Small Cap Value Report (Thu 16 Mar 2023) - Banks, PBEE, ECEL, GYM, TFW

Thu 7:02am by Paul Scott

83 comments 7178 reads

Good morning from Paul & Graham, in these volatile times. I'm (Paul) just typing up some comments on the banking problems (is it a crisis yet? Have CNBC created a new logo for it yet?), so that should be up shortly.

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.

There's a lot on our to do list today, so I can't promise we'll get through all of these, especially if they're just in line with expectations (hence not price sensitive) -

Paul’s Section:

Comments on banking problems

I’m only loosely following what’s going on with the banks, and am not a banking expert, so this section is more a conversation starter than a pearl of wisdom!

As we’re all painfully aware, there has been a nasty sell-off in equities in the last few days, triggered by the strain in the banking sector (SVB going bust, and now Credit Suisse looking distinctly wobbly).

To put it in perspective though, see the UK indices below - 1 year view, with the % change being yesterday's change only. These show the same pattern - that we’ve given back the gains from a strong rally in early 2023, and are now roughly back to where we were at end 2022. Hardly a disaster (so far). This type of move is perfectly normal volatility, although it’s happened quite quickly, and could get worse of course,…

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mjfgs

Thu 12:34pm

I've looked at Oakley Capital Investments (LON:OCI) but their charges are pretty eye-watering, amounting to 8.3%pa (according to oakley themselves) compounded every year....Harbourvest Harbourvest Global Private Equity (LON:HVPE) is 'only' 5%....Still a helluva lot though!!

andrewdb

Thu 12:44pm

I always liked the intent behind Pensionbee (LON:PBEE) (Simplicity / Transparency / ESG / Inclusive / supporting the client at every step)

But am not sure there is a business that makes lots of money there.
Good:
The govt "Pensions Dashboard" has been delayed (again)
V. nice and clear site
No advice - they provide calculators and non-advice articles
Clients are quite sticky - many-most people will remain a client until death

Not so good:
It is a website that acts as a wrapper for some selected asset managers.
Moat - nothing stopping AV / LGEN / PRU setting up 'PensionButterfly' (apart from the name not being very good)
Pricing power - none, the industry is highly regulated and there is a lot of competition
The clients probably really want advice - how do you talk to someone without providing advice (ChatGPT 4?)
Clients are moveable - pensioners are open to low cost / joining incentives from other well-known platforms

But I may well be wrong.
I will register.

Tommy H

Thu 12:53pm

I know Vanguard do a range of US Treasury Vanguard USD Treasury Bond UCITS ETF Dis (LON:VDTY) whether these are in the short range so getting the yield or still tied up in previously issued low value I am not sure.

I have a ~3% holding of Vanguard USD Corporate Bond UCITS ETF USD Dis (LON:VUCP) within my Vanguard SIPP. Which I chose at the time as when I looked at the Treasury options the yield was a lot lower.

Sorry it is not available on Stocko, I also have a <1% holding of US Investment Grade Credit Index Fund through Vanguard again which is showing a 3.42% current yield but I have as an accumulation option.

Tommy

raggedtp

Thu 12:54pm

Yes, but their actual long-term performance is what counts. Remember, they do not mark company valuations up unless there's a liquidity event, and they only get paid those chunks on realisation of asset value, not siphoning off a little of individual values along the way, which is what a 'Fund Manager' does. They are seriously aligned with their projects (and therefore with a long-term management view).

ridavies

Thu 12:56pm

Re Eurocell (LON:ECEL) hello martinck1 - and earlier Paul Scott, thinks for his report. I'm not so sanguine, and there seems little mention of cutting staff (mentions redundancy payments), selling a section off (Security Hardware) at a loss and SP already down around 40% this year.....and then there is the uncertainty of the market segment coming up.

I do like their niche in recycling but I think that the low PE is a feature of the market segment, and could even be lower to attract me - which it doesn't.

Friends I have working in this type of field are saying that things are really quiet right now, and I cant see it getting exciting in the foreseeable future.

The company is taking the right kind of focused action - hunkering down - but its not a rosy picture going forward - all IMHO of course.

Dextro70

Thu 12:58pm

I'm down 20% on these at the moment as i pretty much bought at the top. Final results due on the 27th March so hoping for some good news.

Thu 1:29pm

You cant do that retrospectively - the original (EU...) barber judgement in '92 says pensions are deferred pay.

A new NHS scheme was introduced in '15 that is a _lot_ less generous than the old one ( I think it is a n/54ths CARE scheme ) so this whole issue will fade away over time.

It used to be that you could not have a pension > 2/3rds your salary, then that was replaced with a max salary then that was replaced with the LTA that was ~1.5m back in 2006 where you pay loads of tax if you pension is over a threshold (all that was a massive oversimplification).
This has led to a legislative forest where you will find a lot of lawyers, actuaries, consultants (hello) happy to help navigate at their hourly rate.

Having no LTA will be the first bit of Pensions simplification I have ever been told about (since a roman emperor solved his pension issues by executing them all)

But do not worry, it is not that simple. The AA (annual allowance) is now 60k
60,000 / 16 = 3750. If your senior NHS doctor's pension increases by more than that over a year, they get to pay tax! (that was a massive oversimplification too but the general point remains).

NHS Consultants (used to - not sure anymore) get a seniority award every 5y or so and some get merit awards - so it is likely to happen to the same group of people Hunt has removed LTA for. So the problem is not really solved to anyone's satisfaction.

Personally, I think we spend too much time looking at the 0.5% or less of people who have a possible tax issue. I do worry about the 20% or more of people who have no pension outside the basic state one.

Thu 1:34pm

I should have added that when the LTA was introduced, and when it was reduced, If you had a pension valued over the LTA at the point of change, you could 'preserve' the benefit you had at that point from tax.

So even if Ms Reeves re-introduces the LTA, it wont have the effect she probably thinks it will.

portugull

Thu 2:26pm

Burford Capita lBurford Capital (LON:BUR) link to Presentation which was due to commence at 2pm today GMT will not work.

It was issued last night by email but will not connect. Anyone else have the same issue?

So frustrating. I hold.

Mark Carter

Thu 2:36pm

Signature Bank, a New York regional bank, also collapsed a few days ago.

Talking of Silicon Valley, there have been clear signs of a bubble in the tech industry.

In 2021, one analysis found that in US startups valued over $1b, 90% were unprofitable, and most likely would remain so.

GitLab reported results a few days ago. It lost 38% of its market cap after "weak" revenue forecasts, despite revenues rising 58% year over year. It has a TTM of $379m and a market cap of around $6.6b at the time of the announcement. Needless to say, it is loss-making. The valuation level is irrationally high. That a company with $379m cannot make a profit is also worrying.

I actually host code over on GitLab, so it was a company that naturally caught my attention.

It seems that low interest rate has played a part in highly speculative investment. The problem is, it's not even good investment. They're trying to catch the next Google or Facebook. But those two companies had enormous returns on capital, whereas the current batch don't. Ok, sure, VC means that you will inevitably pick a high percentage of duds. But then again, you shouldn't be valuing them at $1b either.

rmillaree

Thu 2:48pm

Pensionbee (LON:PBEE)

Interesting comments Graham - i thought this looked ultra risky last time i looked and shareprice was way higher than it is now. . But if they are anywhere close to getting EBITDA positive perhaps i will need revisit.

There seems to be no comment by you on what i would perceive to be the beauty of this business model.

Say they have x many clients signed up now - and have the same x many "active" clients in 10 years time.

With pension pots i would expect value of funds under mangement even for a static active customer count - would possibly be 3X 4X or perhaps 6X in 10 years time (X being where they are at say year 1) - simply due to many customers starting at nil saved and getting towards decent amount over 10 years. I would guess theer would be some graphs avaiualble if you look showing growth

This seems like a potentially beautiful business model in that once breakeven they may only need to kep numbers static to get decent growth each year - albeit customer retention will be key - ie if they are making great profits will large competitor come along and undercut them on price or provide superior service?

So to me posibly potentially woryh of more research to see how much "curent customer bank" will genrate in fees in 5-10 years compared to now assuming no customer numbers growth.

Albm7

Thu 2:55pm

It is probably to do with the fact that any money held is not protected as a deposit would be under FSCS deposit guarantee - Many of these types of business or their business segments are authorised as 'e-money' by the FCA which are not protected by FSCS and many firms such as these rely on money being segregated or safeguarded at their partner banks....but with no FSCS backstop...

BnB

Thu 3:00pm

GitLab reported results a few days ago. It lost 38% of its market cap after "weak" revenue forecasts, despite revenues rising 58% year over year. The valuation level is irrationally high.

Your observations on valuations and interest rates are valid, but this has been a major discussion point for over a year. A year on and prices today are fully adjusted to the current level of interest rates and my bank has just encouraged me to switch back into growth from value, now that the peak of the interest rate cycle has been brought very near by this month’s banking panic.

As for Gitlab, actually it was the fall of 38% that was irrationally large, as witnessed by the upwards adjustment over subsequent days to a fall of barely 20% for a real shocker of revenue warning. I personally think the company has good prospects and they are making considerable efforts to balance the demands of growth and profitability. I would be very surprised if revenue growth rates don’t re-establish themselves at much higher levels than in 2023 once sales cycles for IT shorten again. Maybe a good entry point if you can stomach the valuation. I’d have added at the recent lows if I didn’t have a full position already.

Bouden54

Thu 3:18pm

Managed to listen in and should be a replay facility on website. Market spooked by the change in accounting treatment and delay in accounts, but personally don't think anything to worry about - loaded up this morning when it was down 18% and already made good profit (don't normally trade like this but couldn't resist that). Market ignoring the far more important fact that case wins are now coming in thick and fast. Worth having a listen when you get a chance.

Buyandverify

Thu 4:02pm

Alphabet are upping their stake in Gitlab massively so there must be something there.

The Jayman

Thu 4:31pm

This post isn't political, rather thoughts on how investors might anticipate the taxation policy landscape and then make sane decisions . . . . . .

I can't see Labour, if and when in power, allowing unlimited pension pots/increased annual limits to persist for long. In their mind these are an unjustified tax break for the "rich", although most people benefiting will work in the public sector - about the only place left with DB schemes open and accruing benefits.

Labour's last stated position (2021) was that they would reduce the LTA to a flat £1m (despite the fact it was frozen - why not just let inflation mask a cut unless you are desperate to make a point!) and more aggressively limit top-rate tax relief for high earners to basic rate at a far lower point than current and soon to increase taper thresholds.

Labour likes to characterise large pension pots as being the exclusive domain of those with high incomes and/or "the rich". This is false, and the reality, as is often the case, is more complex than political caricature . . . . . . . . .

The total value of a pension pot is determined by the interaction of 5 distinct factors: (i) the net cash amount contributed; (ii) the tax relief received; (iii) the investment period during which the funds are invested and returns compound before draw-down commences (the earlier contribution start and longer they continue i.e. the longer retirement is deferred then the larger the pot); (iv) the investment return during the investment period; and (vi) the costs borne by the pension pot through fees, charges and trading costs etc.

You would need an actuary to review an individual's pensions to determine which factors were most important and I bet you might be surprised . . . . . I know of high earners who have contributed surprisingly little and modest earners who have made sacrifices and been disciplined and saved surprising more than you might expect (do I want a new car now or in retirement). Also having an additional 0.5% of costs (difference between a cheap tracker or EO SIPP versus expensive active funds, PE funds etc) makes a significant difference over the decades.

With the above in mind the only justifiable, sane and equitable way of taxing pensions is to limit tax relief going in and then tax it coming out (during the lifetime after retirement through income tax and at death with a charge in lieu of IHT). In this way pensions would simply defer taxation.

If there is real unfairness in the current system its pots passing tax free to the next generation, a trend being amplified by IHT advice to the wealthy to run down their other assets before drawing down pensions.

But what do we do as savers and investors?

Well for starters take your tax-free lump while you can, particularly given its been fixed in nominal terms and its value will steadily erode. It might also be removed for those with larger pots which is sort of happening anyway with the frozen cash amount of £268,275.

But also beware, there are various Benefit Crystallisation Events ("BCE") where fund values are measured against any future re-introduced LTA that might apply at the relevant time, potentially triggering a charge to tax. The obvious one is age 75: where benefits not yet taken are measured against the LTA; but also for pots which were previously taken (after 55 before 75) these are re-measured against any LTA. Sounds retrospective but watch out and there is logic in that you shouldn't be building value but not paying tax.

I agree all savers and investors need a stable set of rules to plan around.

Thu 4:36pm

General response to Greyster and Wolfy on Capital (LON:CAPD) which is one of my holdings.

I guess that Paul S doesnt look at Capital (LON:CAPD) because he doesnt touch miners (though they are a service company) and perhaps Graham follows the same path (though Mincon (LON:MCON) was covered fully the other day)

I listened into the analyst's presentation this morning. A few comments, not in any particular order.

I was impressed by the new CEO, Peter Stokes who has been here for some month now. He comes across in a very professional and knowledgeable way, and I believe this new position and new person will be able to take the company forward in support of Jamie Boynton. I wish the same could be said for the CFO. All senior people should be trained in webinar presentations. He rarely looked the viewer in the eye which and his delivery was not impressive; content ok.

The company is quite complex, which Mark Simpson, a regular at Mello Mondays considered in his series at end 2021 I think on Added Value to be an advantage. He mentioned 2 extras as t were; the labs and the investments.

The labs go from strength to strength and I am sure are an advantage when it comes to bidding for new business. They are taking the company into new territories eg Canada; and they are cementing relationships with big Tier 1 gold producers in Africa. In terms of profitability, they do not have the same margin as he main part of the business but they a valuable extra.

The Investments are a more complex feature, and since they are essentially in unquoted companies can fluctuate significantly from year to year. This affects declared profitability and EPS. Also the company can be a net buyer or seller in any one year. This year they have been a net seller and as a lot of PE companies have found, valuations have fallen. This can be disturbing to investors in any one year - like this one, and especially when it is a fairly dramatic change versus last year, both extremes in their own way and not a happy one this year!!

On the other hand, to put the Investment process into context, it is worth looking at two charts from today's presentation referring to outside investments on the website which show that the company has benefited form the investments over time since they started the process (I suspect at Mr Boynton's behest?) and he makes the point that they also bring in business to the main focus of Capital (LON:CAPD) - the drilling etc.

The markets don't always like it - like today perhaps, and the management could spend a bit more time during the year explaining these elements - as they did with a trading up RNS on the labs a few weeks ago - so that the shock at Finals is more muted and better anticipated.

I am a holder and look forward to even better results going forward, since Capital (LON:CAPD) will IMHO benefit from their increasing reputation, but also from companies - their existing and potential new customers - investing more in future years in gold production.

Thu 4:39pm

Today's posts and discussions on the taxation of pensions . . . .

There's been quite a few posts on this today given the changes announced yesterday

This post isn't political, rather thoughts on how investors might anticipate the taxation policy landscape and then make sane decisions . . . . . . This shouldn't be a political football rather a framework which encourages savers to invest for their retirement, with confidence.

Thu 4:55pm

Hello Revs 8... re Centamin (LON:CEY) and then I take the dog for a walk, and the SP goes belly up again with a vengeance, for some reason!

It is quite a complex company given the bulk of it is a JV at Sukari with the Egyptian government. However, they are making big strides on cost and ESG with their solar, and (not mentioned today for some reason) their plans for joining the government electricity grid which will save them even more.

jamesalastair

Fri 8:20am

Made me chuckle as well. Nice share.

Small Cap Value Report (Thu 16 Mar 2023) - Banks, PBEE, ECEL, GYM, TFW

Paul’s Section:

Comments on banking problems

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Paul Scott

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