Small Cap Value Report (Thu 12 Jan 2023) - MEX, BWNG, PMP, TRST, HFD, XAR, ASC, GYM, XPP, MCL, DIS, VINO

12th Jan '23 by Paul Scott

68 comments 10481 reads

Good morning from Paul & Graham!

Today's report is now finished.

Very very busy for news today, so we're doing lots of smaller sections again, to cover as much ground as possible. Please feel free to add your own comments too, especially if you spot something good that we haven't noticed, explaining why it's good.

Explanatory notes -

A quick reminder that we don’t recommend any stocks. We aim to review trading updates & results of the day and offer our opinions on them as possible candidates for further research if they interest you. Our opinions will sometimes turn out to be right, and sometimes wrong, because it's anybody's guess what direction market sentiment will take & nobody can predict the future with certainty. We are analysing the company fundamentals, not trying to predict market sentiment.

We stick to companies that have issued news on the day, with market caps up to about £700m. We avoid the smallest, and most speculative companies, and also avoid a few specialist sectors (e.g. natural resources, pharma/biotech).

A key assumption is that readers DYOR (do your own research), and make your own investment decisions. Reader comments are welcomed - please be civil, rational, and include the company name/ticker, otherwise people won't necessarily know what company you are referring to.

Agenda

An absolute avalanche of news today - here's our initial agenda, we'll try to work through as much of this list as we can. Also we'll pick up on the big % movers at about 9am, and prioritise accordingly.

Here's the final list, showing what we did & didn't manage to cover. I think we caught all the main stories today (in terms of price moves) -

Paul's Section:

Tortilla Mexican Grill (LON:MEX) - 101p - mkt cap £39m

Trading update on Mon 9 Jan said FY 12/2022 performance in line with market expectations (footnote: £58.4m revenues, adj EBITDA £4.0m). H1 was £2.5m adj EBITDA, so H2 must be lower at £1.5m. Decent growth from site roll-out, and acquisition of Chilango. Impressive LFL revenue performance at +16.4% vs 2019 - it needs to be at this sort of level to absorb all the extra costs. Although note it was +19% in H1. Says it can self-fund further new sites, and good deals available. Confident in…

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davidjhill

12th Jan '23

thanks portugall - hadn't seen the Michael Taylor piece. on Avation (LON:AVAP) in Nov.

It definitely had a bit of a false dawn in Nov/Dec as they had some delays to finalising the sale of a couple of aircraft from the old Virgin Australia administration and that seemed to lead to a lot of twitchy sales which never helps in a poor market.

As I understand it no further delays were expected though and the company has plenty of liquidity anyway so I'm not really sure why the angst at that time. As you say could have been more related to a technical resistance point. Volume wasn't particularly high.

They have some of the best aircraft to lease though - highly fuel efficient, so as long as there is decent demand for air travel then given the relative low supply of new aircraft second hand asset values should hold up well and increase from here post pandemic. Certainly we've seen that already starting to occur.

Rule of thumb in aircraft leasing used to be around 1.1* NAV as a share price or slightly higher for a takeout of a company with good assets. That would stick them at something over 300p but whether we revert to the historic mean remains to be seen I guess.

The fact that they survived the pandemic, are profitable and have retained most of their asset value from 3 years ago pre pandemic does suggest that there is decent resilience in the business model over black swan type events. Investor confidence returning is something else of course.

abtan

Avation (LON:AVAP)

Hi David

I must admit to not fully understanding the story here.

As far as I can make out:

Annualised revenue looks like it will be = c$104m
Admin costs = c ($12.6m) pa
Interest payments currently = ($47m) pa
Average Annual Capital Repayments = ($165m) pa*

Add those up and it comes to a very large negative number.
What am I missing?

(*the capital repayment figure is an average over the lifetime of the 2 different forms of debt currently being used by the company and based on the last published maturity dates, which are between 2023 and 2031.)

---

I can see that the latest value of planes on the balance sheet is c$813m.
Net debt was $793m.
= c.$20m net asset position

The current market cap is $90m.

I'm not sure that I can see the value that others can see, so any insight would be much appreciated.

Cheers

Tangible Assets $1.22bn

Liabilities $990m

= $230m of tangible assets approximately

As at 30th June Company stated the below. nb: NAV doesn't include any goodwill. (basically Planes, Cash and receivables minus debt and maintenance reserves & def tax)

Calculated at $1.22 / £ so same exchange rate. After write down of 2nd hand plane values coming our of pandemic though I believe 2nd hand values have also now risen so I expect an uplift.

Net asset value per share increased 63% to GBP2.6

Note also that the business model has basically almost no interest rate risk. They fix interest rate and tie the lease duration to the plane finance such that once the lease finishes the plane is basically theirs and then they sell or re-lease. (thats not completely true any more as they did issue a bond but remains predominantly the case)

Key risk as they found during the pandemic is credit risk of airlines and 2nd hand asset values. Generally there are less planes made globally on an annual basis than demand so 2nd hand values hold up well and often increase as planes have a long lifespan if well maintained. Clearly that hypothesis was tested during the pandemic when there was no flying and airlines were going bust.

yiannos1

You are missing the elephant in the room on Aviation plc.

Thanks

Db47

thanks Paul for your great analysis on GYM (LON:GYM) (I hold) all seems very reasonable other then 'Gym memberships are of course one of the easiest things for consumers to cut in a cost-of-living crisis' which I'd disagree with, I think gym membership (especially with the young and retired) is quite sticky and offers great time to expense value, granted the user could join a cheaper gym (or workout at home, run in the park etc.) but this may benefit GYM as they're at or near the budget end.

also, and I hope you don't mind me saying, I was quite surprised you sold out of Saga (LON:SAGA) (I hold) as you always seemed quite optimistic on their long term potential.

finally, I caught quite an interesting little segment on the local news this morning, there was a shopkeeper (I didn't catch which town she was in but it will be South West) and she was enthused about her business and footfall in the area - she put it down to more people working from home and saving money on the commute and other associated costs. I prefer to go in to work but I'm definitely in the minority, there must be a lot of people saving money this way to offset the current cost of living headwinds... just thought the shopkeepers theory was quite an interesting positive if it were to be true.

tic_tac_toe

It is worth asking what Investegate does (or how it does it) that Stocko doesn't.. I mean, we should be able to get the news we need, as we need it from Stocko right, but I too find myself always opting for Investegate in the mornings. Neither sharpad or stocko have a contender in news feed yet..?

Tommy H

Hi Planetx

I know we had a discussion off the back of the first fall, as this triggered my "10% off peak" sell rule and I personally was not sure as it was such a low volume, and with everything else I was in the quandary about sell and buy back cheaper. Double up, or just sit tight.

We all have our holdings which are core to our beliefs, that do not let us corner you in a coffee shop or bar as we will bore the item of clothing off you going on at length about it.

I have chosen to increase my stake, not at the lowest low, but taking from a 1% to 2% holding, and that is just me being honest, having looked through last night I still feel the fundamentals are there, I should talk to some of the farmers in the school playground as 25 years since my folks sold up and divorced, but is my blood.

I am also very honest and say yes I am nervous, but that is a lot of things, like a 3rd redundancy in 7 years last September, loss of both the in-laws in Covid who were younger than my 3 olds, and various other stuff in life, and I can afford to be cash for a year or two...

Anyway, this is not rampy, ok there is not a detail analysis within this, it has had a drop without any real reason coming to light, so would not appear inside sellers ahead of a profit warning, well I hope not.

Keep talking.

Tommy!

ps. I hold Wynnstay (LON:WYN)

Westway001

Stocko’s news feed does not generally seem available before at least 7.10, so if your window is between 7 and 7.10 Investegate is the alternative. I do find the latter a bit clunky (and slow to load), however.

Assume you mean Avation.
Will you tell us what you are referring to rather than just drop a meaningless comment?

I would concur that agriculture is going to be very hard, this is a farmer rather than an agribusiness perspective.

That is a personal view coming from a small farm upbringing, a tenant farmer heritage.

We are addicted as a population to low prices, why pay someone local a good price where you can see them looking after crops or animals well, you can ask what they put on them, feed them, see how they treat them. We take our daughters to see the local organic dairy where we buy our milk from each year! When you can get them from Brazil, or whoever for a 1/10th of the price, including Tesco (LON:TSCO) mark up.

Rant over

Tommy

OsullivanB

I just want to offer admiration and thanks for this heroic shift.

Hi Westway001

Avation that’s the one ( sorry it’s a bit late now! ).

I was referring to the small issue of the bond holders that they actually own this company. If anyone can tell us how all these millions can be repaid without diluting existing shareholders it will be helpful and much appreciated. We are talking here about yearly interest payments that are not far from its market cap and half of their revenues.

Have a good evening.

clearly you know very little about the business then alas and didn't bother to read about it before posting!!!

Thanks for the response David.

Yes, I can see their stated £2.68 net assets per share, but as far as I can tell this doesn't include the sizeable interest payments that are coming over the next 8 years ($243m by my calculations.)

That wipes out quite a lot of the $230m tangible asset you mentioned in your previous post.
Incidentally this value looks like it includes $100m of aircraft held for sale, which surely means even less revenue in the future if any of these are currently leased out.

I have no problems with the aircraft valuations on the balance sheet - I'm sure the company know more about this than me.

Returning to my earlier post on annual cashflows, I still don't really understand how they're going to afford paying loan capital ($165m pa) and loan interest ($47m pa) and admin costs ($13m pa) until 2026 given their expected annual revenues of c$104m.

Surely refinancing on aged aircraft in a few years won't be easy either?

Cheshire Cat

There should be an investigation into the conduct of Paul Smith, the former CEO of Morses Club (LON:MCL), who somehow managed to dump £200,000 worth of shares prior to it being public knowledge that there was a huge spike in claims from Claim Management Companies. This is an open goal for the FCA - will they pull their finger out? Probably not, if history is a guide.

There is a need for short term lending providers but given the tribulations that Wonga, Morses Club (LON:MCL) and Amigo Holdings (LON:AMGO) have had / are having, it seems wise to avoid investing in that industry for now.

I am surprised that this saga has happened with Morses Club (LON:MCL) because I presumed there would be a greater need for short term lending providers given the devastating impact of lockdowns on lower income families. It seems that any momentum that they did have has been eaten up by CMCs.

I also found the comment about Halford's struggling to recruit mechanics interesting. In my very limited experience, it seems that auto mechanics are grossly under-paid relative to the costs of their tools, the technical and physical challenges involved and the increasing difficulty due to the ever changing technology in cars. I hope that the trade gets a bit of a makeover and is seen as more respectable and lucrative. If the salaries and earning potential was higher and not dampened by the 'fix price per hour' model, then presumably their would be more interest in the trade.

13th Jan '23

That’s a great response David , answering my concerns.

Morning abtan ,

They will clearly have to dilute the existing shareholders or go bust. This company offers no investment case scenario ( at least for me ) as it is too risky with a debt that is tremendously too high in relation to its revenues and market cap.

Graham Neary

You're welcome TFI but it's your own decision to invest or not so well done yourself! G

Harry Hindsight

14th Jan '23

Morses Club (LON:MCL)

Needs 75% shareholders approval / shares remain trading prior to cancellation due close 12 Feb / assetmatch.com to facilitate an electronic off-market dealing facility for the Ordinary Shares.

Presume they are mopping up any shares on sale (recent spike) so the free float has gone and only die hards left.

What happens if they don't get 75% - clearly fold the company but presume there is some disadvantage in doing that - maybe directors on the hook with the FCA or suchlike, so taking it out of public eye.

So maybe the auction would give a good deal to mop up the diehards?

Don't understand how have shares in a private company - would that not be good?

Complete newby on this so more a learning exercise. Investment reduced long ago, just a small holding to keep watch. Not sure why I got suckered in, probably the SR99 back in 2021.

Small Cap Value Report (Thu 12 Jan 2023) - MEX, BWNG, PMP, TRST, HFD, XAR, ASC, GYM, XPP, MCL, DIS, VINO

Agenda

Paul's Section:

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