:BMK) - quarterly results showing an improvement in revenue and stabilisation in its markets. The company seeks to improve animal health, productivity, and welfare while reducing environmental impact. A noble aim, but the fact remains that the share price has barely moved in years, while shares in issue continue to increase, so there has been a cost to holding so far.

Amigo Holdings (LON:AMGO) - sub-prime lender that finds itself in a life or death situation just three years after listing. Placing to materially dilute shareholders and the sanctioning of a new scheme is 'increasingly urgent' in order to stave off administration. Uninvestable, in my opinion.

Circle Property (LON:CRC) - property company specialising in regional city centre office assets which it actively manages. Currently trading at around 0.75x net assets, so scope for that discount to close but the shares have already recovered to pre-Covid highs.

Roland's section:

Marshall Motor Holdings (LON:MMH): A blowout 400p per share offer for this car dealership group from the owner of BCA and WeBuyAnyCar.com. I think it’s a savvy acquisition, but I’m not sure it’s a template for other similar deals.

A G Barr (LON:BAG): Irn-Bru maker Barr’s has delivered a modest upgrade to profit guidance for the year. Management cites strong out-of-home trading and some successful recent product innovations. I remain a fan of this family-owned business, albeit with some reservations about long-term growth potential.

Preamble

So it was a fairly brutal end to last week which, in truth, caps off a tough period in the markets stretching back over a couple of months. The indexes don’t seem to reflect the reports I’m hearing from a few private investors of a slightly steeper sell off.

On top of a general souring of sentiment driven in part by supply chain disruption and inflationary pressures, we now have the developing situation of the new Covid variant, which is rattling markets and the media. Covid-sensitive travel and leisure stocks took a bath on Friday and remain exposed to shifting sentiment.

The extent of the threat posed by this new variant is unclear though. Hopefully, we are better equipped to deal with such newsflow than we were back in early 2020, but I still expect markets will remain skittish for at least a few weeks. It’s too soon to quantify the likely impact but we’ve had a very strong run over the last 12 months and so it’s not too much of a surprise to see a reaction like this.

I’m wary of getting too wrapped up in day-to-day headlines and prefer to focus on the longer term view. The market crash at the start of the pandemic shows how easy it is to let action bias take over and run the risk of missing out on the bounce, although it did also throw up some great opportunities for nimble investors. It also showed the value of pound cost averaging for those with cash on the sidelines.

It’s early days but I would like to think we’ve been through worse recently (at the risk of sounding complacent). On that note, David and his team have another Mello event tonight, so that will be a good opportunity for everyone to discuss the current conditions. You can find more info in this post, and here's the sign up link.

Note from Paul Scott

Recently, a reader comment which I saw as a personal attack, rattled my cage, and in the heat of the moment I stupidly responded with a rude reply to that reader comment. Stockopedia HQ pointed out to me that these comments fell well below the site’s required standards of civil discussion.

I’ve taken this on board, and asked for the comments to be removed, which has been done.

Accordingly, I’m happy to unreservedly apologise to everyone for my mistake, and resolve to do better. In future, instead of responding myself to any provocative comments, I’ll just flag them for review by the office.

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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 out to be right, and sometimes wrong, because it's anybody's guess what direction market sentiment will take & nobody can predict the future with certainty. We are analysing the company fundamentals, not trying to predict market sentiment.

We stick to companies that have issued news on the day, with market caps up to about £700m. We avoid the smallest, and most speculative companies, and also avoid a few specialist sectors (e.g. natural resources, pharma/biotech).

A key assumption is that readers DYOR (do your own research), and make your own investment decisions. Reader comments are welcomed - please be civil, rational, and include the company name/ticker, otherwise people won't necessarily know what company you are referring to.

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Jack’s section

Benchmark Holdings (LON:BMK)

Share price: 62.5p (unchanged)

Shares in issue: 670,377,484

Market cap: £419m

Benchmark Holdings is a UK-headquartered company providing advanced genetics, health and nutrition products to the global aquaculture industry. Its products are designed to help customers manage productivity and animal health/welfare, while reducing environmental impact.

Segments are Advanced Nutrition, Genetics, and Health. These sound like big markets to which a lot of value can be added through innovation, but Benchmark remains loss-making and has issued a lot of new shares over the years, which makes me wary.

Q4 results

Highlights:

• Revenues +48% to £37.3m, strong performance across all business areas,
• Adjusted EBITDA +51% to £7.1m,
• Adjusted operating profit +30% to £3.5m; statutory operating profit of £0.5m from a loss of £2.8m,
• Loss before tax from continuing operations of -£3.2m (Q4 2020: -£2.9m),
• Basic loss per share has improved from -1.43p to -0.91p due to improved performance in discontinued operations,
• Net debt excluding leases has increased from £27.1m to £56.9m.

Advanced nutrition revenue is up by 41% to £17.1m and adjusted EBITDA has improved markedly, from £0.2m to £3.6m in the quarter.

The increase in Adjusted EBITDA margin reflects higher sales, as well as growth in diets (which have a higher margin) and ongoing cost control. The Americas remain challenging partly because of the ongoing COVID-19 pandemic and logistical difficulties.

Genetics revenue grew by 35% to £15.9m, with adjusted EBITDA falling from £4.6m to £3.3m.

Top line growth was driven by higher sales of salmon eggs and higher harvest revenues. The fall in EBITDA is due to an increase in operating costs and R&D expenses as operations normalise. Salmon performed well and the group has a leading position here, expanding its incubation facility in Iceland and expanding in Chile.

Health revenue grew from £1.4m to £4.3m, with adjusted EBITDA up from £0.2m to £1.1m.

Revenues in Q4 FY21 from continuing operations of £4.3m were significantly above the prior year due to first sales from Benchmark’s new Ectosan® Vet and CleanTreat® solution.

Trading and outlook -

• Recovery in global shrimp markets with potential to bounce back to pre-COVID-19 levels,
• Stable salmon markets; demand growth continues to exceed global supply,
• The seabass and seabream market have substantially recovered,
• Trading in line with FY22 expectations.

Balance sheet - there’s some £229m of intangibles here, making up 47.5% of total assets. Strip that out and there’s £50.6m of net tangible asset value. Cash of £39.5m does not cover current liabilities of £63.5m, but the current ratio as a whole is reasonable at 1.95x.

It looks fine at first glance, although there’s a large decrease in cash (with a c£32m net decrease) following a combined £22.7m spent on intangible and physical investments.

Management flags refinancing as a risk in its Going Concern note, however:

However, it should be noted that the Group's main borrowing facilities are set to expire within the next 19 months - the $15m RCF is set to expire in December 2022, and the NOK 850m bond is due to expire in June 2023. The cashflow forecasts reviewed rely on these borrowing facilities being in place. The Directors have commenced a review of the capital structure including certain short term actions and also longer term financing options, and are confident that these facilities can be renewed or replaced before they expire, with trading going well despite the headwinds of the pandemic and relationships with finance providers strong. Cash resources continue to remain strong with the group managing discretionary spend closely as recovery from the pandemic progresses.

Based on their assessment, the Directors believe it remains appropriate to prepare the financial statements on a going concern basis. However, while the Directors remain confident that the current facilities will be renewed or replaced in the next 19 months, the requirement to renew represents a material uncertainty that may cast significant doubt on the Group's and Company's ability to continue as a going concern and therefore to continue realising their assets and discharging their liabilities in the normal.

So that’s something to bear in mind going forward.

Conclusion

Benchmark may well be reaching an inflection point, but there has been an opportunity cost to holding its shares so far. Brokers forecast a small profit in FY22 of 0.72p per share, which would give an FY22 PER of 86.8x.

So the investment case hinges on generating significantly larger profits than that in the medium term. That's not something I have a view on, but perhaps holders can add more value here in the comments.

Meanwhile, shares in issue have grown at a compound annual growth rate of 25%, from 202m in FY15 to more than 670m today. Another placing is announced today, 33.1m shares in exchange for £20.5m. It's not the kind of track record that typically interests me.

I see the attraction of exposure to an important, sustainable source of protein (fish and crustaceans), but that doesn’t mean Benchmark is necessarily the way to gain that exposure. And it’s also just not an area I know too much about, so it would take a lot to convince me to part with my cash here.

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Amigo Holdings (LON:AMGO)

Share price: 8.05p (-24.75%)

Shares in issue: 475,333,760

Market cap: £38.3m

Amigo is a sub-prime lender to those who can't borrow from traditional lenders due to their credit histories. It provides guarantor loans, introducing a second individual to the lending relationship (typically a family member or friend with a stronger credit profile) who undertakes to make loan payments if the borrower does not.

This can be a dubious area of business. There are good actors, but ethical and reputational risks are always a concern.

In Amigo’s case, it looks like you can add some pretty stark company-specific risks too. This short update from Paul back in June 2020 provides an interesting bit of context:

Some fractious comments from the outgoing Chairman in today's update. Large liabilities appear to have arisen from customers lodging complaints. Deal to sell the company has fallen through because of the economic situation. Looks very high risk to me.

Add to that its classification as a ‘Highly Speculative Value Trap’ with limited liquidity, and I suspect the risks might make this one uninvestable. It’s been a pretty disastrous IPO, with a low StockRank most of the way.

Half year report

• Number of customers -42% to 102,000,
• Net loan book -53.8% to £224.1m,
• Revenue -38.8% to £56.5m,
• Impairment coverage improved from 14% to 22.5%,
• Profit before tax of £2.1m, up from a loss of £62.6m,
• Adjusted basic earnings per share up from -12.2p to 0.4p.

Amigo leads with the following update on developments:

Following the Court not sanctioning the original proposed Scheme of Arrangement ("Scheme") in May 2021, the Board continues to pursue a new Scheme to address the complaints liability and provide a solution for customers with a valid complaint.

An independent Customer Committee has been set up in response to the recommendations of the judge at Amigo's High Court Scheme sanction hearing ‘to ensure the voice of customers is heard’. This reads like a case of the potential ethical and reputational risks alluded to above.

While neither of our proposed Schemes is expected to satisfy the liability owed to redress creditors with valid claims in full, the contribution to the new Scheme will be significantly increased. This is, in large part, due to improved collections relative to the assumptions made for the first Scheme, in December 2020, when the impact of Covid-19 remained highly uncertain, as well as the delayed implementation of balance adjustments on the loan book.

Amigo will be proposing an equity raise alongside the Scheme to support the future business. This is likely to result in material dilution which will lead to existing shareholders owning a much smaller proportion of the group if they do not take up their rights. The Board is also considering an early part repayment or repurchase of the senior secured notes.

As noted previously, the sanctioning of a new Scheme is increasingly urgent. Without an approved Scheme, Amigo expects to have to file for administration or other insolvency process.

Conclusion

I’ll leave it there for now - safe to say this is not an appealing situation given the upcoming material dilution, substantial complaints liability, and very real prospect of administration.

This kind of bombed-out stock always attracts speculators and traders due to lottery-like upside, but the risks are huge, so it’s not of interest personally. The market cap is still around £40m, so plenty further to fall if sentiment deteriorates further. Astonishing to think JP Morgan et al managed to float this in 2018 for c£1.3bn.

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Circle Property (LON:CRC)

Share price: 205p (-0.49%)

Shares in issue: 28,551,796

Market cap: £58.5m

Circle invests in, develops, and actively manages regional office assets. It is not a Real Estate Investment Trust (REIT), so that gives it more flexibility to actively manage and drive asset values.

At present, it has a portfolio of 12 regional commercial property investment and development assets in the UK valued at £130m.

Interim results

Our regional office portfolio has performed resiliently in the period. As increasing numbers of workers have returned to their offices, the importance of having an environment to meet, collaborate, mentor and train employees is clear. Whilst working patterns have changed, the office continues to play an integral role for many businesses.

Highlights:

• Unaudited NAV steady at £2.74, implying a price to NAV of 0.75x,
• Group loan to value of 46.6%, with £8.6m of cash making for a net LTV of 40%,
• Operating profit after revaluation of investment properties of £2.1m (H1 2020: £0.146m)
• Earnings per share of 4p (H1 2020: 2p)
• Proposed interim dividend of 3.5p per share, ahead of 2020 and 2019 pay-outs (H1 2020: 2.5p / H1 2019: 3.3p)
• Rental income of £3.2m (H1 2020: £3.9m), down largely due to disposals and corresponding loss of income.

Group LTV is expected to reduce further following the completion of the disposal of One Castle Park in December 2021.

Refurbishment underway at properties in Milton Keynes and Birmingham. Contracts exchanged for two disposals in Bristol - one for £20m, a 3.9% increase on 31 March 2021 valuation of £19.25m, and the other for £3.961m (a 62% increase on post-refurbishment valuation of £1.55m).

Conclusion

Given the sales above recent valuations, there could be value here.

The “work from home” argument is valid but could overshoot, as could the idea that the office is dead. Reality is rarely so dramatic and instead tends to tread a more pedestrian middle ground.

That said, the shares have already recovered well.

A 3.16% forecast yield is useful, but there could be better income candidates out there. I don’t see why the shares can’t close the gap to net asset value, which suggests maybe a 20-30% rerating in time if all goes well. The sales ahead of market value bode well for the £20m of assets held for sale on the balance sheet, although ongoing disposals will reduce rental income as well.

Not particularly exciting, with perhaps better value opportunities to be expected in the weeks ahead.

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Roland’s section

Marshall Motor Holdings (LON:MMH)

Share price: 274p (pre-open)

Shares issue: 78.2m

Market cap: £274m (pre-open)

Cash offer of 400p per share

One minute before the market closed on Friday, car dealership group Marshalls put out a RNS statement acknowledging bid speculation. This morning we have the offer.

Constellation Automotive will pay 400p per share for MMH, valuing the group at £322.9m. It has already secured the agreement of the controlling shareholder Marshall of Cambridge (Holdings), which owns 64.4% of MMH.

The offer price represents a 41% premium to Friday’s closing price of 283p and an 87% premium to the stock’s 12-month volume-weighted average price of 214p. I think it’s a pretty strong offer. With the backing of the controlling shareholder, I think it’s almost certain to go through, so congratulations to holders here.

Unprecedented vertical integration: I’ll look at the value (or not) of the offer in a moment. But I think it’s worth taking a closer look at the buyer here. Constellation Automotive owns WeBuyAnyCar.com, BCA (used vehicle auctions and logistics) and Cinch, the online used car dealer. Together, these businesses provide a high degree of vertical integration in used car retail, spanning the whole used car value chain. All of Constellation’s businesses have a very strong digital presence.

By adding Marshalls, Constellation will extend its reach to include new car sales, physical retail locations and valuable relationships with major manufacturers. Owning a dealership group will also provide new opportunities for sourcing and retailing used cars, and expand the scale of Constellation’s financing operations.

On balance, I think this is a canny acquisition by Constellation. I’ve been consistently impressed with Marshall’s financial performance in recent years and have also had a good experience as a customer. I think it’s one of the best-run UK dealership groups.

Fair value? Car dealership groups are making exceptional profits at the moment, due to the shortage of new cars. This has enabled dealers to expand their profit margins on new and used car sales. I expect this to be a temporary boost until the supply chain normalises - that’s a view reflected in broker forecasts, which suggest profits could halve next year.

According to broker forecasts I can see, Marshall is expected to report an operating profit of £62m this year, compared to c.£30m in both 2019 and 2020.

This mean’s that today’s offer represents 5 times current year forecast operating profit, and around 11 times a more typical level of operating profit.

Is Constellation in danger of overpaying for Marshalls? I thought so at first, but having looked more closely, I’m not so sure.

Constellation has said that it will review Marshall’s operating model and property portfolio over the 12 months following the completion of the deal. Marshall’s has c.£140m of freehold/long leasehold property and minimal leverage. Constellation should be able to extract some value to offset the acquisition cost, if needed.

As a vertically-integrated group, I suspect the deal should also deliver margin improvements and cross-sellling opportunities.

On balance, the price looks pretty full to me, but not unjustifiable.

Are other dealership groups likely to receive bids? UK car dealership groups have looked cheap for many years, and tend to have attractive freehold property portfolios.

However, the current level of profitability doesn’t seem likely to be sustainable. Forecasts for both Marshalls and Vertu (I hold) suggest a 50% drop in earnings next year. Personally, I’m not sure the economics of the Marshall acquisition would be so attractive to a private equity buyer.

But given the changing nature of the car retail business and the pace with which sales are moving online, I can see the opportunity for further consolidation or trade sales in this sector.

Personally, I won’t be buying more shares in car groups at current levels, but I am still comfortable holding the ones I have.

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A G Barr (LON:BAG)

Share price: 485p (+3.8% at 08:40)

Shares in issue: 112m

Market cap: £544m

Trading update

“Full-year profit now expected to be ahead of current market expectations”

Barr’s best-known drink, Irn-Bru, enjoyed a moment in the limelight at the recent COP26 conference in Glasgow. Due to a sponsorship deal with the event organisers, Barr’s were the only soft drinks available in the conference building. The impact on sales was probably negligible, but the press coverage generated by journalists interviewing foreign visitors about Irn-Bru can’t have done any harm.

In any case, it looks like Barr’s business is starting to recover from the hit to sales caused by the collapse in out-of-home consumption last year.

Today’s trading update reports strong sales in both the soft drinks and Funkin business unit. Funkin produces pre-mixed fruit syrups and other flavourings used to make cocktails. The firm’s products are sold to the pub sector and through supermarkets.

Barr’s says that performance in the “on the go” and hospitality sectors remains particularly strong. Recent product innovations are said to have “exceeded our expectations”.

Supply chain challenges are mentioned, but the company says that its production and wider supply chain have “maintained their resilience and supported the growth in volume”.

As a result, profits for the year to 24 January are now expected to be ahead of expectations. Happily, the company has provided clear guidance, so we’re not left guessing:

• Revenue c.£264m
• Pre-tax profit c.£41m

To put these numbers in context, consensus forecasts prior to today were for revenue of £256m and pre-tax profit of £38m. So these numbers represent an upgrade of around 3% to revenue and 7% to profits.

That’s a nice demonstration of the impact of operating leverage - as Barr’s business becomes busier, its fixed costs are spread more thinly across increased volumes. This increases the profitability of each sale and the wider business.

My view: I’ve long had a favourable impression of Barr’s. The business remain part-owned by the family and is also held by noted long-term UK fund managers Lindsell Train and Keith Ashworth-Lord’s Sanford Deland:

The business scores well for quality and has consistently reported a net cash balance for many years:

My main concern about Barr’s has been whether core products such as Irn-Bru, Ice Cream Soda and Dandelion & Burdock would remain relevant as consumer tastes changed - and if not, whether the company would be able to replace them with new commercial offerings.

So far, my caution seems to have been misplaced. The acquisition of Funkin Brands appears to have been a success and the group’s core soft drink offerings remain popular, albeit mostly within the UK only.

However, I think some caution is still merited. Sales and profits are expected to remain below 2019’s peak level for at least the next year:

The company also remains heavily dependent on its core soft drinks business, which generates the majority of sales and is far more profitable than other operating segments.

These numbers were obviously affected by various lockdowns and hospitality sector closures last year. But I think they demonstrate where the bulk of the business still lies.

Quality at a reasonable price? Barr’s shares are up modestly today, reflecting the company’s upgraded profit guidance. At current levels I estimate the stock trades on around 18 times forecast earnings, falling to perhaps 16 times in FY23.

Broker forecasts suggest the dividend will be reinstated at close to pre-pandemic levels this year, giving a prospective yield of more than 3%.

I’d say the shares are probably fairly priced at current levels. If I was looking to build a position here, I might consider buying after today’s news, given the proven quality of this business.