Small Cap Value Report (Thu 18 Feb 2021) - RNO, TRI, WIL, OPTI

18th Feb '21 by Paul Scott

57 comments 11935 reads

Good morning, it's Paul here with the SCVR for Thursday.

Thanks to everyone who attended the StockSlam (via PIWorld, 3 minute pitches for people's favourite shares, with 10 shares covered) last night, an amazing turnout of about 1,000 people. My stock idea was Renold (LON:RNO) (I hold) - where a big pension deficit seems to be obscuring strong fundamentals, and a turnaround plan that's working. Here are my notes from Renold's most recent trading update. There's a persistent seller in the market, so hopefully my comments don't trigger a spike up in price, it's awkward when that happens.

The next StockSlam is on 7 April.

Agenda -

Trifast (LON:TRI) - Q3 trading update sounds reassuring. Although worrying comments about raw materials inflation

Wilmington (LON:WIL) - Impressive interim results, but the weak balance sheet rules it out for me

Optibiotix Health (LON:OPTI) - trading update for 2020. Signs of progress, at last!

Trifast (LON:TRI)

139p (flat, at 08:22) - mkt cap £188m

Trading Update

Leading international specialist in the design, engineering, manufacture, and distribution of high quality industrial and Category 'C' components principally to major global assembly industries … Trifast plc (Main market LSE Symbol: TRI) issues the following unaudited Trading Update covering the Q3 financial period and up to the date of this announcement.

Trifast has a 31 March 2021 year end.

Trading continuing to strengthen

H2 revenues up 5% for the four months to 31 Jan 2021

FY 03/2021 revenues expected to be slightly ahead of market expectations
1. Company compiled consensus shows market revenue expectations of c.£172m

Particularly noteworthy points are -

Border issues (logistical challenges) re Brexit
Well-known problems with transport costs & container freight are mentioned
Global shortage of steel is causing price rises, and delays - leading to “additional margin pressure which we are working hard to mitigate”

Dividends - will be reinstated.

Outlook - sounds reassuring -

The Group's continued recovery, in addition to a strong pipeline and high activity levels, provides a solid base for the business to move forward…

My opinion - I find that Trifast tends to focus too much on revenue, and not enough on profitability, in its trading updates.

As you can see below, earnings expectations for this year and next year, are still way below (about…

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abtan

18th Feb '21

Moneysupermarket.com (LON:MONY) (I hold)

Sharing my notes for any interested:

2020 AR:

-ve's

Worrying comment on Gross Margins:
"The rest of the decline was mainly due to volatility in SEO positions for key insurance terms, with SEO positions in H1 weaker on average than in H1 2019. This means a lower proportion of customers came to us via natural search, leading to a fall in gross margin."
"Our planned £5m increase in brand marketing spend drove the increase in distribution expenses for the year"
Is this partly to offset lower SEO (note 1)? Will it keep going up?
"We anticipate that incentive costs will return in 2021. Overall, we expect operating costs (excluding depreciation and amortisation) to be slightly ahead of 2019 levels."
Why? Isn't 2021 going to be a shit year too?
£8m VAT bill deferred to 2021 - cash generation okay for 2020, but would have been lower.
Q2 2021: "We particularly welcome the FCA proposal to make it easier for consumers to opt out of policy auto-renewal across general insurance. This is a consumer pain-point that can lead to them paying higher costs - and is a barrier to switching.

The proposals to end 'price walking' within car and home insurance are likely to dampen switching levels in the medium to long term..."

Bad for business. Insurance companies pay referral fee in anticipation of little/no/negative profit in year 1, and much greater returns in subsequent years. Why would they keep paying Moneysupermarket.com (LON:MONY) the same referral fee? Could be quite impactful.

+ve

When they return to "normal" looks undervalued. Generating in excess of £100m FCF pa, Current EV = £1.4b. Even with hit to referral fees (note 5 above) they'll still be making decent return on cash. Probably a safe holding to tuck away - they'll always find ways to keep growing.

Deegee Eff

Don't you mean gilts are falling ? gilt yields are rising.

hayashi22

One other point about Renold (LON:RNO) (from memory!) ..it was two divisions chains and torque conversion. It seems as though if one is doing well the other not so. The Holy Grail is I guess to have both firing at the same time. It struck me that it might make it more difficult to be bid for...someone wants chain but not the other, and vice versa.

peterg

Suspect he means Airea (LON:AIEA), quoted spread around 10%

Gromley

R-G Paul did indirectly touch on the reason the negative NAV & TNAV at Renold (LON:RNO) , namely the pension deficit which stands at around £125m. (Compared with Book Value o -£11m, Market Cap of £33m and Enterprise value of £76m.

The very archetype of a Pension Fund with a small company attached to it.

Make of that what you will, but a key consideration is that these are long term commitments, the agreed recovery payments whilst large, do not seem fatally onerous at this stage and they appear to have a good working relationship with the funds.

It does of course increase the risk and I think very much puts the dampener on any likelihood of them being bid for.

No position currently.

ezlifeme

Hi Inde - Everyone starts out as a rookie - re What is an MM?

Every question is a good one (Just need to understand the tools to use in every walk of life)

https://www.investopedia.com/t...

Rusty2

Is that unusual for Airea (LON:AIEA) ? I checked in December 2020 and it was around 12% then.

I don't think it is. I was really thinking he probably meant Airea as AIRA doesn't exist and it's so close! But 10-11% is on the large side in general these days, thankfully!

Mark L.

Could the data not also be interpretted as a positive reaction to Covid Vaccine roll out success? Reflecting optimism that rather than prolongued economic depression, there is financial light over the horizon.

These spreads are crazy IMO. I have been looking at US shares, the largest spread in my watchlist is 0.5%, most are around 0.1%.

psin

Indie,

I strongly recommend you buy Anna Coulling's book, Volume and Price Analysis.

Published in 2013. I read it again and again........

xcity

The rise in the value of sterling suggests that import price inflation is more likely to be deflation.

Boon

Yes, my bad! Gilt prices falling, gilt yields rising.

timarr

Agreed. We have specific challenges in the UK due to well, you know, that Brexit thing.

But more generally, it's hard to see inflation getting out of control globally.

Revs8

hi. I meant Air Partner Air Partner (LON:AIR) on here. It’s AIRA on Investing.com I should have checked. Spread was 5 to 6% earlier today. Not usually anywhere near that.

QARPY

Thanks Gromley, yes I see now. But I also see -£53.7m of accumulated losses in their balance sheet, and I am trying to undertand why this is not a huge red flag.

Paul Scott

Ah yes that reminds me, the torque transmission division of Renold (LON:RNO) is smaller, but some quite interesting products. I am told that it might involve couplings e.g. for a warship driveshaft, so it cannot break. Or rather, if it breaks, it has to be capable of still working, but at lower revs. These things can cost £1m+ per coupling. Sounds really specialised.

Why do people enjoy cannabis? It turns them into boring zombies. Waste of time if u ask me. Leave them in the corner, give me some dance music & some E & we'll partay! :-D

I did a post on this a couple of days ago directing attention to that day's Big Read in the FT.
There are many ideas, but the truth is nobody knows. Money supply itself is imprecisely defined - or rather there are many precise definitions but the underlying reality changes over time; maybe we're missing something important here. Asset price inflation doesn't explain it. The chosen QE methods would inflate some financial asset prices but it would be expected to spill over into other prices, and it hasn't. And the correlation between the two isn't great anyway whatever MS definitions are used. Nor does technology explain price stability.

The relevant economic theories will be right - they're largely mechanistic - but the detail of the relationships with real world behaviour have clearly changed. This leaves economists stuck because all models are based on a relative stability of behavioural relationships measured through long observation. The examples we have of recent QE type stimulus have not produced inflation either in the west over the last decade or in Japan. Governments running huge deficits haven't either. I don't remember a large, sustained attempt at helicopter money, smaller trials haven't been effective.

What you can observe is a build up of tensions within and between societies both short-term (visible now) and long-term (eg ageing demographics). Sooner or later they will be resolved with the equivalent of an earthquake(s). Given the difficulties with firm predictions, I'd advise maintaining flexibility and freedom of action as well as spreading risks.

Cleeve

#AAA late post but the options from Nick Candy and David Rosen’e vehicles if exercised are a game changer, this share could easily go to £1, I have held since 2p and added at various times but it a play on AI with some products that have real traction. I also think #PIRI could double within 2 months essentially a VC for Crypto and other Tec, Low6 is a mega soon to be viral gaming app which will float in Q2, Pluto a VC for Crypto, YOP adds to the mix plus others - DYOR but plenty to get excited about - I am long

Small Cap Value Report (Thu 18 Feb 2021) - RNO, TRI, WIL, OPTI

Trifast (LON:TRI)

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Paul Scott

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