Small Cap Value Report (Mon 7 June 2021) - RIO, RCDO, CLG, GUS, STCM
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 come up with much. At the moment, a really good field to search on, is broker upgrades, as that helps flag companies which are out-performing forecasts that are often too low right now.
Two shares that caught my eye for further research were;
Rio Tinto (LON:RIO) - amazingly good dividend yield of about 9%, combined with a low PER - could this be a good way to play the commodities boom, I wonder?
Ricardo (LON:RCDO) - low forward PER, and although it took a battering in H1, with profits down, the outlook & order book seem healthy. I was looking at the interim (H1 to 12/2020) presentation on its website, and the business is not just automotive, but also has other divisions which have been robust in the pandemic. All of the downturn in profit was due to the automotive division stalling. Could be a potential turnaround maybe? A big military contract was won recently.
Any views?
Covid jab
I had my second covid jab (Astra-Zeneca - cheap & cheerful!) on Friday, at the BiC (Bournemouth International Centre). It was well-organised, and doing things on quite a big scale, lots of medical staff, and volunteers doing a great job. A volunteer went down the queue of people, asking who was there for the AZ second jab, so she led me & another chap to a different, much shorter queue (or VIP area, as it has morphed into, in my account of things on Facebook, to wind up my left wing friends, of which there are far too many, I must have a cull!).
Once in the cubicle to get jabbed, I noticed the nurse calling the jabber by his unusual name, Tobias. Reassuringly posh. I cheekily asked Tobias, "You're not our local Tory MP, Tobias Elwood are you?", to which he sheepishly replied, "Unfortunately, yes". At that point I broke cover, and told him I was the chap who bombards him with emails about topical issues, several times a week, using the website WriteToThem, which makes it very easy. "Ah yes", he warily replied. I then proceeded to tease him gently about Alan Duncan's memoirs which are riddled with criticism of Tobias. He replied, "Yes, he doesn't seem to like anyone very much, does he?!"
It made my day to meet, and be personally vaccinated by my MP! I don't know why I'm writing about that here, probably just to pad things out a bit.
Anyway, hardly any side effects from jab number 2, and it has already appeared on my phone, in the NHS App, which looks set to effectively become a travel passport facility at some stage (France is already saying double jabbed Brits can visit, but I don't want to go there at the moment, they're being too difficult).
The other issue which might make some travel/hospitality shares wobble today, are doubts over whether the full re-opening in the UK might be delayed by possibly 2 weeks? Also serious staff shortages, and wage inflation seem to be a growing issue. It seems to me that a spike in inflation generally is on the cards. The question is, whether it's likely to be short-lived, or become self-fuelling? Who knows? Answers on a postcard. The key question for every share we hold, and to ask management in webinars, is what pricing power do they have - i.e. can higher costs be promptly passed on to customers? Or are they locked into contracts with fixed prices?
Inflation isn't necessarily bad for shares, in fact it can be beneficial for companies which can readily raise their selling prices. I read a book recently about Weimar Germany's hyper-inflation. In the early stages of inflation (which started in about 1913, before the war, then took about 10 years to build up to hyper-inflationary collapse in the currency, there was a stock market boom. People with fixed incomes (bonds, etc) got wiped out, but equities soared, until the final collapse of the economy some time later.
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Clipper Logistics (LON:CLG)
817p (up 5% at 08:19) - mkt cap £832m
(note the share price is erratic in early trading, with hardly any trades printed, and a 60p spread on the published bid/offer prices, which are not the real prices of course).
Most shares in cyclical companies have done very well in the last year, but Clipper has done particularly well, as you can see:
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Today’s update:
Trading Update, Acquisition, Contract extension
Clipper Logistics plc ("Clipper", the "Group" or the "Company"), a leading provider of value-added logistics solutions, e-fulfilment and returns management services to the retail sector, today provides a post-close trading update for the year ended 30 April 2021 ("FY21").
There’s a nice summary at the start -
Strong performance in FY21 and continuing momentum with upgrades to guidance for FY22 and FY23
Acquisition of Wippet B2B marketplace to extend reach into life sciences vertical
ASOS contract extension in Europe
My summary of the main points -
- Accelerating contract wins in UK & Europe
- Very well positioned to further accelerate growth
- Structural shift to online - helped by the pandemic, but expected to continue - online now makes up 70% of Clipper’s revenues
- Traditional retail also strong for Clipper, as outsourcing growing in popularity
- Profit for FY 04/2021 in line with expectations at £31.6m operating profit on the old IAS17 basis - up 53% on last year - very impressive growth
- The IFRS 16 operating profit of £40.2m is also given, but of course this is meaningless, because a load of property rental costs are moved down into finance charges under the nonsense that is IFRS 16
- Revenue for FY 04/2021 is up 39% to £698m
- New contract wins - e.g. JD Sports, River Island, Joules (I hold), Mountain Warehouse
- European expansion, including helping UK retailers deliver into EU efficiently, post Brexit
- Strong new business pipeline
- Acquisition of Wippet Ltd - launching a B2B marketplace in Sept 2021 - sounds like a startup? Supplying healthcare products
- Asos (I hold) European contract with Clipper - extended by 3 years, doubling staff in Poland from 250 to 700
- Exploring acquisitions in Europe & N.America
- Net debt greatly reduced, from £45.1m to £17.0m in the last year (IAS 17 basis, ie excluding lease liabilities) - plenty of headroom on key bank covenant
Outlook -
Given the continued strong trading momentum and pipeline of contracts wins, we expect EBIT (under both IAS 17 and IFRS 16) for FY22 and FY23 to be ahead of Company-compiled consensus (https://www.clippergroup.co.uk/analyst-consensus/) by mid-single digit percentages in both years.
Guidance - this is the guidance provided by Clipper, using the link immediately above -
How about this for clarity! Why can’t all companies give specific guidance like this?
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Valuation - I’d be inclined to value this share on 30p forecast EPS, and put it on a PER of say 20-25, to reflect the strong growth. That values the shares at 600-750p. The current share price is 817p, a bit above my target price. However, that can probably be justified, in that the company is performing so well, that it’s likely to beat forecasts.
My opinion - this looks terrific. I can see why the share price has gone through the roof, as earnings growth has dramatically accelerated. The outlook sounds really positive too, together with international expansion.
If I held (sadly I don’t), then there’s more than enough in today’s update to justify continuing to hold. This is going on my “buy any dips” watchlist.
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Jack’s section
Gusbourne (LON:GUS)
Share price: 82p (pre-open)
Shares in issue: 46,478,619
Market cap: £38.1m
Another UK Kent-based winemaker reports today: Gusbourne (LON:GUS) .
The original Gusbourne Estate in Appledore Kent dates back to 1410. Andrew Weeber took over the estate in 2004 with a new emphasis on sparkling wines. It appears as though a couple of the wines so far have got some good reviews.
But as with so many obvious reopening trades (particularly in Leisure), a lot of the post-Covid recovery is priced in here.
And then a more fundamental point: interesting companies that you might like to see do well do not necessarily make good investments. Even considering the strong momentum, Gusbourne only has a StockRank of 27 due to low Quality and Value Ranks of 17 and 14 respectively.
What’s more, this habitually loss-making company is now valued at some 20x sales, with £1.9m of trailing twelve month (TTM) revenue and a market cap of £38m.
And an additional point: the free float is a minuscule 8.6% of shares in issue. With a spread of 732bps, liquidity is a serious issue to consider here.
Highlights:
- Net revenue +28% to £2.11m; 5Y CAGR (compound annual growth rate) of 35%
- Shift to direct-to-consumer (DTC) - DTC now represents 30% of net wine revenue, up from 20%
- International sales up from 19% to 33% of sales
- UK trade sales down from 61% to 37% of net revenue
As with Chapel, Gusbourne looks to have unlocked the DTC route to market over lockdowns. This could provide longer term value going forwards but, with other specialised delivery models like Naked Wines and Virgin Wines already owning quite a lot of market share, it’s unclear at present how this market evolves and who captures the profits.
The group will continue to focus on DTC. It plans to invest further in online and digital in the coming years.
No surprise that on-trade has suffered. In response, Gusbourne has worked on its off-trade offer and won the placement of its first exclusive product with a premium supermarket chain, as well as growing international sales.
Mid-year the group entered into a £10.5m asset-based lending facility with PNC Financial Services. This provides additional liquidity and long-term working capital finance. Gusbourne aims to maintain its ‘robust investment strategy into vineyards, property, equipment and of course wine inventory’.
Gusbourne has also increased capacity at The Nest, which is its retail, tour and wine tasting operation in Appledore, Kent.
Conclusion
Gusbourne has managed to grow revenues at a fair clip in recent years, with more expected in the year ahead.
But this is a perennially loss-making company. While some early investors might buy into the grand vision, the facts of the matter so far are that Gusbourne is heavily loss-making and capex hungry (and it sounds like there is more capex to come), meaning it burns up cash.
It has so far significantly diluted its shareholder base after raising cash via stock issuance in seven of the past eight years.
At the same time, net debt has been growing - up from £3.6m in 2018 to £11.7m on a TTM basis (including £2.03m of capital lease obligations). Given these characteristics, it’s no surprise to see the Piotroski F-Score (which gauges trends in financial health) at a lowly 3/9.
The Major Shareholders list shows a raft of individual investors. I do wonder if companies like Gusbourne are better off being held privately anyway, where long term shareholders can ride out volatile periods (which will undoubtedly come).
On balance the risk:reward here is not attractive, particularly given the current valuation. The same could be said for Chapel - while growing DTC and online business sounds could have potential, it’s all very early on and the numbers are small given the valuations on display at present.
Steppe Cement (LON:STCM)
Share price: 46.01p (-11.52%)
Shares in issue: 219,000,000
Market cap: £100.8m
Steppe Cement (LON:STCM) is the Malaysian-incorporated holding company of the two operating companies, (Karcement and Central Asia Cement) that form the cement manufacturing complex at Karaganda in central Kazakhstan. It listed on AIM back in September 2005.
It’s on the agenda today primarily due to the fact that it has, for a long time, generated an exceptionally strong StockRank. Here’s the three year chart.
It seems like this attractive blend of quantitative factors has seen the share price nearly double recently but the SR is still a sky high 99 so is there more to come?
Revenue has been choppy in the past so there could be a good reason for the stock’s previous lowly valuation.
Net income has been similarly volatile and, in 2010, 2014, and 2015, the group racked up some notable net losses.
There are a few other reasons that might put investors off this share. The shareholder base is unfamiliar and populated with individual investors and coverage of the company is sparse and the shares are thinly traded, which can lead to volatility (as seen this morning).
Results are affected by currency fluctuations around the Kazakhstani Tenge.
But then, some of the numbers here are hard to argue with. Steppe is paying out a forecast 9.51% dividend and is priced at 12.3x forecast earnings with a forecast PEG ratio of 0.7. The quality metrics are also good, with a ROCE of 20.7%.
Highlights:
- Revenue -6% to $74.8m,
- Net profit +14% to $11.1m and EBITDA up slightly from $23.9m to $24.2m,
- The overall domestic cement market grew by 6% to 9.4m tonnes but Steppe’s local sales fell by 6% due to milling limitations during two months of the high season,
- Exports increased by 20% ‘in line with the market’,
- Shareholders' funds decreased to $57.9m from $62.9m due to currency devaluation and after dividend distribution to shareholders,
The average KZT/USD exchange rate fell by 8% in the period. Steppe Cement's average cement selling prices increased by 6% in KZT, but decreased by 3% in USD, to USD 45.4 per tonne delivered.
Interestingly, the group adds that ‘the replacement cost of the Company's assets remains many times higher than their current book value’, so that could be something for value hunters to investigate.
The group says the Kazakh cement market increased by 6% in 2020 despite the impact of Covid, and it expects a modest increase in 2021.
Imports into Kazakstan decreased by 13% to 0.6 million tonnes (equivalent to 6% of the total market), mostly due to the ban on imports from Iran. Exports from local producers increased by 22% to 2 million tonnes mostly to Uzbekistan and Kyrgyzstan.
Volumes exported to Uzbekistan by Kazakh operators will be reduced once the new factories built in Uzbekistan become operational, most likely in late 2021, however.
Conclusion
Kazakhstani cement production is not a market I’ve investigated or claim to know much about.
This is an unusual listed stock to find on the UK markets. Some might view that as a risk. Others might view the dearth of research and market communication as an opportunity.
While the financial data is undoubtedly attractive, I’m mindful of previous losses and volatile trading patterns. As a cement producer, Steppe presumably does not have much pricing power and must be subject to the vagaries of supply and demand. Is there any kind of moat here? What’s to stop others from establishing cement production if prices rise?
There could be good answers to these questions, so any views on the above are welcome.
The exposure to the Tenge also complicates the investment.
A company that has grown out of former Soviet assets, with operations in Kazakhstan, that exports to the likes of Uzbekistan and Kyrgyzstan, and is currently navigating a ban on imports from Iran… That’s a world away from what I know and there’s a lot of work to be done before I would feel comfortable here.
It could do well for holders. That’s what the Ranks appear to be saying, from a more quantitative perspective.
But considering its unusual location, history, volatile trading track record, and shareholder base, I would also want to do an above average amount of due diligence into the management, major shareholders, and business model of this company before admitting it into my portfolio.
In all likelihood, other opportunities will present themselves before I get that far.
Disclaimer
This is not financial advice. Our content is intended to be used and must be used for information and education purposes only. Please read our disclaimer and terms and conditions to understand our obligations.
102 comments
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.
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.
Craneware (LON:CRW) placing was completed at 2200p per share, a 10.2% discount to last night’s closing price.
https://www.investegate.co.uk/....
Shares still don’t look cheap but if they open close to the placing price it could be a reasonable entry point.
Gus.
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...
Yes please. Raise the limit to £700 million. Really value your reports. Thank you.
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.
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.
Paul, sorry amended this. On re-reading my humour about the covid jab wasn't coming through. I'll stick to twitter lol.
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
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
I agree on new small cap limit and microcap-- seems logical.
Love the Tobias story!
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.
Hi Paul,
Absolutely, please raise to 700m
ps - I really do enjoy your reports
I agree witn extension to 700m as long as you Jack and Roland dont find it too much.
Re: inflation "The question is, whether it's likely to be short-lived, or become self-fuelling"
I have a few contracts (e.g. broadband) which have been changed recently to build in an annual price rise of CPI+X% (where X is typically 3 or more) - if lots of suppliers do this then we could see things run away quite quickly.
Yes please raise to £700m. I enjoy reading your section everyday although not a regular poster. Excellent service keep up the good work!
I agree raise the limit to £700m If you do not you will miss some companies you have reported on which have had substantial growth (which is what we want).
Yes to £700m. Opportunities and ideas matter regardless of market cap!
Paul
On 700m or 400m or whatever
I read this because you produce good quality insight into shares.
I think I will get best value from you if you are left to write on what you are interested in.
"cookie cutter" analyst reports are available all over the place.
Dont apologise, dont explain. Churchill is rumored to have said that but Edith Piaf sang it better.
Hi Paul, for me it's yes to £700m and no to teasing the vaccinator immediately before he vaccinates me with a long needle!
If a share is likely to make money, then I really don't care what the value of it is.
Post about any company that you see fit would be my recommendation. Why lose out on potential returns just because the company valuation is too high, some elephants for instance Ashtead (LON:AHT) do gallop
Accsys Technologies (LON:AXS) a strange announcement today - their lead contractor on the Tricoya plant in Hull is pulling out siting 'force majeure due CV19' Anyone with thoughts on this - (Yes I hold!)
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.
Hi Paul,
Do you still listen to Grant Williams Podcasts? Have the recent ones been as good as the original free to listen ones were?
I find all the macro stuff very interesting and listen to Russel Napier's podcasts.
Here's the most recent two.
McAlvany Weekly Commentary | The Power of Politicized Credit: Russell Napier on Podbean, check it out! https://www.podbean.com/ea/dir-kjqnq-e28b063
Macro Voices | MacroVoices #256 Russell Napier: Prepare for Secular Inflation on Podbean, check it out! https://www.podbean.com/ea/pb-6zefd-f8f247
Here's some of my notes from the two podcasts for anyone that's interested:
Total amount of
Dollars are up 25% YoY,
Yen 9.9% YoY,
euro 13% YoY,
Canada + uk + Australia all up about 12% Yoy.
This is the equivalent of doubling/ tripling the supply of money in some countries.
Bond yields - Government debt bankrupts itself at plus 220bpts on the 5 year US bonds. (China 100 bpts)
Total government and public debt to GDP
America 290%
Advanced world average 311%
France 374%
Japan 411%
Russel thinks a safe level of debt to GDP is around 200%
France and Germany need two completely different central bank policies…?? Euro single currency could collapse?
Russel suggests Hold equities until inflation gets to 4%.
Hold equities until yield curve cap comes.
Hold gold, commodities are a hedge, commodity equities could be better than equities.
Also hold Emerging markets particularly India. (India just come out of a financial repression)
I agree with the proposal to increase the market cap to £700m...Plus I think Paul, you are doing a brilliant job, and your commentary on non financial aspects of investing is priceless..Keep doing what you are doing as we all appreciate your hard work and dedication..Tony
Also agree to 700m, the previous limit was set a long time ago now and valuations have crept up across the board.
Yes to £700million. Still not really in widows and orphans territory and there's much fun to be had here, especially with The Team to hold my hand!
Thanks to all those who work so hard to produce the commentaries and the comments.
Also yes to £700m. I worry, though, that you both may have enough on your plate already without adding a further tranche. You both produce such excellent and thorough coverage on companies within the current range and I wouldn't want to see this diluted because there are more to analyse.
Hi Paul and all
With regard to inflation.
Cathie Wood's market update vid from 04/06/21 is an insightful insight into the possibilities of inflationary impacts. Vid is 35 mins and covers much more than just inflation. It's US-centric but I find extremely useful interpretations of all sorts of economic and market gyrations with direct read across into both UK and European markets (in which I invest as well as US).
Cathie does a market insights vid at frequent intervals which are an essential viewing for me.
Others might be interested if they are not already familiar with her and her research (ARK Invest).
The vid is here ...
Regards
Howard
Yes to 700m, but only if one of you are inspired or energised to write about it
Agree with the proposal to move limit to £700m cap and thanks again for continuing to make this blog essential reading.
£700m and £100m seems very sensible arrangement
Another vote to move to £700m
Upper limit of £700m makes sense to me. Many thanks for all your insights - incredibly helpful.
Move up to £700m ASAP, please. Plenty of interesting situations with much more liquidity.
+1
yes to 700 million
I have no objection to raising the limit to 700M as a rule of thumb, it does strike me that while that's fine from your friends comment
"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"
Perhaps small cap should be defined as outside the ftse 350 size ? because presumably that's when coverage becomes more comprehensive and the interest of the big financials is initiated, so rather than a fixed numerical amount which might need to go up and down with the markets, wouldn't that be a better guide to what should be covered, then obviously there could be exceptions on either side of the line as now,
Thanks for the coverage,
K
Yes I agree. Seems a good idea to define it as outside the FTSE350.
Yes, I would also agree to be outside the FTSE 350. It seems sensible to me.
Have a N i c e Day youall
Good idea Kenobi! So we'll define small caps as outside the FTSE 350 going forwards. Obviously we can't cover everything, so we'll just carry on curating coverage to about 5 companies each day that publish what we think are the most relevant & interesting trading/ results announcements, particularly big movers up or down. We do look at most of the RNSs each day, but we ignore the ones where there's nothing much to say (e.g. in line with expectations), and we also ignore most of the tiny, loss-making stuff. Jack and I discuss what to cover every weekday in our WhatsApp room. That's also where he reminds me to post the placeholder, possibly every other day! (I'm not a mornings person!)
We welcome readers posting your own comments on companies that have announced something interesting, which we might have missed. Some of my best ideas have come from reader suggestions - e.g. several of you nagged me to look at Redde Northgate (LON:REDD) (I hold) last autumn, and I bought some personally, after doing a write-up about it being fabulously cheap, and am currently sitting on a £60k profit on that position, so big thanks to readers in giving me a nudge to review it!
Best wishes, Paul
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.
I certainly agree that £400m is too low and would be more than happy with £700m which would bring in another 6 companies of mine for you to cover. But I also have a couple just above that and also a couple a bit closer to £1000m.
For me, the more stocks you can cover and review for us the better but I understand you want to remain true to the Small Cap ethos.
Thanks for everything you guys do. Very much appreciated.
Also agree on an upper limit of at least £700m. The other issue is whether coverage should continue if a stock exceeds this size. I think it should because it is likely that many readers would be holding and so we can learn any lessons- after all this is surely the type of share we are all looking for
On Rio Tinto (LON:RIO) I hold and for purposes that Paul mentions, that I think higher commodity prices are here to stay for at least a few years.
But clearly the market doesn't think so, as both the PE and dividend yield suggests we're at the peak of the cycle. However, brokers keep upgrading this year and next year's forecast. So there will be a crunch point - either brokers proved wrong and current share price is correct. Or shares will have to rerate upwards to the historic dividend yield range.
I agree. Spanish copper miner Atalaya Mining (LON:ATYM) was profitable at a copper price of $2.72/Lb when its all in sustaining cost was $2.21 . The price of copper has been well above $3.5/Lb since last December and is currently at $4.5/Lb. I keep wondering if there's an invisible elephant in the room!
China is trying to put a lid on prices of iron ore, RIO's principle product and shipped from their mines in W Australia. Last time I looked Chinese domestic auto sales were off the scale and they are a major demand factor. Relations between Australia and China are very frosty which doesn't help the Rio case - it is a dual listing. Both Rio and BHP have gone ex their year end dividend so the next income will come with the interim payment. Last year there was a bumper special year-end dividend but no special interim payment (unlike 2019) reflecting the huge rise in second half base commodity prices.
"The data from China indicated that that iron ore imports over May totaled 89.79mt, down almost 9% M/M, but up a little over 3% Y/Y." (Kitco news).
Like copper - also significant at Rio - China is worrying about direct cost-push inflation and I guess - but am not at all sure - that much of the processed steel comes from state-controlled corporations. The story on copper is more about alternative energy/electric cars and lack of new supply but both commodities have seen spectacular rises. In a funny way, the stronger they are, the more inflation fears are stoked, the more the likelihood of higher borrowing rates coming more quickly.
There are still lots of pundits arguing that this is a super cycle in commodities but also lots of people beginning to opine that wage inflation is starting to take hold and belittle the argument that this is a temporary rise in overall prices and all will be well (say) by year end. My personal sense is that this is pretty deep rooted and that while one has to accept the 'pent-up demand' scenario I would be surprised if we are not looking at a much steadier and longer-lived rise in prices by 2022. That would prompt many central bankers urging governments to put on the brakes exactly as China already is attempting to do.
I only took a position here as insurance and as you note the immediate 2021 ratings appear very attractive. But the share depends on the prices of the commodities they supply and frankly who knows how these will develop.
One other thing to add to WDWombat above is that China is experiencing food price inflation in part due to pig herd collapse due to swine fever, but also due to the generalised price inflation.
Due to fact food price inflation is very hard to control, they are acting to limit inflation in other commodities. Copper for example, is not used in EVs or renewable energy any where near as much as it is used in new real estate development. My guess is China is leaning on copper to ensure the booming housing market in coastal cities does not go higher due to production cost increases.
Time will tell if they succeed, but I suspect possibly not given urgent need for electrification worldwide.
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.
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.
"Kazakhstani cement production is not a market I’ve investigated or claim to know much about."
Jack, I don't think we're gonna hold that lack of knowledge against you!
Much appreciated carvalio!
Thanks Paul, Jack and Roland for your daily updates which are informative, interesting and in many cases thought provoking. I also agree to increasing the limit to £700m.
I agree, the market cap limit shd be raised to £700m. Following recent general reratings, many really interesting companies with continued growth prospects wd cease to be covered if the limit isn't changed. Why not be a little more selective in choosing which companies to report on within the higher limit? I suspect most of us are primarily interested in finding new shares to invest in, undiscovered nuggets. Perhaps a lesser coverage of micro caps - which are illiquid and usually have wide spreads - cd compensate for the extra numbers of companies to be surveyed with the higher market cap limit.
100% yes to increasing the limit. I think the insights you guys provide apply to shares of any size - E.G. You have often covered Next in the past providing at least one buying opportunity about three or four years back that would have been missed otherwise.
Yes to increasing the mkt cap to £700m. It reflects the new reality of small cap valuations. And I enjoy reading the shares analyses, so the more the merrier! Thanks Paul and Jack for your excellent insights
While you are lifting the limit I would go to £800m for a bit more future proofing. It only adds five more actual trading companies, the rest being investment trusts.
£700m maybe, but I think £100b might be pushing it a bit :>)
re Venture Life (LON:VLG) - research is provided by Cenkos (free but you need to register). This morning they say "With further financial updates expected in the near term, relating to the credit facility and further M&A activity, we are leaving our forecasts unchanged at present and will update with the future announcements".
Part of the investment case for this company is that they have a factory in Italy with spare capacity. They have made acquisitions in the past where they have transferred the manufacturing to the Italian factory so sharing its overheads and boosting the bottom line. With today's purchase it looks like repeating that trick over again: "The business comes with its own manufacturing facility in Gnesta (near Stockholm), Sweden, which manufactures the BV gel product. This facility has been heavily invested in by the Seller and possesses fully automated production machinery that is currently running at circa 20% capacity. This facility has significant capacity for volume growth and provides VLG the opportunity to increase output to meet and generate new business".
The company came under a lot of flack for raising money last year for acquisitions and then sitting on it. From the IMC presentation in March:
Q At the time of the placing 4 months ago you teased "Project Vulcan" , "Target A" and "Target B" and it sounded imminent. What happened - did they fall through or are they still in discussion?
A Yes we are still progressing this potential deal (Vulcan)......Target A and target B......are less near term than Vulcan for a number of reasons, and are still targets for us, but, early days and may or may not transpire in our favour.
Hence today there is defence of the placing "which, by virtue of the cash it put in our balance sheet, enabled VLG to enter into discussions to acquire this exciting business, which we otherwise would have been precluded from. This is validation of our strategy that, armed with cash on our balance sheet, we can be successful in acquiring attractive assets".
As for Project Vulcan " (today's) acquisition will initially utilise the cash raised in December 2020 and afterwards we intend to put in place a revolving credit facility to repatriate some of the cash back onto our balance sheet, which will still leave significant firepower in our resources for further acquisitions, such as Project Vulcan, which is still in progress and we expect to update the market on soon".
I hold (but not as much asSlater Investments who have 15.2%).
Thanks for your thoughts on Venture Life (LON:VLG) sharw. the acquisition announced today looks pretty expensive, at least in the short term. As soon as management talks about a strategic deal you know they have overpaid! the disadvantage of raising finance in advance of a deal is that the vendors know you have it . Anyway time will tell if the deal is good or not, its all about top line growth. I am a holder and will continue to be for now . N+1 Singer have updated their 2021 & 2022 forecasts btw with eps of 3.3p & 4.2p respectively. An updated TP of 140p.
I am against increasing the SCVR small cap limit to £700m. There is already plenty of coverage available for businesses of that size for those that are interested in them, so there is less opportunity for the SCVR commentary to add value. Additionally, you are a lot less likely to find really exciting opportunities amongst these larger companies and adding them in will inevitably dilute the attention given to the more interesting genuine "small caps".
Yes to increase in mkt cap to £700m
Could I make a case for a review of £ZPHR today please.
I appreciate it operates in a market that is rarely covered on SVCR but they have just announced their final results and ‘appear’ to be on the verge of some significant growth over the coming months/years.
Many thanks
Paul, re your suggestion to raise the small cap limit to a market cap of £700 mn. You (or Stocko) needs to estimate the increase in the number of companies to be covered, and whether you and Jack ( and maybe others) have the capacity to increase coverage without dilution of quality.
Personally, I find that I am close to my capacity to read, absorb, and think about with the existing coverage.
Meanwhile, keep up your excellent work. I much appreciate it.
Richard
Hi RichardK,
Thanks.
I think we'll stick to doing c.5 companies per day, but picking the best ones from a wider range, with market caps up to c.£700m.
As you've probably noticed, we're not commenting much on the real minnows, because they're so illiquid, nobody could buy in any size, and spreads are often ludicrous. But we do read a lot of RNSs, and pick out the ones we think look most relevant for coverage here.
Regards, Paul.
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 .
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.
What do readers think? Would it be useful for us to increase our coverage up to £700m mkt cap?
Yes please Paul. I think it would be great to get a wider coverage of companies, I always enjoy it when new companies are covered and always end up thinking wow never heard of that one before that’s interesting one to look at :-)
hopefully, it should also make it more interesting for you too if you get to view different companies to learn about as long as you do not mind the extra work! which I greatly appreciate by the way.
Thanks for this Paul & Jack!
Agreed £700m seems sensible when nothing is cheap anymore
"Would it be useful for us to increase our coverage up to £700m mkt cap?"
A definite yes from me because there's at least some element of a logical demarcation as Chris Boxall describes. £400m seems somewhat arbitrary. I also don't mind at all when you widen further to discuss stocks that have grown beyond their earlier coverage on SCVR such as Games Workshop (LON:GAW), Redde Northgate (LON:REDD), Reach (LON:RCH), Frontier Developments (LON:FDEV), Focusrite (LON:TUNE) and many many more.
Thanks Paul, Jack and Roland for all the magnificent work done here.
johnsmith68 you've summed up exactly what I wanted to say as well.
It's a yes vote from me to up the coverage limit to £700m and also periodic coverage of companies which once were covered here, however due to their success have outgrown the limit yet many of us still hold, e.g Games Workshop (LON:GAW) etc.
If you stick at a limit of £400m, many quality companies have outgrown that market cap limit which leaves you with a population consisting of more illiquid and potentially a higher % of more dross companies.
Totally agree with increase to £700 million. Casting the net wider, captures a greater pool of shares to be scrutinised and offers potentially more opportunity to investors.
Paul, very much agree with raising the upper limit on coverage. I'm not sure a hard limit makes a lot of sense - what if the stock market doubles? I am completely in favour of Jack, you (and Roland) having choice on whether to cover or not, rather than being bound by an artibrary limit, particularly for stocks or sectors that have been covered for some time and you feel that prospects may be good. That's what makes the SCVR such an intriguing concept - and on a site that by and large likes rules :-)
cheers
Mark
Yes to 700m!
Morning Paul & Jack,. Any chance that you could share your thoughts on Steppe Cement (LON:STCM) results issued this morning.
I personally would keep the small cap limit where it is.
Once a company goes over around 3-400m or so, it jumps onto the radar of the big money guys and that's when rerating becomes a possibility.
If the limit goes higher, we would just be heading towards matching the FTSE 250 or so - in which case - why not buy a tracker.
Anyway, each to their own - but Im happy with the 400m limit + the odd interesting share above there.
Paul I would certainly be in favour of increasing the limit to £700 million. The more companies that Jack and yourself review,the better
I cannot comment on Gusbourne (LON:GUS) the company, but the Gusbourne wine is both very good and very expensive (from memory was about £35 for a bottle)
Gusbourne make no attempt to appeal to the mid-market like chapel down
Interestingly the chalk seam that runs through the French Champagne region extends up through Kent (white cliffs of Dover) up into Surrey- with global warming will mean we will at some point have the best growing conditions for ‘Champagne’ aka Sparkling Wine.
On May 6th SEC Newgate SpA issued a trading statement and several on here commented on the SR -"The PE Ratio is forecast as 0.224 & 0.176 and PEG 0.008 & 0.014 which appears extremely low" - suggesting they were out by a factor of 100.
I replied "Yes, eps .... is shown in Euros, not Euro cents in the SR - I will try the green button". I did and only a month later Speedy Stocko have put the decimal point in the right place so head over to SEC Newgate SpA (LON:SECN) if you are interested (I'm not).
My problem with SECN is their bid-offer spread - one of the widest i have ever come across
Yes agree - 700 million for small caps.
If the SCVR market cap increases a little, I'm hoping it can include Ienergizer (LON:IBPO) which has a great track record and is founder owned and managed. A recent special dividend shows confidence in their business model, and full year earnings are around the corner too.
Luckily checked the major shareholders pie-chart first of that company...
Thanks for mentioning Ienergizer
Looks like a quality outfit. Worth looking into further
According to the stockopedia list of shareholders, 82% of the huge Ienergizer (LON:IBPO) special dividend appears to go to the CEO. It's largely being funded from the recently announced debt facility. I agree this shows confidence – by someone.
Hoping there might be a trading update this week...
Agree with the proposed increase to 700 million for small caps.
Morning Paul, great post as usual. Raising the SCVR coverage to £700m mkt cap makes sense to me.
Revolution Bars (LON:RBG) shows in my IG share dealing account
Hi Paul
Expanding coverage to £700m mkt cap doesn't worry me, as long as they are potentially interesting companies. They might also have better governance and therefore less risky that small caps?! (possibly just thinking aloud).
as an Awesome Stockopedia Subscriber I'd second that motion Paul. seems sensible and timely.
Might be worth casting an eye over the Venture Life (LON:VLG) acquisition announced this morning. A long wait after their fundraising ahead of purchases. My intial thoughts: 1) purchased from a PE firm (caveat emptor); 2) full price - >3x historic revenue. Co. claim revenue growth from existing new projects should reduce this a lot in 2021. Irritatingly, Cenkos (house broker) have not updated their forecasts.
Bought into Venture Life (LON:VLG) on their covid killing mouthwash - silly me.
I was an holder at the time and decided to go out and buy it along with their toothpaste. I dislikes both and therefore sold the stock
I'd also be interested in Paul's (& others) thoughts on the Venture Life (LON:VLG) (I hold) acquisition, particularly if there is any broker research.
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.
Regards, Paul.
Clipper Logistics (LON:CLG) - has added retailers to e-fulfilment and returns. Buying Wippet B2B supplying 'life sciences' (care homes) presumably with beds, arjo baths, equipment etc.
My morning smallcap tweet:
Accsys Technologies (LON:AXS) Avacta (LON:AVCT) Nuformix (LON:NFX) EPE Special Opportunities (LON:ESO) Omega Diagnostics (LON:ODX) Netscientific (LON:NSCI) Empiric Student Property (LON:ESP) Idox (LON:IDOX)
Accsys Technologies (AXS) Tricoya factory contractor serves notice to terminate the project by reason of force majeure arising out of the pandemic and stating that they plan to demobilise over the next two weeks. Tricoya UK may takie over the completion of the final stages earlier than planned. [SP=167.12 Cap=320m]
Avacta (AVCT) MHRA has confirmed registration of covid rapid test for professional use.in UK. [SP=239 Cap=606m]. I'm short.
Nuformix (NFX) gets US patent for "CRYSTALLINE TRANILAST SALTS AND THEIR PHARMACEUTICAL USE". This covers NXP002 - co's pre-clinical lead asset and a potential novel inhaled treatment for Idiopathic Pulmonary Fibrosis. [SP=1.98 Cap=12m]
EPE Special Opportunities (ESO) NAV 519.48p/sh. Also sells £15m of its Luceco shares. [SP=346 Cap=111m]. I hold.
Omega Diagnostics (ODX)it's taking longer than expected for confirmation on which covid test it will be making for UK Gov't. . [SP=63 Cap=115m]
NetScientific (NSCI) will take responsibility for completing the validation and global commercialisation of a covid serology ELISA assay. "In return for providing access to the required intellectual property and technical know-how, AstraZeneca will receive a royalty fee on future Global net sales of the assay." [SP=76.12 Cap=11m]
Empiric Student Property (ESP) revenue occupancy for the current academic year remains at 65%. Bookings for the coming year are 40%, lower than in precovid cycles. £11m sale of asset in Exeter is ahead of book value. [SP=88 Cap=531m]
Idox (IDOX) pays £7.5m plus £m earn-out for Aligned Assets , a UK based public sector software business. Expected to be immediately earnings enhancing. [SP=61.4 Cap=273m]