Small Cap Value Report (Thu 14 Oct 2021) - MMH, XPS, NXR, BMS

14th Oct '21 by Paul Scott

73 comments 8257 reads

Good morning! It's Paul & Jack here with the SCVR.

Mello Results Show - is this afternoon, starting at 1pm. More details here. Interesting sessions lined up. Some people say, oh the shows are too long, but I tend to have webinars playing in the background, and zone in & out, depending on what interests me. The presentation from Onthemarket (LON:OTMP) (I hold) should be interesting - we had a good debate about OTMP in a recent SCVR, with bulls and bears offering their opinions, we very much like 2-way debate here at the SCVR.

A suggestion to presenters - keep mentioning the company name. Often people say, "they", or "this company", etc, and I have no idea what company they're talking about!! Or the name is said quickly & indistinctly, and I don't catch it. Names need to be said clearly, and give the ticker too. Maybe I'm starting to go a bit deaf, as everyone seems to be mumbling these days?! Schools should start doing elocution lessons again. How is it that they can have kids in for 10+ years full time, and yet many of them leave seemingly incapable of speaking or writing clearly? Then people wonder why they're not attractive to employers.

Agenda - to follow

Paul's section:

Marshall Motor Holdings (LON:MMH) - material acquisition (c1/3 of market cap) for this car dealer. It's a hot sector right now with surging profits, so we might see more consolidation going forwards.

Norcros (LON:NXR) - a positive trading update for H1 is out today. It's a bit vague on supply chain issues/inflation, but does say it's confident to raise full year guidance (not stating by how much though). I have a stab at valuation, as no broker notes are available. Still looks reasonable value, but remember the giant pension scheme & S.Africa risk are a big headwind for valuation of this share.

Braemar Shipping Services (LON:BMS) - this shipping broker (hot sector) upgrades its full year FY 02/2022 profit guidance by 15%. Seems modestly valued on a forward PER of 9.7, before today's upgrade. Might be worth a closer look for value investors.

Jack's section:

Xps Pensions (LON:XPS) - pension scheme administrator and consultant. Recurring revenues, recovering conditions, a good dividend, and potentially attractive long term organic growth profile.…

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KEBUTLER

14th Oct '21

To try and answer to your questions regarding the downsides of the dealership sector:

1) I'm not (and really never have been) close enough to supply chains to know if new vehicle supply will be back to normal next year, but what we do know is that the parc of used cars will not have grown dramatically last year or this year, so prices will remain high. The problem is that this is now generally known so used margins could come under pressure. Given that it's normally owners of newer vehicles who have their cars serviced at franchised dealers as opposed to independents, and that there have been fewer cars sold in the last two years I think service visits could also come under pressure. I therefore see profits as levelling off next year and not continuing to increase.

2) As regards powertrains I agree but there are increasing numbers of other things in cars which could malfunction.

3) I think that, for new vehicles, dealers will become more of a handover/collection point as customers buy online from the manufacturers, but not for a while yet - most manufacturers have other problems. Used sales and aftersales will, though, remain to keep efficient dealers profitable.

Of the six quoted dealer groups Caffyns (LON:CFYN) is almost family controlled with a small free float, Cambria Automobiles (LON:CAMB) is about to be taken private and so this leaves Lookers (LON:LOOK) Marshall Motor Holdings (LON:MMH) Pendragon (LON:PDG) and Vertu Motors (LON:VTU)

I held all four up to yesterday and sold Mitsubishi Motor Q Ord (LON:MMR) (grrrr)!

I see all four as staying within a limited SP range and there's very little to choose between them, but this morning's news could give Mitsubishi Motor Q Ord (LON:MMR) the potential to remain at a higher level.

Sorry - I meant Marshall Motor Holdings (LON:MMH)

rmillaree

peterg

"But overall, if wages increase then unless businesses are willing to forgo profits, not something that is generally the case, then prices must also rise. Leading to inflation and no benefits in terms of real wages."

Completely disagree if labour costs make up 20% of the final price of good or services bought - a payrise flows down very nicely to the bottom line even if all labour cost increases are passed on as most of the costs are not labour and should not rise by as much!!!

Note i am not an economist so i could be wrong in my simplistic thinking here - am i missing something - if i am please let me know?

Rambo

I am inclinded to agree with you on this rmilaree, however having worked in manufacturing all my years I have learnt that when prices go up it generally takes a long time for them to come down and they usually never return to their previous levels. I would say that supply and demand will find its equilibrium in the medium term and inflation will stabilize but as you say there is "choppy waters" ahead which I am sure will create opportunities.

JohnEustace

Thanks KE, very helpful.

FREng

... though if the other costs also contain 20% labour costs ...

I for one am over the moon happy that at present workers have a bit of pricing power in the overall picture in the economy - to me its the ultimate goldilocks situation if your average workers pay is increasing in real terms and the economy is managing to cope with that - that seems perfect planning rather than ineptness - if we can manage that. Its been heartbreaking to watch over the last 20 years as skilled tradespeople/workers have had their earnings power destroyed by the quick fix that was "import a worker from Poland on the minum wage and pay em tax credits on top for their kids that they left back home".

@rmillaree:

I agree with your sentiments. The distribution of wealth and opportunities in the UK has become obscenely unfair but that has many causes, most of them to do with the imbalance of power between workers and employers, the erosion of the welfare state safety net, with the vilification of those who need help as "scroungers" and "idle", the racism and xenophobia exemplified by the "hostile attitude" of the Home Office and the prohibition of asylum seekers from working while their applications are heard ...

Just closing the borders and shouting at business to put up wages isn't a sensible strategy to "level up". It's extreme hypocrisy when the NHS is so short of staff yet the Government thinks that a 1% pay rise is "all the country can afford".

This may all seem off topic for SCVR but it isn't. Small cap companies are mostly UK and rely on the UK economy. They need far more joined-up, strategic planning and action by the Government.

andrewdb

Read an interesting article - american west coast - on the issues in the port of LA

https://www.theatlantic.com/ideas/archive/2021/10/america-is-choking-under-an-everything-shortage/620322/

dcon85

Another way to pay higher wages without forgoing profits and raising prices is to strip out layers of management, middle-men, agencies, project managers etc. Although you'll probably need a consultant to tell you this, a project manager to oversee it, and they'll need a team of people who will also require management.

Wilbraham

Those interested in Braemar Shipping Services (LON:BMS) might like to take a look at Taylor Maritime Investments (LON:TMIP) which is a pure-play asset owner in the shipping space. Essentially they hoover up 'Handysize' bulk carriers at a good discount on the second hand market in the 30,000 ton range and lease them on contracts of up to 2 years duration. Their cargo is typically essential grain and foodstuffs, not Chinese tat, vehicles, metals, coal etc.

There's next to no info on Stocko, despite it being almost 5 months since listing (not even a market cap!) but recent RNSs have been positive, notably the 5 July trading update - see https://www.investegate.co.uk/... They expect to have 32 ships in service by Jan 2022 and claim to achieve gross yields of 20% on recent charters. My take is that their leasing revenue shouldn't be a victim to the temporary port closures but I accept I have no knowledge of the field, eg I don't know if there's often a void between contract renewals. Management team sounded experienced when I read the prospectus some months ago, if a tad incestuous, and there was a hint of a conflict of interest.

Westway001

Hope the AGA isn’t gas, oil, electricity or coal fired!

Lighty

“Contrary to the irresponsible news reports on. BBC Radio 4 this morning and elsewhere - the true situation in UK ports...

Statement on port congestion issues

Most UK ports are busy but operating normally

Responding to the recent attention on container port issues the British Ports Association, the national body for ports, harbours and marine terminals, which represents gateways that facilitate 86% of our maritime trade, issued the following statement:

Whilst some are extremely busy, the overwhelming majority of UK ports are currently operating normally. We have a variety of port gateways around the UK and they are continuing to keep the country supplied.

Container ports around the world are dealing with backlogs in containers, originally stemming from the post COVID-19 lockdowns when we saw surges in activities and pressures on cargo storage. Getting empty containers back to Asia and other locations has been challenging but the shipping industry is doing its best to meet global demands. This has been a real issue in North America and continental Europe.

A particular issue UK ports are also experiencing surrounds the much publicised lack of haulage. This has meant that some freight is not being collected as rapidly as it would normally. The situation is impacting all types of ports, not just container terminals. It has resulted in some further delays for a range of ports and terminal operations are working with their customers to get these goods out of their ports to avoid further congestion. Also this is a peak period in the freight calendar as the pre-Christmas order books create an additional surge in the demand for the ever import hungry British economy.

The maritime sector is vital to the UK economy and the ports and shipping industry are working closely to keep Britain open for business. Containerised trade carries manufactured products, consumer goods and other smaller supplies around the globe. Containers account for approximately 15% of UK port tonnage.

Richard Ballantyne, Chief Executive, British Ports Association”

Paul Scott

Hi WarrantStar,

Re Norcros (LON:NXR) and pension deficits, you have to be very careful. This is because accounting standards are absolute nonsense, and often result in the true liabilities & cash outflows being understated. Accounting deficits can be small, but the real world figures are the actuarial figures (completely different calculations), and it's the actuarial assumptions which drive the cash outflows in deficit recovery payments.

That's why I always check out the actuarial cash outflows, which is the real world impact. There can often be gigantic differences between actuarial, and accounting numbers for pension schemes.

So please don't dismiss these things are a storm in a teacup. I wouldn't mention them if they were!

I recall when I met Norcros mgt a few years ago, they said something like, "This is a 30 year liability". They made the point that once pensioners die, there is often a widow to continue paying, which can go on for many more years. So be a bit careful with assumptions about age of pensioners too.

Regards, Paul.

Howard Adams

Hi Alec

This is exactly why the SCVR is so important. Someone posts an informative piece. No spin, no jargon just useful stuff.

Thank you.

Regards

Howard

bryans1311

15th Oct '21

Not just the BBC. All media outlets seem to be at it. Every day there are stories about shortages. It’s almost as if they want to cause an ever downward spiral of shortages, fear, panic buying, more shortages, more fear and so on. UK media have never been so blatantly negative.

mark1308

They did the same with the Covid-19 reporting - utter panic was the aim it seems !

gus 1065

Ever was it so. Dog bites news - not news. Man bites Dog - Pulitzer prize winner. Journalism nowadays is about viewing eyeballs so it has to be sensational to draw a crowd. If it’s not sensational make something up that is. Not always negative, but invariably hyperbolic …..

Gus.

Not just in the UK. Interesting Freakonomics podcast last week on a US study on the negative/pessimistic big-media reporting bias, using covid19 reporting as an example

https://freakonomics.com/podca...

Norcros (LON:NXR)

Great post Paul - although i am comfortable with the pension position as it is here (on the basis i am satisfied this business should be making 20-30 mill per year profit) - there is certainly no doubting the pension scheme is huge and there is a decent chance it could be a material cashflow drain in the near future at levels materially above what they have been paying recently. Note the triennial pension review here is or was conducted at 31st March this year - i have not been able to find any published information with regard to this 3 yearly review - i am guessing we wont have too long to find out though in that regard. Hopefully the narrowing of the deficit means the payments will stay in tickover mode rather than materially increasing - there is no certainty in that regard though i would categorise the £3 mill per year at the moment as being modest payments but it is still 10%+ of profits departing out the door as real cashflow.

Small Cap Value Report (Thu 14 Oct 2021) - MMH, XPS, NXR, BMS

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Paul Scott

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