Small Cap Value Report (Mon 7 Oct 2019) - DUKE, RFX, BOOM, ANG, GHH

Monday, Oct 07 2019 by
53

Good morning!

Well done to everybody reading this - you've survived a tricky couple of weeks in the markets.

The FTSE has stabilised around 7150, which from my perspective seems to price in lots of bad news, especially with the pound also rather weak.

The papers suggest that this is a critical seven days for Brexit negotiations. I'm sure we're all completely fatigued when it comes to that subject, however, so let's not dwell on it!



Personal trading update

I like to be as transparent as possible when it comes to my personal portfolio, so please note that I have today closed both my short position in Tesla and my long positions in the FTSE Index. That's why this morning's report has got off to a slow start - I've needed to tidy up a few personal matters.

To be clear, this has not been driven by any change in my view of the merits of these trades. I still view them both as extremely attractive. The reason is that I am in the middle of a house-buying process, and need to use the collateral for the deposit and fees. The potential returns from a trading account must be swapped out for the certainty of home equity.

On that subject, I wonder if readers here have any views on the home equity vs. stock market equity question? Do you carry a large mortgage while also building a stock portfolio? Or would you prioritise building home equity first, before venturing into the financial markets? I've always found this an intriguing question, and now I have to answer it.



Today's news

This is what I plan to discuss today:




Duke Royalty (LON:DUKE)

  • Share price: 45.5p (-4.4%)
  • No. of shares: 197 million (pre-fundraising)
  • Market cap: £90 million

Fundraising of up to £20 million

Retail offer via PrimaryBid.com

This was announced on Friday, after…

Unlock this article instantly by logging into your account

Don’t have an account? Register for free and we’ll get out your way

Disclaimer:  

All my own views. I am not regulated by the FSA. No advice.

Do you like this Post?
Yes
No
56 thumbs up
3 thumbs down
Share this post with friends



Duke Royalty Limited is a Guernsey-based diversified royalty investment company. The Company specializes in diversified royalty financing and provides alternative capital solutions to a diversified range of businesses in Europe and abroad. The Company’s investment policy is to invest in, without limitation and restrictions (including geographical restrictions), long-term, revenue-based royalties in private and/or public companies, and or other alternative asset classes and/or financing instruments from time to time that bear similar risk and return characteristics. The Company provides financing solutions to private companies that are in need of capital but whose owners wish to maintain equity control of their business. It provides capital to companies in exchange for rights to a small percentage of future revenues. more »

LSE Price
44.29p
Change
-2.0%
Mkt Cap (£m)
93.9
P/E (fwd)
12.7
Yield (fwd)
7.4

Ramsdens Holdings PLC (Ramsdens) is a financial services provider and retailer. The Company operates through four segments: Foreign Currency Exchange, Pawnbroking, Purchases of precious metals and Jewellery Retail. The Foreign Currency Exchange segment consists of primarily, the sale and purchase of foreign currency notes with prepaid travel cards and international bank to bank payments. The Pawnbroking segment is a form of asset backed lending where an item of value is given to the pawnbroker in exchange for a cash loan. Through its precious metals buying and selling service, Ramsdens offers to buy unwanted jewelry, gold and other precious metals from customers for cash. The Company is engaged in refurbishing items bought from customers and retailing them through its store network. The Company also provides ancillary services, including franchise fees, western union, sale and buy back of electronics, and credit broking. It has a portfolio of over 130 stores. more »

LSE Price
195.8p
Change
1.2%
Mkt Cap (£m)
59.7
P/E (fwd)
9.2
Yield (fwd)
3.9

Audioboom Group plc operates an audio platform for hosting, distributing and monetizing content. The Company works with approximately 2,400 active broadcasters, content creators and podcasters around the world, and hosts in over 7,400 content channels. The Company's hosting and distribution platform allows partners to embed, share through social channels and re-syndicate their content. The Company receives over 40 million listens per month. It also works with its partners to monetize their audio through live in-reads, the dynamic insertion of pre and post roll audio adverts and video advertisements. Its audio, cloud-based, software as a service (SaaS) platform enables the creation, broadcast and syndication of digital audio content across various devices, networks and geographies. Its subsidiaries include Audioboom Limited, Audioboom Inc, One Delta Limited and Audioboom Pty Limited. more »

LSE Price
172.66p
Change
0.1%
Mkt Cap (£m)
24.2
P/E (fwd)
n/a
Yield (fwd)
n/a



  Is LON:DUKE fundamentally strong or weak? Find out More »


47 Comments on this Article show/hide all

jonesj 7th Oct 27 of 47
3

I purchased my first property in 1995, having deliberately decided they looked too expensive in 1990.
I liquidated my Investment Trust holdings to have a 26% deposit.
The mortgage was about 2x income and I put together an Excel spreadsheet & adjusted the numbers until it showed the mortgage being paid off in 5 years. Which is exactly what I did.
I then went back to stock market investing from 2000, having had no exposure during the life of the mortgage.

With hindsight:
1 The property purchase was well timed.
2 I was much too conservative in paying off the mortgage, when I should have being doing a combination of paying off the mortgage and utilising PEP allowances. With the way I did it, I missed PEP allowances and missed the 1995~2000 stock market returns.
I did just fine from 2000 onwards, avoiding tech stocks and investing in breweries etc.

The situation now is slightly more complex, a a couple have 2x £20k ISA allowances, plus the opportunity to avoid a lot of 40% tax with a SIPP (£40k per annum ?). So it would need a good 6-figure income to live, fully exhaust these tax allowances and still have some left over to pay down the mortgage.

| Link | Share
doublelutz 7th Oct 28 of 47

In reply to post #519396

I would say few people consider other major purchases such as cars as investments because they know they are certain to eventually be worth nothing (unless it is classic car). Although I am aware that people can finish up at least temporarily with negative equity I believe that over a lengthy period your house can only be an appreciating asset. For one thing building costs increase. There must be many people whose houses like mine are worth 10 times what they paid. The investment return is that I do not have to pay rent. So if we say that my house which cost me £60,000 would now cost me £18,000 to rent that would be a pretty good return. Also it is an investment in that the ultimate value on my death is relevant to me in that one objective is to pass on as larger an amount as possible. As regards paying off a mortgage or investing the money I think it depends on age and whether the amount of the mortgage is something you are comfortable with. I went with paying off the mortgage.

| Link | Share
golfnut59 7th Oct 29 of 47
6

"Do you carry a large mortgage while also building a stock portfolio? Or would you prioritise building home equity first, before venturing into the financial markets?" Graham, I think the answer to this comes down to your appetite to risk. Considering you can borrow money for next to nothing at the moment, this lends itself to carrying a large mortgage. It doesn't look like interest rates will be moving north anytime soon. If interest rate rises worry you, for peace of mind you could always take advantage of a 10 year fixed product. I notice you can get fixed rates at 2.3% on a LTV of 75%. Considering you are still a young man it seems sensible to have the capital work for you in the markets rather than have it tied up in property. Its really a question of opportunity cost. Personally, I think you'd be crazy not to take full advantage of the low interest rate environment and use it to your advantage.

| Link | Share
bluecurve 7th Oct 30 of 47
8

Hi Graham, Your question about Home Equity v Stock Market Equity has generated a huge response, and rightly so.   I've faced a similar decision recently, as I was in a position to pay a significant part of my mortgage early.  I had 10 years to run and faced the decision: do I pay it off, or do I keep investing?

One source that I found really useful when thinking about this was a series of articles by "Big ERN" on his blog https://earlyretirementnow.com.  He's done a lot of research into the "sequence of returns risk", and how the sequence of returns affects your actual return over time.   His worked examples are extremely detailed.  He also discusses the merits of paying off the mortgage early.

As a quick example, say you choose to pay off the mortgage early, so pump as much free cash as you can into that goal.  You're mortgage free, maybe 10 years earlier than planned.  Is that a better scenario, than pumping all your free cash into the stock market and running the mortgage out for the full term?  If you go with option 1 then you've potentially lost 15 years savings, PLUS all the compounded returns.   You also start investing 15 years later, and although you may now be in a position to invest more cash, you have less time left to benefit from the compounding effect.  The risk due to the sequence of those returns is also greater because you have less time left to invest. 

Inflation also plays a serious part here.  Although the interest rate may fluctuate, the amount you owe will not be affected by inflation.  In fact that amount will become less significant over time.  By investing alongside the mortgage, inflation works in your favour, as your returns should benefit from inflation, whilst your mortgage amount remains unaffected.

If you fancy a podcast that provides and good summary of this subject then he appears on the Choose FI podcast - this one discusses sequence of returns risk https://www.choosefi.com/035-sequence-return-risk-early-retirement-now/ .

| Link | Share | 1 reply
batt 7th Oct 31 of 47
8

On buying a home versus investing, I think that this country's obsession with bricks and mortar has been damaging to the UK economy. On top of which we have continual government meddling. Help to Buy etc.

| Link | Share
RichardK 7th Oct 32 of 47
1

In reply to post #519346

Henry, I had a very similar experience with the Duke Royalty (LON:DUKE) PrimaryBid offer. In my case I had two Lloyds debit cars rejected because of errors in the expiry date (both in 2022). PrimaryBid has yet to respond to the message I left. PrimaryBid seems unusable for me.

Richard

| Link | Share
Ned Kelly 7th Oct 33 of 47
1

At age 70 I had to payout my previous mortgage on my home but found I was able to remortgage at a fixed rate for 5 years at just over 2%. This seemed a no- brainer to me rather than taking the money out of the market. Effectively the mortgage money is now in a Fundsmith ISA earning 17% plus so far, so will pay it off when the 5 year fixed term is up.

| Link | Share
Henry Walpole 7th Oct 34 of 47
2

I've always thought of any houses I've owned as investments. There are massive regional variations but where I live in Norfolk renting seems cheap to me compared to buying. We sold our house last year as prices had got 'silly' (they may yet get 'sillier'). This has freed up lots of cash for investing. We're now renting a very nice house on a long term secure lease and I reckon the landlord is grossing about 2 to 2.5% pa. Happy to take the other side of that trade.

| Link | Share | 1 reply
doublelutz 7th Oct 35 of 47
3

You could take the house out of the equation and ask would you be prepared to borrow, say, £100,000 at a low rate of interest to invest in shares. Younger people may find this hard to believe but at one time you could get tax relief on interest borrowed for any purpose. At the time tax rates went up to almost 100% when the investment income surcharge was taken into account and it was often the case that persons on high earnings would borrow money, get tax relief on the interest at their top rate of tax and hope to secure a capital gain which was entirely free of tax at the time. It is not something I would do at the present time as the £100,000 borrowed could become £60,000 in short time but, of course, if it came off it would be a good idea.

| Link | Share
aflash 7th Oct 36 of 47

Two factors do not appear to have been clearly pointed out so far:

First: Real Estate prices are cyclical, moving from Buyers to Sellers' markets over periods of about 25 years. There are cycles within cycles, moving from the developed world to individual countries to individual regions. So one has to judge where one is in the cycle for where one wants to buy. In North America prices have surpassed the peak of 2006-7 but in South America there are some great opportunities. 

Unfortunately few of us have the time to shop, invest or settle in those areas.

Second: Property with a mortgage is a leveraged investment just like one in the stock market and if you buy at the right time the underlying asset is fairly stable. The fact one can live in the asset if it drops in value helps.

So then it comes down to a question of cash flow. How much mortgage debt can you service? If you have tenants you can service more.

| Link | Share
pka 7th Oct 37 of 47

In reply to post #519441

Bluecurve wrote:

"As a quick example, say you choose to pay off the mortgage early, so pump as much free cash as you can into that goal. You're mortgage free, maybe 10 years earlier than planned. Is that a better scenario, than pumping all your free cash into the stock market and running the mortgage out for the full term?"

If you have an offset or flexible mortgage, you don't have to make that decision until the mortgage reaches its full term. You are free to put any free cash into offsetting the mortgage (and thereby reducing your mortgage interest payments) or into the stock market as and when you choose.

| Link | Share
simoan 7th Oct 38 of 47
6

In reply to post #519481

We sold our house last year as prices had got 'silly' (they may yet get 'sillier'). This has freed up lots of cash for investing. We're now renting a very nice house on a long term secure lease and I reckon the landlord is grossing about 2 to 2.5% pa. Happy to take the other side of that trade.

If that's the case, what if the landlord comes to the same conclusion as you tomorrow, doesn't want to be on their side of the trade any longer, and decides to sell the property?  This idea of a long term secure lease does not exist in reality and is a bit naive... and therein lies the rub -  the vast majority of people in the UK want their own home with the peace of mind and security that brings, not just a house to live in as an investment.

I guess if you are a full-time investor like Graham and need to reduce equity exposure to fund a property acquisition you may naturally take a different view, however as someone who has paid a mortgage off entirely from the income gained through full-time  employment, I don't see any need to conflate the equity in my home with my quite separate equity investments. Investing is difficult enough without that added complication IMHO.

All the best, Si 

| Link | Share
Henry Walpole Tue 8:26am 39 of 47

In reply to post #519546

Hello simoan, we are renting an Ecclesiastical property so it is genuinely a long term lease, several of our neighbours have been here 20 years or more. None of the houses (100+) have ever been sold they're all rented. We can stay as long as we like as long as we behave! 

I suppose they might have a change of heart and decide to sell up but I think that's unlikely after all this time.

| Link | Share | 1 reply
simoan Tue 11:10am 40 of 47

In reply to post #519606

Hello simoan, we are renting an Ecclesiastical property so it is genuinely a long term lease, several of our neighbours have been here 20 years or more. None of the houses (100+) have ever been sold they're all rented. We can stay as long as we like as long as we behave! 

I suppose they might have a change of heart and decide to sell up but I think that's unlikely after all this time.

Obviously, I'm glad you feel secure in your new environment but I hope you take my point that it is just a feeling, not a 100% guarantee that you get from owning your own property outright. I'm not sure how you put a value on the peace of mind offered by the latter? All I know is that it's worth a considerable amount to me given all the other things there are to worry about on a daily basis, particularly as you get older.

All the best, Si

| Link | Share | 1 reply
timarr Tue 12:44pm 41 of 47
1

In reply to post #519671

Obviously, I'm glad you feel secure in your new environment but I hope you take my point that it is just a feeling, not a 100% guarantee that you get from owning your own property outright.

To be fair, if you wanted a landlord that was pretty much guaranteed to give you peace of mind it would be Ecclesiastical. This was their response when Aviva tried to steal preference shareholders rights away:

Ecclesiastical notes Aviva's governance statement that "as one of the biggest companies in our sector, we aim to make our industry work better for everyone.  That starts with us building trust with our customers, investors and shareholders by running our business honestly and transparently."   Ecclesiastical trusts that Aviva will follow the principles set out in that statement when considering whether to pursue this course of action.

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

Their annual report is well worth a read: https://www.investegate.co.uk/...

Of course, I've held hold a boatload of Ecclesiastical Insurance Office (LON:ELLA) prefs since the GFC, so I'm probably biased ...

timarr

| Link | Share
Henry Walpole Tue 3:07pm 42 of 47
1

In reply to post #519671

I don't believe the feeling is any different to the one you may have owning your own property.

For example what if your neighbours decide to let their house to rowdy students, or a new four lane bypass is built that comes very close to your home, or a homeless/drug addict shelter is built on the other side of the road to your front door?

All these are real life examples I've come across where people who had a feeling of security with home ownership suddenly found that this wasn't the case. With an illiquid asset like property that can leave you stuck.

Not to mention what might happen regarding home ownership if we get a Marxist government!

| Link | Share | 1 reply
Henry Walpole Tue 3:09pm 43 of 47

In reply to post #519696

Ah I probably expressed that ambiguously, when I said Ecclesiastical I meant church owned property - nothing to do with the Insurance office.

| Link | Share | 1 reply
timarr Tue 3:46pm 44 of 47

In reply to post #519741

Ah I probably expressed that ambiguously, when I said Ecclesiastical I meant church owned property - nothing to do with the Insurance office.

Ah. It was the capital E that baboozled me :)

timarr

| Link | Share
simoan Tue 5:25pm 45 of 47
1

In reply to post #519731

I don't believe the feeling is any different to the one you may have owning your own property.

For the majority of people that is simply not true in my experience. Most people in the UK want to own their own home not live in rental property and pay someone else's mortgage for them. Especially if they view their property as an investment! :)

I think we'll just have to beg to differ. All I know is, with low interest rates it makes sense to buy a house if you can afford it and need somewhere to live because the returns on holding cash are pitiful and being eaten away by inflation. Of course, that may change, but if I were to rent my current house it would cost 15-20x the final monthly mortgage payments before the interest was cleared. Why on earth would I sell it and rent?

All the best, Si 


| Link | Share
john2 Tue 7:29pm 46 of 47

In reply to post #519731

Or the Hell's Angels buy the house next door to use as their club house.  Another true tale.

| Link | Share

Please subscribe to submit a comment



 Are LON:DUKE's fundamentals sound as an investment? Find out More »



About Graham Neary

Graham Neary

Full-time investor and independent analyst. Editor at Cube.Investments, small-cap writer at Stockopedia. Previously a fixed income analyst in the City and institutional fund manager. I'm a CFA charterholder and have the Investment Management Certificate and STA Diploma in Technical Analysis for good measure. When I'm not talking about finance, I enjoy recreational poker, chess and Mandarin Chinese. more »

Follow



Stock Picking Tutorial Centre



Let’s get you setup so you get the most out of our service
Done, Let's add some stocks
Brilliant - You've created a folio! Now let's add some stocks to it.

  • Apple (AAPL)

  • Shell (RDSA)

  • Twitter (TWTR)

  • Volkswagon AG (VOK)

  • McDonalds (MCD)

  • Vodafone (VOD)

  • Barratt Homes (BDEV)

  • Microsoft (MSFT)

  • Tesco (TSCO)
Save and show me my analysis