Small Cap Value Report (Mon 4 Oct 2021) - FCCN, CER, CBOX, RWI, CGS

4th Oct by Paul Scott

57 comments 8778 reads

Good morning, it's Paul & Jack here with the SCVR for Monday. Today's report is now finished.

Agenda -

Paul's Section:

French Connection (LON:FCCN) (I hold) - finally we get a reasonable exit from this problematic fashion brand. Founder Stephen Marks (unanimously with the board) has agreed a 30p cash takeover bid from 2nd largest shareholder led consortium. Not an amazing price, but it's 3-times the level before the announcement of bid talks, and 10 times the pandemic low in March 2020. So overall, I'm happy with this.

Cake Box Holdings (LON:CBOX) - another positive update from this fast-growing franchise cake retail business. However, it's only in line with FY expectations, so shouldn't move the price much really. I'm really impressed with this company, and it deserves a premium rating.

Renewi (LON:RWI) - another positive update from this European recycling group. Heavily indebted, but that doesn't seem to be causing any problems. Looks potentially interesting, although I don't understand this sector, so don't have a strong view either way.

Castings (LON:CGS) - It's a profit warning, but no guidance provided. Tough Q2 (July-Sept) is entirely predictable, given that its main customers (heavy truck manufacturers) are experiencing semiconductor shortages, hence have cut production considerably. Fabulous balance sheet, and divis are being at least maintained. Demand is likely to return in due course, so I don't think long-term holders have anything at all to worry about, given the financial strength of the business. Not cheap enough to make me want to buy though.

Jack's section:

Cerillion (LON:CER) - short but positive update. FY revenue slightly ahead and adjusted profit significantly ahead. Higher mix of license revenue is increasing margins. The shares appear expensive but the momentum is hard to argue with and the outlook remains positive so there could be further to run on a multi-year view.

Explanatory notes -

A quick reminder that we don’t recommend any stocks. We aim to cover 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 stick to companies that have…

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dahokolomoki

4th Oct

You can't. Precovid the usual excuse was weather and rain. Now they have a much better excuse of "supply chain" and "logistics".

turbo

Moonpig (LON:MOON) has been on the slide recently, was intrigued to read this in their recent RNS:

"The Selling Shareholders will be locked up in respect of their residual holdings until 60 days post settlement of the Placing, subject to customary exceptions."

Could this explain why the SP is dropping...?

ollie_nicholson

To me the only reason it doesn't look cheap on Stocko is because the Finncap 2021 EPS forecast has dropped from 19.8p on 6th Sep (as per their latest research note on H1 earnings) to 16.6p on 27th Sep. Can't see any justification for such a drop given business isn't impacted by any of the supply chain issues we're seeing elsewhere, the rental market it going from strength to strength, their will be a full 6 month impact from the Nicholas Humphries acquisition (vs. 3 months in H1) and there are another 21 mortgage advisors in H2 from the Nottingham acquisition whilst mortgage rates are at all time lows - obviously offsetting any slow down in estate agency sales following the end of the stamp duty holiday in Q4 (which only makes up 20% of GP vs. 56% from recurring lettings). Based on my own modelling c.20p EPS is still conservative so fairly comfortable trading around 11-12x (before adjusting for amort from acquisitions) and even cheaper on a FCF basis.

simoan

Which is precisely why I would never ever hold positions on margin (and really not sure why anyone would). During the Covid sell off some of my shares did fall around 50% but I was pretty relaxed because I knew they were quality businesses with strong balance sheets. I knew it was just a matter of time waiting for them to recover, which they did pretty quickly. Holding physical shares means you can be as patient as you like and never need to worry about margin calls and such like. I think we are probably due another sell off as you suggest but again plan to focus on quality companies and ride it out.

The reaction to Covid was just a scratch. Wait until your shares fall 50% one day and 50% the next. I can still remember what that felt like but as I have never used leverage was able to survive unscathed. I have no crystal ball, and so just to be clear, was not suggesting a bear market sell off is imminent; just that it will at some point and no-one will ding a bell to let us all know. Who knows what the catalyst will be next time?

All the best, Si

Richard Goodwin

Presumably security will have a hard time getting manning for guarding services at present? It is a famously poorly paid profession in general.

mammyoko

I may be one of those sheep you refer to. I was dumping UK small caps on Friday. Most of them, like Gear4music Holdings (LON:G4M) and Focusrite (LON:TUNE) are good companies that will prosper over the long-term but which felt to me had got a bit ahead of themselves in terms of share price on similarly low volume over the summer. Nearly all the shares I sold were at least 10% off their recent highs. G4M’s house broker, for instance, is forecasting a reduction in earnings for the current period. Paul may be right that this is too pessimistic. But equally, it may be that many businesses had a Covid-bounce last year that is not representative of the underlying prospects for the business. For Gear4music Holdings (LON:G4M) the supply-chain issues for a company that imports from China persist and will affect their margin. It feels right to me to question whether continued optimism over UK small company trading is still warranted against the back-drop of multiple supply chain and other issues – higher delivery driver costs, petrol shortages, higher oil costs, higher natural gas costs, higher freight costs, increase in VAT on hospitality, China slowing growth, US and EU inflation picking up and US tapering and end of the UK furlough scheme are just some of the things that worry me.

There has been huge momentum in UK small caps since last November and lots of US-backed takeovers of UK mid-caps and some larger small-caps. But it feels to me as if market sentiment has turned and that much of the optimism in UK small-cap share prices has evaporated in the face of all the potential problems that seem to be stacking up for the UK economy. Of course, that may well be ‘glass half-empty’ but many people have been anticipating at least some retracement from the highs for some time.

I have moved from 75% invested to 30% invested. The crucial decider for me was that I feel that earnings multiples on many popular UK small caps have run ahead of themselves, pulled up by euphoria, cheap money and (perhaps partly) by US multiples. Taxes are going to have to rise in the UK and, if inflation isn’t as transitory as billed, interest rates will also have to rise. In that context, we could well see some re-evaluation of those high multiples in UK small caps which, combined with some (probably) short-term margin erosion would have the kind of dramatic effect on share prices that others have mentioned. Essentially, the risk/reward feels to me as if it is more slanted towards risk than reward at these levels. I am holding onto some recently bought positions in Avon Protection (LON:AVON), Argentex (LON:AGFX), Gamma Communications (LON:GAMA) and Sylvania Platinum (LON:SLP) but am otherwise considering if it really is true that There Is No Alternative to equities – even in a period of expectation for increased inflation.

I would be very interested to hear from others about whether I have been too pessimistic and hasty and what could cause sentiment to reverse again.

JohnEustace

I'm sure retail investors make many mistakes - everyone does. But it takes a gifted professional to blow up $20bn like Bill Hwang did in March.

The professionals are like you and me, they just play with more money.

Jef Warwick

Paul,
We can all see that there is going to be a drop in the market, if not already. You suggested Friday that a falling market would be a great time to buy really high quality businesses at a discount.

Any examples of ones to keep an eye on, to buy when the market drops?

BnB

Post deleted

gwilli68

"To me the only reason it doesn't look cheap on Stocko is because the Finncap 2021 EPS forecast has dropped from 19.8p on 6th Sep (as per their latest research note on H1 earnings) to 16.6p on 27th Sep."

Belvoir (LON:BLV) - I believe the Finncap forecast is actually unchanged. The drop showing in analyst forecasts in Stocko is caused by an unidentified broker feeding this into Refinitiv. Stocko dont know who this is, and neither do Belvoir (atleast they didnt when I asked a couple of weeks ago). Louise George, the CFO, replied to an email stating "As far as I am aware, it is only finnCap who cover Belvoir, so I am not sure where Refinitiv are getting another source from. If I am able to find out, then I will let you know."

I think Im right in saying (apologies if wrong) that on Mello the other day they reiterated they believe they will meet their forecasts for this year - and to me, those forecasts are the Finncap ones. The "1 broker" showing on Stockreport is because there is only 1 broker offering a Buy/Sell opinion on the share (which is Finncap), but the EPS forecasts are an average of 2 brokers.

I hold so am bias, but bearing all this in mind, I personally do think that it is now looking reasonably cheap (based on the Finncap numbers) for a quality company.

Westway001

I have been selling some off today (wish I had started a week ago), didn't quite manage to press the button though on Redde Northgate which dropped a further 3.78% today alone. I am expecting further reductions to many stocks over the coming months and fully intend to buy back in lower when I feel the time is right. I have moved from pretty much fully invested to around 50%.

Great to know - thanks for the colour

Kouremenous

"Covid was just a scratch" Not quite sure that's how I remember it:

It took the S&P 500 only 22 trading days to fall 30% from its record high reached on Feb. 19, making it the fastest drop of this magnitude in history, according to data from Bank of America Securities.
The second, third and fourth quickest 30% pullbacks all occurred during the Great Depression era in 1934, 1931 and 1929, respectively.

Think you have to go back to the South Sea bubble in 1720 to get a faster market wide crash - Jeez you've been investing for a long time Simoan :-)

GarryC

Caretech Holdings (LON:CTH) and Safestore Holdings (LON:SAFE) are falling but god knows what they have to do with China, petrol, gas, drivers, our 'leaders' conferences (maybe worse than covid?), etc.

They just fall to a point where you think a good 'support' on the weekly chart maybe and you would ordinarily buy. Bit silly to 'sell' if you were not holding and another part of the brain says a good 'buy' opp.

If the MAs are heading South, not sideways then it is watched daily, maybe intra-daily.

Don't have to sell all, just reduce the risk and dip in when things pick up to be sure its real.

On the plus side I was looking for a point to get into Kainos (LON:KNOS) and of course Volex (LON:VLX) - but not today.

Stocks123456

French Connection (LON:FCCN) Thank fcuk to get out of fcuk!! I averaged down from 50p but it kept dropping to 4p. Life changing getting out of that one. I need to be more sceptical of target prices in future.

Patrick L

Might Redde Northgate (LON:REDD) be a benefit of the current situation though with higher prices for its used vans? At least in the short-term before new vehicle sales normalise. Plus the roads are definitely busier now so the accident side of the business will (sadly for victims) be picking up. It's trading less than 10x next year which feels like good value. I think there are other small caps less favourably priced.

David Dias

I got Cake Box Holdings (LON:CBOX) on my SIPP and my glad I did it early.

I like Moonpig (LON:MOON) a lot as a business - great card selection and the app is excellent. But debt is high here and I think it was priced fully at IPO. It feels like it is sliding into more reasonable territory. I feel like 20-25x is a more reasonable valuable for a company whose international growth prospects are likely hampered by its balance sheet. See you at 250-275p hopefully!

andywillz94

I love the G4M business however I've taken a huge hit across a few companies in relation to supply chain issues (without any negative figures being reported yet) so i reviewed my portfolio and had to cut G4M as it just makes sense they will be hit in some way.

whether or not it will impact badly on trading, I assumed sentiment would send the price crashing - and it has.

Cracking business though which has been added back to my watchlist so i can try catch the bottom.

5th Oct

I get the joke but don't see the relevance of the S&P 500, the smallest market cap is $11.8bn!! We were discussing UK small caps and investor psychology., in particular companies where virtually all the daily liquidity is provided by PI's and a few small sells can bash the price.

Clearly you weren't investing at the time of the GFC and its aftermath. Believe me, March 2020 was a scratch. During the GFC you didn't even know if your safest asset of all was safe. I remember my other half was made redundant in 2008 and put her payment into a savings account with IceSave a month before Landsbanki went tits up and the whole Icelandic banking sector followed shortly after. I'm talking about falls day after day, you'd then get a dead cat bounce to get your hopes up, and then yet more and more falls. It was psychologically on a different planet to March 2020.

Why not ask Paul how he would compare the two? I've still got the scars and a couple of missing fingers...

Small Cap Value Report (Mon 4 Oct 2021) - FCCN, CER, CBOX, RWI, CGS

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Paul Scott

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