Small Cap Value Report (Mon 7 June 2021) - RIO, RCDO, CLG, GUS, STCM

7th Jun '21 by Paul Scott

102 comments 11404 reads

Good morning, it's Paul & Jack here with the first of this week's SCVRs.

Market cap - upper limit for SCVRs

We've been discussing raising the market cap limit here to £700m, because a lot of interesting companies have now gone above our existing £400m-ish upper limit. I was watching an interesting video from my friend Chris Boxall at IHT specialist fund management firm, Fundamental Asset Management, who is a walking encyclopedia on small caps. When asked how he defines small caps, he said up to £700m, because that's roughly the level when companies join the FTSE 350. So anything below that, it makes sense to call a small cap. Or micro cap below £100m. That makes sense to me.

What do readers think? Would it be useful for us to increase our coverage up to £700m mkt cap?

Mello - tonight

Starting at 18:00 tonight. I see that Keith Ashworth-Lord is being interviewed. Our own Jack is featuring in the BASH (buy, avoid, sell, hold?) session. More details here.

Check out Jack's recent article on Gear4music Holdings (LON:G4M) here if you haven't seen it. Very interesting. This is a coffee can (i.e. hold forever) share for me.

Timing - it's quiet for news today, so I think we should be finished by mid-morning. Today's report is now finished.

Agenda -

Paul's Section:

Clipper Logistics (LON:CLG) - bigger than usual, but as there's very little else to cover today. Today's update is in line with expectations, but there's lots of positive commentary about future growth. Guidance is raised. Looks excellent, and I think the big rise in share price looks justified by strong fundamentals.

Jack's Section:

Gusbourne (LON:GUS) - another Kent-based wine producer but, as with Chapel Down (OFEX:CDGP) , valuation looks to be ahead of events given the scale of revenue being generated. Caution is advised given historic levels of capex and the track record of equity dilution

Steppe Cement (LON:STCM) - shares down on final results. The Ranks and value metrics here are consistently excellent but there are more qualitative due diligence considerations to factor in as well

Paul's Section

Share Ideas

Stock screens - I ran some of my personal stock screens over the weekend, looking for potentially cheap shares, and didn’t…

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Paul Scott

7th Jun '21

Hi bohenie,

Agree your points - would only add that if not enough time/energy to cover everything - frankly, I would opt out of the very small companies

That's pretty much what we're doing these days. Looking back, in the past I've definitely spent too much time, and maybe become obsessed with, some very small companies, which rarely work out well! So lesson learned.

Every morning from 7am, Jack usually collates a list of potential companies that we could cover, in a shared googledoc that we use to draft sections before publishing into Stockopedia (which means we have a backup if computers crash, because it auto-saves every change), and Jack & I can see what each other is working on, so we don't duplicate. We go through the list of companies, and I tend to start at the top, with the larger market caps, then only mention minnows if something important is happening (e.g. an out-perform outlook statement, or a profit warning).

So there's method in how we pick the things to report on. MrC's early morning snapshots are really useful too, in flagging up anything interesting.

I have quite a lot of personal holdings too, so as any investor would, I tend to look at those first, and seeing as I'm reviewing the company updates anyway, might as well publish them here.

Regards, Paul.

Phil O.

Rio Tinto (LON:RIO) : Revenues of 2020 in rough: 5 parts iron ore 2 parts aluminium, 1 part copper & diamonds, 1 part energy (& some small rats & mice)..so forgive the circa summary, but a)its a better mix than BHP IMHO, b) its well positioned to recovery commodities (eg EV's will use 4x amount of copper than petrol vehicles...so yes Id say I like at this price (I hold)..(Refence: https://www.statista.com/stati...) not sure how accurate.

Golspie

I agree on new small cap limit and microcap-- seems logical.

Love the Tobias story!

fred9566

Would really appreciate you moving the cap up to £700m -it would broaden the horizon for everyone and in particular it would broaden the pool of more liquid stocks which has to be beneficial

Hi SurreySteve,

I've had a quick look at BBI Healthcare Ltd accounts at Companies House. They're only for FY 12/2019, so a bit out of date. On reviewing them, I'm seriously struggling to work out why Venture Life (LON:VLG) has paid £36m for this company.

It had a £465k depreciation charge, which would have to come off EBITDA to arrive at operating profit. It only had 25 staff at end 2019, 4 in sales & distribution, 19 in production, and 2 in administration. So it seems a very small company. It didn't make any taxable profits in 2018 & 2019.

I went off Venture Life (LON:VLG) when Directors dumped a lot of their personal shareholdings in the big fundraising. Why would they do that, if the prospects are so good? Doesn't make sense to me, hence I prefer to give VLG a wide berth, there are plenty of other shares to look at, so if in doubt, I just keep away.

Lolarose

Splendid idea re the raising of the cap to 700. I do fill that by doing this we can get an insight to other growing stocks that are worth a mention.

Look forward to your reports every morning.

Thank you

Barry5

Paul, sorry amended this. On re-reading my humour about the covid jab wasn't coming through. I'll stick to twitter lol.

Metatron

My problem with SECN is their bid-offer spread - one of the widest i have ever come across

Harry Hindsight

Confused. Cairn Homes (LON:CRN) in my RNS (set an alert in stocko some time ago but did not keep a note - duh) but see its in the SCVR before so a looose £400m cap anyway. No issue with that, if of interest then would like to hear. Under £50m a bit too risky for me and may set an alert for when the SR breaks 45 or something and happy to lose out on the blue sky gains.

Really can't recall about Craneware - nothing to do with building - seems to be the current BIG THING healthcare information software stuff. Holding a loss in Palantir thanks to the CIA so not an easy space to guage a moat in.

Craneware (LON:CRW) apologies.

JohnEustace

I think that setting the boundary at the FTSE 350 will inevitably lead to us wanting to discuss the firms likely to be promoted or relegated at each re-balance of the index. Personally I would welcome that, but it does imply a bit of flexibility to allow the few companies at the bottom of the index to be discussed.

The Australians are having little difficulty finding other markets for the products that the Chinese don't want to buy for them. The Chinese buy from somewhere else and the Australians replace that product for other customers.

SundayTrader

Re the £700 million limit for small caps, personally I don't see much point in being too formal about what is small. Is a company with a market cap of 500 million, and revenues the same, small? Depends a bit on the business. What about a company with a market cap of a billion and revenues of 100 million? It's small in my book, albeit possibly overpriced. I would rather see you looking at companies that you consider fit the small cap billing, than being too precise about the current market cap.

Hi Bohenie

re Accsys Technologies (LON:AXS), it must surely be pretty unusual for a lead contractor to pull out this late in a project. And I am not sure citing Covid as "force majeure" would stand up - most construction work, being outside, has proceeded fairly normally over the past year. So - purely a guess mind you - there may have been disagreements with the client. The announcement from Accsys Technologies (LON:AXS) sounds almost pleased to be shot of them.

Boon

Forgot to add that apart from bargain valuation, there's two other things about Rio Tinto (LON:RIO) that makes me think it will move substantially higher in next year or two.

First, many institutional investors sold out and don't consider buying at the moment, due to the issue in Australia with a sacred Aboriginal site two years ago. However, people will forget and Rio has taken all the right actions.

Second ttheir copper mine, OT (can't ever remember how to spell it!) has huge potential once the expansion is finished. But currently in dispute with other investors and the Mongolian state. However, given the price of copper, they'll probably be able to find an economic solution to this problem. And if copper prices keep rising... This will be one of the biggest new sources of copper globally.

Rojo

Yes please. Raise the limit to £700 million. Really value your reports. Thank you.

On Empiric Student Property (LON:ESP) currently trading at 16% discount to last published NAV. Probably will increase next results, given the reference price of today's disposal being above book value. Plus residential property up nearly 10% YoY, student accommodation should be rising too.

Key concern is whether they can achieve a high lettings rate by the start of 21/22 academic year. But I'm relaxed as students obviously now scared of what happened last year and all the horror stories, and leaving it to as late as possible to commit to accommodation. But student numbers will be up this year compared to 19/20 year, and supply hasn't massively increased, so...

gus 1065

After hours announcement of a sizeable (US$400m) acquisition in the US for Craneware (LON:CRW) this evening funded in part by a placing of an additional 23% of the current share count.

https://www.investegate.co.uk/...

https://www.investegate.co.uk/....

Looks to be a good acquisition at face value and if the equity book build requires a discount to get it away to institutions may present a buying opportunity for investors looking to get into a company that has perennially good Q scores (ROE/ROCE consistently in the mid to high 20’s) but always looks a bit on the expensive side. Don’t hold but thinking about it.

Gus.

8th Jun '21

Craneware (LON:CRW) placing was completed at 2200p per share, a 10.2% discount to last night’s closing price.

Shares still don’t look cheap but if they open close to the placing price it could be a reasonable entry point.

mojomogoz

I haven't been paying much attention. But Venture Life (LON:VLG) remains the gift that keeps on giving. Comedy company. Raised a huge amount as according to them they are brilliant (sold some cheap hand sanitiser for a tidy sum in 2020 and got a nice one off China deal) and PIs should give them a load of dosh...and handily mgt placed a lot of their shares at same time for nice profit.

Taken them 6 mths to spend any cash. They alleged they had 3 cos in sight but turns out they blew all the money on one paying 3.5x revenue and something like 17x earnings....of course that's accretive as VLG's earnings are poor what with hand sanitiser bonanza over and 'massive' China opp not going anywhere.

Expect a H1 2021 car crash result. I'm maybe just wrong...but I think if you haven't sold yet then this is another chance.

IMO mgt don't care about short term sp. They sold plenty equity. They now have cash generously donated by investors to buy stuff. If they sp goes down as revenues and profits are disappointing relative to its now bloated valuation then all the better to reset management options low and get ready for an even bigger payday 5 years from now.

Small Cap Value Report (Mon 7 June 2021) - RIO, RCDO, CLG, GUS, STCM

Market cap - upper limit for SCVRs

Mello - tonight

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Paul Scott

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