Small Cap Value Report (Mon 7 Nov 2022) - JOUL, LGRS, APP, DWF

7th Nov '22 by Paul Scott

38 comments 6255 reads

Good morning from Paul & Graham! It's a very quiet news day today. Today's report is now finished.

Weekend podcast - was published here (and on podcast platforms) around Saturday lunchtime. I've typed up the written summary, for Stockopedia subscribers only, which is here. Lots of ground covered, as usual!

Mello Monday - is this evening, starting at 17:00. Fund manager Judith MacKenzie is being interviewed, and one of my favourite companies Sanderson Design (LON:SDG) is also presenting.

Agenda

Paul's Section:

Joules (LON:JOUL) - financially distressed special situation. Its update today includes yet another profit warning, and indications that it's going to run out of headroom at end Nov 2022, hence is seeking bridging finance. More detail below, this share looks increasingly precarious, so I'm steering clear.

Loungers (LON:LGRS) [no section below] Quite an interesting development here. This lounge/bars operator thanks it has spotted a gap in the market, and is creating a third format, called “Brightside” - roadside cafes, which evokes Little Chef, focused on comfort food, including all-day breakfasts. Sounds great to me! LGRS management is respected as being best in class operators, so I imagine they’ll probably do well with this new format too. Three sites in the South West have been lined up for spring 2023 opening.

Graham's Section:

Appreciate (LON:APP) (£48m pre-open) - two of my favourite financial stocks are set to combine forces. PayPoint (LON:PAY) has offered 44p for each Appreciate share, in the form of 33p plus a fraction of a PayPoint share. Even though it’s a premium of nearly 70% to the existing Appreciate share price, I suspect that Paypoint will do extremely well out of this. The Appreciate valuation was extraordinarily low, and they are about to start benefiting from higher interest rates. My attention now turns to Paypoint. It’s not quite as cheap as Appreciate was, but I expect it to benefit from this acquisition. As was the case with Appreciate, I suspect that stock market investors also underrate it and undervalue it.

DWF (LON:DWF) (£221m) (-2%) [no section below] - this large professional services company announces an acquisition worth up to £27.7m (including debt). It’s buying a Canadian law firm that earned revenues of £20m (translated from CAD) last year, and adjusted EBITDA of £3m. The deal “marks the next step in DWF's…

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darren23

7th Nov '22

https://www.reuters.com/world/...

timarr

I see the SRT Marine Systems (LON:SRT) share price has increased 15% today on the back of a tip from MIDAS in This is Money. Volatile times.

It's pretty standard. The smart money will flow somewhere else in a week or so after it's rinced the hot dumb punters. Situation normal.

Trident

I guess better to listen to what you tentacles say, rather than your testicles (unless you are Bull for shares). Guess you are in a for few extra squid now.

topturkey

Good spot and even better Georgia Capital (LON:CGEO) looks very very cheap - less than 50% of NAV based on last results with the next set on Wed? Really not good on knowing Georgia and the political risks but just on the bank of georgia valuation and the recent exchange rate moves the discount must have increased even more. Looks like a good entry from a quick glance - thoughts?

carmensfella

Here is the full info on the Mello Monday show tonight. All are welcome

rwh3ue

SRT Marine Systems (LON:SRT)

Why is it different this time?

As a long term investor in SRT (since 2011), I understand the scepticism. There have been many false dawns but despite this SRT have won some impressive contracts in the Middle East and in Asia where the Philippines BFAR agency has the largest fishing vessel monitoring system up and running and it is confidently expected to be expanded to cover thousands more vessels. At some point, the national CoastGuard may also define its requirements.

The other recent contract win in a very large ME country is operational and additional project phases originally required to be completed in three years are now planned to overlap to satisfy the customer requirement to complete in two years.

Both of these major contracts have a recurring revenue element for system upgrades and data collection and are not just one offs..

The current excitement is the potential to land a large contract with Indonesia. Those who have followed to SRT story will know that a contract was won here before but due to high level personnel changes it was aborted. Now with a new president keen to improve the lives of their fishermen and protect their national interests, SRT are once again bidding for the work. Why this is looking particularly promising is down to the Indo Defence Expo which took place last week in Jakarta. SRT were one of the UK companies here but rather than occupying the UK Government stand, they were featured by Bakamla (Indonesia's Maritime Security Agency) with a large. scale live demonstration of the SRT system. You can see photos here https://srt-marine.com/gallery...

To some it may appear odd that a system for which a contract has not yet been tendered would be being demonstrated by the prospective customer. Those more aware of the long process by which SRT builds a relationship with the client and confidence in its system and implementation ability will see this as a sign that the ground work has been well prepared. Having already achieved a reference site in neighbouring Philippines can only be helpful.

There is little doubt that SRT have a world class set of products and a system to analyse the masses of data collected so that operators can home in on the unusual activities which need human scrutiny.

So far, I've only talked about the systems side of the business but the transceivers side is also making good revenue growth. This is being watched by investors who know that a new product called Nexus is due for commercial launch next year having been a couple of years in development. SRT regard it as a potential game changer which combines AIS and VHF radio in a way which they believe is superior to anything on the market. Talks have been held with all the major brands to ensure they have the opportunity to include Nexus in their product line up.

So, it may just be different this time.

The Boon Fund

Many banks in the UK trade a discount to NAV/book value. Why take extra geopolitical risk?

marigold

Anybody know why the price of Natural Gas has jumped up 11% today?

yep good point and explains why discount is more like 65%+ from further research. Do any UK banks trade at such a discount? And when a big chunk of that NAV is a premium listed FTSE plc (albeit a georgian bank) that also helps derisk it

yiannos1

What do these new contracts and/or new products mean in relation to net profit and free cash flows?

Give us some meaningful numbers please?

Thanks

Metro Bank (LON:MTRO) is the extreme case, trading at 0.15 Price / Book Value.

But even if we take Lloyds Banking (LON:LLOY) one of the biggest, it is at 0.58 Price / Book Value. Natwest (LON:NWG) at 0.66

Back in the days of 4%+ interest rates, which was pre-2008, retail banks were trading at premium to book value I believe (caveat: someone please step in with better knowledge, as I wasn't even trading shares pre-2008! So this is based on foggy memories of articles read since 2008)

Don't think it will ever go back to that, with huge regulatory restrictions on banks and therefore their ROCE power much diminished. But it shows potentially the scope of opportunity. Lloyds potentially re-rating to 0.8x P/B maybe?

(I hold Metro in the Boon Fund)

Edit: Just had a look at Bank of Georgia - P/B of 1x! Wow. Maybe that is a good example of what banks could be worth in a high interest rate environment (it looks like Georgia central bank rate is 11% currently?)

Thanks! v useful. So implies Bank of Georgia itself may be a bit overvalued.
of course my example of Georgia Capital (LON:CGEO) is essentially a fund (well, asset manager) holding lots of assets mainly utilities/property/financial etc of which this bank is only a proportion, so the discount to NAV needs to be looked at compared to other similar funds in other territories. But those examples above are great and i'll go away and look more closely at Metro Bank (LON:MTRO) and Lloyds Banking (LON:LLOY) now based on this as you'd imagine some normalisation may happen. I was trading back in 2000 so do remember bank valuations particularly RBS!

"Give us some meaningful numbers please?"

I'm not prepared to be a hostage to fortune so close to the date when SRT's half year results will be announced (14th November). More relevant to the question asked will be the publication of an updated broker note which I'm assuming will address the subject having access to more insight than a mere shareholder can muster. Suffice to say, I believe the next couple of years will see a significant improvement in revenue, post tax profit and cash flow.

If it was easy to predict before the event, there would not be any advantage in being an investor. DYOR sounds glib but it helps build some confidence in one's choices. Despite the travails of owning SRT shares over the years, my personal investment is thankfully well above the water line and I remain optimistic.

NewInvestor1972

Does anyone know where Stockopedia get the 'upcoming events' dates from?

No idea but the sooner we detach the price of energy from a traded commodity the better in my humble opinion.

davidallen77

delays on French nuclear plants going online but that was late last week

Whitbourne

The gas price rise seems to be a delayed reaction to Friday's news of lower nuclear output in France plus an expectation that the unseasonably warm weather can't last, according to this article. Also on Bloomberg if you have an account. It needs to be seen in the context of a significant drop in price since the September peak. Chart here.

Let me help you with the numbers then as there is a brokerage note out.

The revenues will be around £55m and the free cash flows about £2.5m , the dividends will still be 0 and the share buybacks nowhere to be seen. Therefore on a market cap of £75m this is not even close to any meaningful investment case.

Quilleron

If you really want to investigate the case for SRT Marine Systems (LON:SRT) look no further than their news page - a more full and frank evaluation of their prospects and obstacles to progress I've rarely seen. ST's webcasts are at the bottom of the page. And striking to me was this screen that I captured from the most recent AGM

8th Nov '22

As I said before forget all these colourful stories.

Concentrate on the numbers.

The numbers do not add up here for an investment case scenario.

Thanks and good luck

Small Cap Value Report (Mon 7 Nov 2022) - JOUL, LGRS, APP, DWF

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Paul Scott

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