Small Cap Value Report (Thu 14 April 2022) - VTU, Bank Lending, RNO, NXR, PRV, TLY, REAT

14th Apr '22 by Paul Scott

74 comments 9714 reads

Good morning, Paul & Jack here with the last SCVR for this week, then 4 days off, due to the Easter bank holidays, yippee! Today's report is now finished.

Given how awful this year has been for small caps, I think we deserve a rest from it all. That said, in my experience these horrible sell-offs pave the way for the next bull market, and we'll be wondering why we didn't buy more aggressively when shares were dirt cheap. The only bit I can't predict, is the timing.

Agenda -

Paul's section:

Vertu Motors (LON:VTU) - has acquired a key freehold for £7.1m. This demonstrates that a boom in trading has given car dealers plenty of firepower from stronger balance sheets, to make acquisitions and do other things to improve long-term shareholder value.

Peel Hotels - now a private company, but a local paper reports it is selling assets to repay all bank debt, due to bank unwillingness to renew facilities. This alarms me, and looks a warning that we need to avoid highly indebted companies in cyclical sectors, as lenders look to be perhaps going into tightening mode.

Renold (LON:RNO) - an excellent update. Shares have shot up c. 26% today, which looks fully justified.

Norcros (LON:NXR) - a positive update, ahead of expectations. There's a lot to like about this share, which is now looking cheap. Pension fund risk is greatly reduced, the only remaining worry is exposure to South Africa. Overall, this strikes me as an attractive entry price, even allowing for a possible reduction in earnings after pandemic boost recedes.

Porvair (LON:PRV) - a reassuring-sounding update, but it omits to tell us how the company is performing vs market expectations! Valuation looks toppy, unless you think it can beat forecasts.

Quickies (brief mentions with no sections below)-

Totally (LON:TLY) - a very quick mention, before I shut down for the long weekend. There's a brief trading update today, saying that based on draft numbers for FY 3/2022, it expects to " report performance ahead of FY22 consensus market expectations." . We quite like Totally, here at the SCVR. It has an interesting (albeit low margin) business model, providing outsourced health services for the NHS. Well worth a closer look for readers not familiar with the company. Management strike me as the right type of people…

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stuartb58

14th Apr '22

Porvair (LON:PRV) I have been a holder of PRV for over 15 years, attending AGMs in most years pre covid, and very pleased with returns to date. At the AGM this morning I was one of only three shareholders to attend. There is an impressive board of directors, keen to engage after the formal business was finished and whilst not giving anything away, I feel it likely that they will once more demonstrate a very solid performance. Steady if unspectacular overall revenue growth, in markets where there should be decent prospects, is bolstered by occasional bolt on acquisitions. Minimal debt (net cash last two years at least). Very modest dividend is at least better than cash on bank deposit. My sort of share!

Tortoise investor

FYI Finncap have just published an updated broker note on Renold (LON:RNO) . They increase EPS by for FY22 just gone by 13.8% to 3.7p. At 26p this trades at 7x for the now last financial year.

At this stage they say management have not guided further increases for FY23 but the broker notes the company is on the look out for acquisitions. (I hold).

https://www.finncap.com/resear...

Barry5

I used to do a lecture to our audit students about double entry bookkeeping, which was invented by Luca Pacioli in 1494. As Paul will know, it is very very easy once you get it and you get that Eureka moment feeling when, somehow, everything balances! (God knows how!) Can't imagine what it was like with only single entry records!

But, of course, we all know that the easiest way to differentiate between debits and credits is that debits are the ones nearest the window.

Have a great Easter Break Paul, Jack and everyone on here.

BnB

Smithson Investment Trust (LON:SSON) It holds some quality overseas companies which I don't have the time to research in detail

I really like the guiding principles of the investment strategy but I have to say I'm surprised at the underperformance of some of the main holdings. Sabre's troubles are easily explained but did they really have to emulate the Fundsmith holding in Amadeus? Simcorp and Temenos are legacy banking tech nowadays and that Fevertree holding was just too pricey at initiation. The same can be said for IPG Photonics and Verisign no matter their great operating numbers. And then there's the operational problems at Ambu.

On the other hand there are some good companies (and gains) in there. I like (and hold) Ansys, Cognex and Addtech. And if the problems at those I mentioned above clear up, I guess good gains are in prospect.

turbo

Talking of lack of liquidity, I am looking at Amedeo Air Four Plus (LON:AA4), a specialist fund engaged in acquiring, leasing and then selling aircraft to obtain income returns and a capital return for its shareholders. Looking back over trading volume, it seems that liquidity can be an issue.

Amedeo Air Four Plus (LON:AA4) Stock Rank has doubled over the past 4 months, Chart signal suggest possible breakout over the long term to around 42-44p. Stocko classifies this company in a ‘Turnaround.’

Any thoughts/warnings from Stocko community would be appreciated. I have taken an initial position....

55555

Thanks Paul.S for your response, which was reassuring. Most of my other stocks are in 'okay' shares but I've a few nightmares that surely can't go too much lower, like G4M and BooHoo.

Paul Scott

Hi Deegee Eff,

Thanks for your comment. I've not heard of Asset Match before, so am having a look at its website now.

A few years ago, my friend & renowned investor David Stredder of Mello fame, was keen on Peel Hotels shares, when it was a listed company, so he booked it for a Mello conference (the Peterborough branch). I stayed there, and found the hotel quirky and pleasant enough, slightly under-invested. It struck me that these old historic buildings are fiendishly expensive to alter, and improve, which put me off the shares a bit, which I think tended to change hands for below book value.

We've got some posts in our archive here from me & Graham Neary, about Peel Hotels. I'm a bit bored now, so might read them to refresh my memory, with no particular aim in mind. As an aside, I'm stuck indoors in Valletta, Malta, in an Airbnb studio apartment, because it's cloudy & windy outside, and the same temperature as Bou'mth right now (15oC), so I've cracked open a bottle of cava, to celebrate getting out a decent SCVR, and to reduce the amount of things I have to carry in my rucksack tomorrow, as I relocate to Gozo.

I'm thinking of buying a holiday home in Gozo, to function as a refuge for distressed small caps investors. Gozo has about 21 cathedrals on it, despite being only 10 miles long. Apparently each village gets "cathedral envy", if any nearby (which they all are) village builds a cathedral, and then spends up to 100 years planning and building an even bigger cathedral. One even has a dome that's bigger than St Pauls in London, apparently.

I didn't realise it was Easter this weekend, when I booked my Malta/Gozo trip, so am tremendously excited about all the religious festivities that I'm about to witness! ;-)

Maybe a staycation at a branch of Peel Hotels was an alternative I should have taken more seriously?

Best wishes, Paul.

davidjhill

I don't know the company but I do have experience with another aircraft lessor in Avation (LON:AVAP)

They still only trade at 0.5* TNAV whereas historically these companies trade around 1.1 to 1.2* book.

What I would say is to look out for a few risk items. Bear in mind that Avation (LON:AVAP) avoided many of these but still found themselves in a mauling when covid hit so it's an arena you need to be careful in. Not in any particular order.......

Credit risk : airlines can go bust (see Virgin Australia as an example) and the lessor then needs to get its aircraft back, do a full overhaul and re-market. Takes time and is not always easy.
Interest Rate risk : lessors generally fund the aircraft with debt and then lease at around 12%. Are borrowing costs fixed for the duration of the loan and do lease terms match it. If not then you have rates risk, which being on the rise could become a problem
Aircraft type : a number of lessors have got into trouble buying the wrong type of aircraft they then struggle to lease. It's not uncommon.
Leverage - TNAV can get wiped out quickly if the LTV is too high. Example - You have a £1bn portfolio of planes with £800m of debt and a TNAV of £200m. 2nd hand plane values fall just 5% and TNAV is hit 25%. If 2nd hand values fell 20% TNAV becomes Zero.
Concentration risk : Too many planes with a single lessee could magnify credit risk implications
Plane purchase - getting the option to buy planes from the very few plane manufacturers in the world is not easy. Even less so to get ones that will lease easily. If they don't have this capability then how will they get the planes to grow? If the plan is to buy 2nd hand planes and re-market then you have pricing risk and fleet age risk. Given the times the aviation carriers want the most efficient planes - that is unlikely to include older planes.

JohnEustace

Re £AA4 I took a quick look a couple of weeks ago and was put off by their A380 concentration. That's not an aircraft that many want to operate, hence no longer being in production. Passengers like me love them, airlines not so much. And I'm not sure on the risk with Thai Air - again a superficial view based on a five minutes online look so happy to be corrected .

The Company currently has a Portfolio of six A380, two B777-300ER and four A350-900 aircraft, all on long-term leases to either Emirates or Thai.

From listening to Avation (LON:AVAP) presentations it's the resale value at the end of the lease that produces most of the profit. Lease to the airline for 10 years from new, cover the aircraft cost, then the residual value is the lessor's.

At least with Avation they have aircraft that are easy to find alternative customers for.

Re: Amedeo Air Four Plus (LON:AA4) - thanks for your excellent bullet point list. Looking at your post, I am reminded that I read somewhere that one shouldn't invest in areas that one knows little about.

Re: Amedeo Air Four Plus (LON:AA4) - Interesting to read your comment. Perhaps there is enough of a timescale before the end-of-life of the aircraft for the airline industry to pick up and cause a spike in demand

mojomogoz

Yup. Without significantly more information the React (LON:REAT) raise is quite unpalatable. If you were on the inside you might have more comfort/belief from mgt...but the no clear deal nature of raise leaves an approx 3 week window of uncertainty that could be challenging...

...plus a trading update is due too so given its not come before the very large raise it seems probable that its a little meh rather than wow.

Going to be an uncomfortable few weeks for holders until clarity comes

Wimbledonsprinter

I have been thinking about buying G4M for a while as it seems a quality company. But I have decided to hold off (despite the tempting price) because of

(1) the explanation that the main reason for the recent poor sales in Europe is due to Brexit (lack of supply centres in the EU) is a bit unconvincing. I would suspect that if this were true, then they should be seeing offsetting gains on the UK sales as Thomas and others should be having similar problems supplying the UK. Maybe they are but then I would expect UK sales to be even stronger.

(2). The December sale by Andrew Wass was quite significant .

I don't see any trading update schedule announced but in 2021, the FY trading update came out on 22 April - so after that if things look like they are stabilising, perhaps I (and others) will have the confidence to buy.

Agreed. With React (LON:REAT) I'm amazed how badly advised they seem to be, by Singers. A nano cap like this is all about getting PIs excited. So what possessed mgt & advisers, to alienate their entire PI shareholder base by doubling the share count, through a 33% discount for Instis & mates of the broker?

Looks like a rubbish business, with over-priced shares, and a management in a rush to build something from acquisitions, for their own glory possibly?

Some people rate the management here. I don't. Selling PIs down the river with this deal, shows they don't give a monkey's about PIs.

Over-priced trash, is how I would describe this share. And the management (arguably, some might say).

RutlandRam

Thats got to be a joke about Bradford ?
Having lived in the wharf valley for many a year it must stand the chance of being elected the most appalling metropolitan district in the uk.
A magnificent 18th/19th century city architecture has been laid to waste over the last century.
Going out at nightime it is a “no go” area

Good luck with surviving pootling about there Deegee Eff !

You have clearly been nowhere near the place

eighthwonder

I’m not sure how this management can present to smaller investors on Mello and other private investor forums then complete dilute them. Bad judgment and all credibility gone. #reat ed by getting out!! All the best to them

Gostevie

15th Apr '22

Thanks! That is very helpful.

I have such fond memories of that Mello event in Peterborough. Was it 2014? I too stayed at the Peel Hotel. My room was a bit draughty but as a hotel it certainly had character. I gave it a good review on a website and got a lovely reply from the manager. I would certainly stay there again if I was ever back in that part of the world.

gmtrader

I like Totally (LON:TLY) as well. Canaccord raised their target price last month from 60p - 70p.
VOX did an interview back in December with CEO Wendy Lawrence which is worth watching.
Plenty of cash and no need to do any raise.
Profit making with good margins, averaging 17-18%.
Beating forecasts and likely to continue to grow.
Dividend paying.
Chart wise it looks like it will continue to rise now though there is a possibility it could go sideways for a short while and you may manage to buy around 37/38p level. If it does indeed go sideways for a bit then a nice cup and handle pattern will have formed which would suggest the next rise to low 50’s.

TheArb

16th Apr '22

David, I think there's a bit more to it than that. Markets rarely give the benefit of the doubt with surprises, certainly in the short term, that's something I learnt long ago in this kind of situation. Secondly we have the cloud over S4 Capital at the moment with their delayed prelims, remember WPP had to restate numbers after Sorrell left; as soon as I saw that AWE news I thought about the violent market reaction in S4 . Lastly FT Alphaville did a piece last September which resulted in AWE dropping 50% in one day, they never recovered. 20% down last Thursday looks about right to me, stocks on high valuations will make large % moves easily, nothing to do with liquidity or price discovery. It might be a magnificent buying opportunity or it might be a great time to get out. We don't know, the auditors might. Someone in the industry might be able to comment more generally on audit delays re Covid - you might find some background info on relevant forums. What I would say is an awful lot of companies HAVEN'T delayed figures.

Small Cap Value Report (Thu 14 April 2022) - VTU, bank lending, RNO, NXR, PRV, TLY, REAT

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Paul Scott

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