Small Cap Value Report (Thu 13 April 2023) - TET, INCE, WJG, SIS, PZC, LINV, MRK

13th Apr '23 by Paul Scott

62 comments 7473 reads

Good morning from Paul & Graham!

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.

This is what we're going to attempt to cover today - making good progress at 09:00, so time for a tea break before tackling some more on the list. I'll also check the top % movers table, to see if there's anything interesting going on that is not on ze list -

Summaries of main sections

(more detail below)

Treatt (LON:TET) - H1 TU - up 6% to 622p y’day (£375m) - Paul - AMBER

H1 trading is strong, in line with expectations. Outlook section hints at possible upgrades later this year. I like the company, but my main concern remains the lofty valuation, discussed in more detail below.

Watkin Jones (LON:WJG) - H1 TU - down 3% to 93p (£239m) - Paul (I hold) - GREEN

Seems reassuring about H1 and the outlook. Although a project in Exeter has been hit by unexpected costs, due to a contractor going bust - it would have been helpful to give some idea of the size of this impact, which is missing. Heavy H2 weighting, as previously indicated. It's good value, I think, with a nice lower risk business model (forward selling developments before construction starts).

Science in Sport (LON:SIS) - Strategic review concludes / TU - up 6% to…

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davidjhill

13th Apr '23

Is that because (drumroll please......) you were worth it......... :)

timarr

RE: John Lee

His record speaks for itself and I think his strategy is a good one.

Interestingly he has Aviva (LON:AV.), Phoenix group (LON:PHNX) .Legal & General (LON:LGEN) and M&G (LON:MNG) in his ISA now, none of them small cap. As he notes the inversion of small and large caps in terms of yield is quite striking.

BnB

Well at my age, I could probably make better use of the product than the money :-)

JCPr

Probably better if Begbies Traynor (LON:BEG) don't touch Ince (LON:INCE) . There's all sort of issues in the background. I believe a lot of the key staff from Arden left after the takeover, and the rump was sold off a few weeks ago. The original Ince went bankrupt before the reverse takeover. There's been problems with the relationship with the partners and they seem to have difficulty collecting receivables in the Far East. Not to mention there's still an onerous lease on unused office space in Aldgate. Better for Begbies to continue acquiring good businesses that they can easily integrate.

Graham Neary

I missed that RNS, thanks for the info Wolfy! Very interesting. Fingers crossed that their new facility leads to success for SIS. G

bohenie

Cos they are clever - sold at the right time - 450 against todays much increased price of 414.

Mooted offer for Network International Holdings (LON:NETW) from a consortium led by CVC capital partners. Looks a well timed bid to me as the takeout price would be 50% higher in a better market. Nevertheless my rule is sell on the bounce - based on the theory that the (usually) 10% you miss out on is nothing next to the drop if talks fail to reach agreement (see GB (LON:GBG) Darktrace (LON:DARK) etc).

Plenty of depressed prices into which to re-purpose the proceeds - today and likely for some time.

sharw

DarwenLad - re deleting posts

They are not quite the same - the last 4 words only appear in the second.

Two ways to try to delete - report yourself using the flag (bottom R on the one you want to delete but there is not a suitable category) or (probably better) use the green button (bottom R of whole page).

DarwenLad

Many thanks

Lord Gnome

Lord Lee has obviously been taking a sneaky peek at my ISA holdings.

raggedtp

Congratulations!

Equity Development

VP (LON:VP.) On track to again grow profitably in FY'24 *** Today’s “in line” FY23 trading update from Vp reiterates that it had made “good progress within its core markets” since the interims in Nov’22. It has benefitted from strength in civil engineering (eg highways) and infrastructure (eg water, rail & energy), alongside successfully lifting prices to cover input inflation as well as rightsizing some parts of the group to further reduce costs.

Elsewhere, the international energy & testing divisions also performed well, while residential housing has stabilised at lower levels - partly supported by robust RMI activity where millions of properties need modernisation.

As such, we retain our projections and £11.30/share valuation. Based on forecasted FY’23 revenues, adjusted PBTA and EPS of £365.5m, £40.2m & 75.9p (+6.5% YoY) respectively - climbing to £376.5m, £43.3m and 81.3p (7.2%) in FY’24. This in turn puts the stock (at 670p) on attractive FY’24 EV/EBITDA, EV/EBIT & PE multiples of 4.2x, 8.2x and 8.2x – whilst paying a 6.0% dividend yield. We believe this is simply far too cheap for a best-in-class, economically resilient business with a proven track record through thick & thin.

gmtrader

Marks Electrical (LON:MRK) does have a hi PE value as it is a growing company. It has proven it has a good business model compared to AO and Currys. The question would be can they continue to grow? Imo, yes, because as they are mainly an online competitor, they are largely unknown still by the public. From previous surveys I think only 6% of the public had heard about them. So this gives them the opportunity to increase yoy as more of the public become aware of them.
Because of the way their business model works it is very hard for their competition to under cut them without hurting themselves. They have the capacity to keep growing from their current warehouse and are looking to expand their warehouse to accommodate future growth.
Imo, what Paul said about buying any dips is the way to go.

Lucky dip

Even lord lee has had better luck with large caps than the smaller ones.

Legal and General, Aviva and MNG have proved great investments with dividends and capital appreciation.

Anpario has been a disaster for anyone invested followed by Treatt and PZC.

Anpario has been a disaster for anyone invested followed by Treatt and PZC

Depends on your timescale. John Lee invested in Treatt (LON:TET) at under a £1 as I recall. But that was 20 years ago.

Dechra Pharmaceuticals (LON:DPH)

Blimey. You wait months for an offer and then two come along at once - see Network International Holdings (LON:NETW) earlier today. Looks an attractive bid at nearly 50% premium to the undisturbed closing price.

Harry Hindsight

YouGov (LON:YOU) - a FANG delves into the SCVR land. Mr Shakespeare has transferred his holdings to Mrs S and to become a NED. Meta Platforms (NSQ:META) exec Mr Hatch to become CEO. Somebody from Deliveroo also in the mix.

I wish the SVCR would focus on some real stuff rather than Science in Sport (LON:SIS) - really just a scroll on the mouse. A £14m MC SR 24 (generous) micro value trap. Yes I will DYOR - not.

Just took example at random - when gold is exploding why do I want to hold whatever they do. LOL.

Paul Scott

14th Apr '23

Not this again! We've discussed this topic to death in the past. We cover over 500 companies here, a large chunk of the UK market, much of which is not covered elsewhere. The idea is to build up an archive, where people can quickly check to see if any company looks interesting (from a value/GARP investing perspective) or not (steering people away from risky stuff is just as important as flagging the good things).

So whilst you may not be interested in SIS, there might be other people who read a positive article about it somewhere else online, and then want to check what Graham/Paul/Roland think about it. So they can look up our view here, and see within 1-2 minutes if it floats their boat, with us covering the main points, good and bad, that are often not covered properly elsewhere.

Turning to YouGov (LON:YOU) thank you for flagging the change of CEO, looks quite interesting. That in itself wouldn't trigger us writing about it here, as we focus on results & trading updates, and takeovers. But it's always useful when readers post comments flagging up this kind of development which might be significant.

We covered YOU for years, always concerned about its accounting policies of capitalising far too much in internal costs. I'll check it out & do a review here next time it reports some numbers.

Paul.

Ridley1966

Treatt- Last year Tea & FX were largely responsible for SP weakness. There is a huge opportunity in cold brew coffee. Difficult to produce authentic taste due to instability of coffee oxidisation although looks like Treatt have very interesting proven solution. Most of Treatt ingredients are 0.2% of finished product but coffee 25%. beverages are recession resilient- affordable impulse purchases. Mega trends, natural products, sugar reduction, provenance, RTD cocktails & seltzers, China( 6% sales & recent new order) & cold brew coffee( tea & coffee 10% sales). New UK facility has 2-3x capacity & there are joint development projects.

WDWombat

He still writes intermittently in the FT weekend which I buy (the print copy) but I cannot really access the archive. His latest was March 7th. He is still quite frank, including about his failures (don't we all have small cap failures in the past year? I certainly do) prefers companies with family management and investment. If you have a friend who gets the online edition he should be able to dig it up for you. I think if you register you can get one article a month yourself.

Small Cap Value Report (Thu 13 April 2023) - TET, INCE, WJG, SIS, PZC, LINV, MRK

Summaries of main sections

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Paul Scott

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