Small Cap Value Report (Thu 1 July 2021) - RBG, HEAD, SPR, AGFX, COG, ALT, LOOK

1st Jul '21 by Paul Scott

30 comments 9662 reads

Good morning, it's Paul & Jack here with the SCVR for Thursday. Good job I checked the date, as this originally said Friday!

Timing - today's report is now finished (14:45)

Disclaimer -

A friendly reminder that we don’t recommend any stocks. We aim to cover notable trading updates & results of the day and offer our opinions on them as possible candidates for further research if they pique your interest. We tend to stick to companies that have news out on the day, and market caps up to about £700m. We avoid the smallest, blue sky type companies, and a few specialist sectors (e.g. resources, pharma/biotech).

A central assumption is that readers then DYOR (do your own research) and discuss in the comments below. The comments, incidentally, sometimes add just as much value as the articles. We welcome all rational views, whether bull or bear!

It's helpful if you include the company name or ticker within reader comments, otherwise some readers may not be aware of what company you are commenting on.

Agenda -

Paul's Section:

Revolution Bars (LON:RBG) (I hold) - a strong trading update. Since re-opening indoors, 86% of 2019 revenues achieved, on only 28% capacity. Guidance raised, and net debt largely eliminated by recent 20p placing. Good upside here in my view, providing covid restrictions don't return.

Headlam (LON:HEAD) (I hold) - is holding a CMD today at its Ipswich HQ. Slides are available online here. I think broker forecasts look far too low, and I see long-term upside of c.70% on the current share price. Obviously don't rely on my view, as it could turn out to be right or wrong, nobody knows for certain what the future holds. A resumption of divis in future could lock in a yield of over 5%, if historic payouts return.

Cambridge Cognition Holdings (LON:COG) (I hold) - interesting news of the spin-out of startup (Monument Therapeutics) which COG has incubated since 2018. Creates about £1.5m value for COG shareholders, who now have a free carry in Monument, with further upside potential from licensing. A cherry on top of the cake!

Lookers (LON:LOOK) - accounts for 2020 are finally published. Positive trading, but we already knew that from the strong trading update on Monday this week. The whole sector is cheap, so why chose…

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Tortoise investor

1st Jul '21

An intriguing situation at private equity investor Cip Merchant Capital (LON:CIP) - this morning. Corporation Financière Européenne S.A has increased their holding from 18.2% to 25.4%. CFE had their bid at 50p in September 2020 rejected and then made another offer in January 2021 wanting 50p still. They have evidently decided not to give up. The company trades at 60p this morning which is well below its NAV per share of 89.6p - Cip Merchant Capital (LON:CIP) invests in mostly publicly listed companies.

I am not experienced enough to know what might happen here. Looking back at the previous announcement CFE were restricted from making another bid for six months which I assume is from the date of the bid, so maybe they can have a go again at the end of July?

CFE previously indicated they planned to take Cip Merchant Capital (LON:CIP) private. In the situation the company gets taken private on the cheap would I automatically get bought out or would I find myself somehow owning private shares. Anyone know?

The upside here is whether CFE decide to try and buy out the rest of the shares at a more expensive price. My buy price was 56p.

Bouden54

Just worth highlighting that they received a lot of performance fees in an exceptional year for tech (around half their AUM). I would imagine this would be something of a one-off. Not sure how much this contributed to the 62p eps, but does need to be factored in.

Michael Taylor

The Art of Execution is a great book.

The sample size could be bigger, but I think it offers plenty of takeaways for private investors.

I've summarised the book here:

https://twitter.com/shiftingsh...

greensiax

Here are my SCVR heat maps for today (prices as at ~9:15am).

I share these heatmaps with the intention of giving a visual indication of what is going on in the SCVR world: who’s reporting (and it's impact on the share price); and what’s moving more than 'normal'. There are no associated recommendations, implied or otherwise, just information. How, or indeed if, you choose to use that information is up to you. Please feel free to ignore them if you don't find them useful.

Please read my heat map thread for a great deal of explanation of how the heat maps are formed and how I use them to guide me with my research, and for a full key to the contents.

I very much welcome feedback so if you do have any feedback, not already covered in the heat map thread, it would be very helpful if you could post your comment in the heat map thread rather than the SCVR thread. The more specific and constructive the feed back is, the more that likely it is that I will be able to act upon it. Thank you all for the feedback so far.

Small / Micro Caps reporting today:

Big movers today in the SCVR world (moving more than a 20d EMA of the ATR against either yesterdays close, or today's open):

Warm regards, stay safe, and best of luck!

Mark Tughan

For the very patient and those interested in a potential special situation, there appears to be fresh management change over at Dolphin Capital Investors (LON:DCI) . DCI is not to be confused with the Dolphin Trust - a well known fraud.

The discount to NAV exceeds 70% (getting your attention?) but is slowly degrading (oh...). There are some new shareholders on the register in the last 15 months, one of whom (Peter Gyllenhammar) features in the excellent Free Capital book by Guy Thomas (hmm..).

A real DYOR if ever there was one, and patience required. SP seemed to troughed in April 2020 at 2.1p, after which it has been steadily ticking up. There's still a significant margin of safety here at 4.5p.

Zipmanpeter

Re Headlam (LON:HEAD) - just been through Capital Day presentation - refreshingly simple business model and strategy. I held already, loved what I saw and bought more today on the back of it. My notes

* Already market leader from loads of small acquistions, goodwill always fully written off (20% mkt hare, x6 vs nearest competitor, UK focus)

* Grow sales (esp from Multiples currently <10% share, added value trade counters)

* Cut costs (stop transport duplication, digitising procurement, better links for customer - really liked the news had used customer focus groups to update website)

* Grow margin via mix (O/L products, trade counter items, NPD, direct to final customer and indie trade social media done in house for cost and control)

* People (v important - new tier 2 leadership team with specific skills highhlighted, new sales leader has cut 60+ positions but given sales more latitude to hit bigger targets)

Personally I think they can do £725Mn Sales by 2023 and they (credibly IMHO) state a target a 7.5% Op Margin - so £54Mn Op Profit (vs +/- £40Mn 2016-19).

So 35% ahead of when they traded at a range of 440-640p - my target is 600-860p with an extremely good chance of a 5% dividend by next year (strategy to pay out 50% profit)

With WFH an ongoing trend, consumer savings from missed overseas holidays and re-opening of F&B/commercial sites, I can't see carpets/flooring having a bad go in next 24months unless the whole economy is tanks again. So also relatively low risk I feel.

I hold - and now my 2nd largest position

RichTea

£POLR "Adjusted diluted core EPS" was 40.6p. This excludes performance fees.

GrahamF

With Headlam (LON:HEAD) I think the big imponderable is to what extent they have already benefitted from the housing market mania that is now inevitably going to slow as the stamp duty holiday is phased out?

I suspect that the residential market is at its peak right now and that it will start to decline in about two months time as the number of housing transactions diminishes. The boost from the WFH trend has already peaked too I would think.

Can commercial pick up the slack? I don’t see a reason for that. So, I think profit acceleration has to come from operational efficiency rather than revenue growth. I’m sure that they have opportunities to become more efficient but their input costs are likely to be increasing like they are for everyone else eroding potential efficiency gains.

(No current position having sold out some time ago as market sentiment did not seem very favourable for this stock).

I think that's a fair point to draw attention to. Also there's c.£7m of additional 'other income' compared to last year which seems to be from the realisation of some of their seed interests. This looks like it represents about half of the extra non-core profit (I don't know if this caused other costs though). However, their seed investments are worth about 33% more than they were in 2020 which bodes well for future years' profits maybe?

Performance fees are clearly difficult to predict so that probably does need to be factored into the valuation. Thanks for underlining that point.

With markets having traded well so far this year I would have thought we'll see a decent increase in core profits coupled with some level of performance related and other profit.

Maybe when I have more time I'll go back and work out what their average performance related profit tends to be perhaps as a percentage of core profit.

Norfolk'n'Good

Scs (LON:SCS) (I Hold)

Has anyone else seen the 'surprise but welcome trading update' issued by Shore Capital on Research Tree today?

Some excellent figures.....

From 4th April '21 to 12th June '21 order intake up 371% and (more impressively) up 79% on same period FY 2019.

Declaration of delayed interim dividend of 3p per share

Forecast Net Y/E cash of £74.5m against a market cap of c £110m

FY21 & FY22 forecasts substantially upgraded

Despite this sp has fallen today....?

Paul Scott

Thanks Zipmanpeter, for taking the time & trouble to post that - very useful.

I've been a somewhat lone voice on Headlam (LON:HEAD) for some time now, so it's great to have another investor crunch the numbers and come to a similar conclusion & price target as me.

I see it's up 7% now, so maybe the brokers visiting Ipswich today have been texting buy orders in to their offices!

As you say, it does sound like they're starting to properly integrate all those separate businesses they acquired. Some of the existing practices do look surprisingly primitive, even sloppy. Hence there should be low hanging fruit in terms of improving profitability here.

All in all, the shares still look cheap to me. And I love the c.£100m freehold property assets too.

Regards, Paul.

Morning Simmo1a,

I've had a quick look. Logistics Development (LON:LDG) seems to have been an investment company, with one big holding, which is has just sold for net cash proceeds of £127m.

That compares favourably with the mkt cap of about £83m. I can't see any other liabilities on LDG's balance sheet.

I think it would now be a cash shell, with c.£127m in the bank, looking for a home. Hence if the mkt cap stays significantly below that, then it could be a bargain - but we don't know what management will do with the cash pile. If they mess it up, with a bad acquisition, then that could destroy value.

My other question is what are the tax consequences of the disposal, would any tax be payable? That's key to the valuation.

Overall though, this certainly looks an interesting special situation for further research by readers. My initial glance at it suggests there could be an opportunity here for the share price to rise closer to the cash figure. It's almost like a SPAC now, but at a discount to cash.

Thanks for flagging it.

Indie

Hi Norfolk'n'Good, re Scs (LON:SCS) trading update...

I've misplaced my Research Tree login on my phone (how??!) but from the numbers it looks like the updates that are on the Scs (LON:SCS) website dated 16/18 June. The share price had gone up sharply before then, and I bought more on the news, but it has been edging down ever since. There's no predicting anything.

Hi Indie re Scs (LON:SCS) You are right - I hadn't thought to look there, we live and learn so thank you for replying!

Wimbledonsprinter

After the close, Bidstack (LON:BIDS) has announced a £10m placing at 2p (c33% discount) - leading to a more than doubling of shares in issue, with no rights for existing private shareholders to participate. (no Primary Bid raise, no Open Offer etc).

gus 1065

Re. Bidstack (LON:BIDS), it’s ”another kick in the b***s” for the PI as Pink Floyd once nearly sang.

On the principle that even if it doesn’t repeat it at least usually rhymes, history suggests the shares will open down 30% or so tomorrow, slightly above the 2p offer price giving those not in the placing the chance to buy in the market and avoid the heavy dilution. If you still buy into the story top up as the placees sell down to their preferred holding position. If not cut your losses and sell. This seems to be the modern/cheap way of achieving an underwritten rights issue nowadays. No position.

Gus.

ridavies

Hello Jim. Re Angle (LON:AGL) comments, thank you for that. I look forward to picking them up.

Quite a busy day I guess but I was surprised that neither the chiefs nor even Mr Contrarian picked up the prelims of Finncap (LON:FCAP) this morning. I guess that the results were largely predicted, but I thought that the reduction in SP was surprising. If you can find time tomorrow, I would be grateful for a comment from the team. After all, Finncap (LON:FCAP) is often quoted for its free and prompt research on this platform. I live in hope for tomorrow. Thank you.

I was rather surprised that the prelims of Finncap (LON:FCAP) were not picked up this

6th Jul '21

Fair pushback on Headlam (LON:HEAD) but my view is revenue should at least return to 2019 levels by 2022 (esp now they confirm this is already being achieved in mid 2021)and should probably go ahead from i) more sales to big multiples and ii) taking share from smaller regional players weakened by COVID closures or impacted more than Headlam by cost/availabity squeeze.

To me this is like how DFS steadily grew mkt share and value through recessions - except without the PE induced goodwill/debt overhang.). I think the WFH thing on carpets is much slower burn than say 'office chairs'. You can make do for 12months with a dodgy carpet but eventually if you are going tospend more time at home long term , you want to do the 'office' up or at least you will wear the carpet out faster. Only if carpets go out of fashion will their absolute sales decline and to an extent they have mitigated this by diversifying (a bit) into other floor coverings

I thought the other big risk was a disruptor finding a way to go big online at scale as their systems and 'local company' approach would have made this approach possible so I was very re-assured when I saw them recognise this in the Capital Day presentation to the extent of taking it in house.

They have grown historically through loads of small, cheap acquisitions to fill in geographic gaps (until recently when they felt they had become national). With their balance sheet strength, I would not be surprised to see them now make a substantial regional acquisition to buy market share and better access adjacent markets. Domus was a mis-timed (London, big project focus) but strategically sound attempt to do this.

The efficiency gains look straightforward and credible and come from a scale based 'moat' that other direct competitors dont have, given their claim to be x6 bigger. That has got to help short term with stock availability and priority in containers.

Finally, there must be a chance that PE look to make a bid directly as per DFS although I think the moment for that has probably passed.

Net, especially with dividends resuming at a decent level this is sleep easy share for me with good upside possible over next 18-24 months.

Small Cap Value Report (Thu 1 July 2021) - RBG, HEAD, SPR, AGFX, COG, ALT, LOOK

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Paul Scott

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