Small Cap Value Report (Thu 18 Nov 2021) - FCAP, WINE, ASAI, FIF, EYE, BEG

18th Nov '21 by Paul Scott

60 comments 10149 reads

Good morning! It's Paul & Jack here with the SCVR for Thursday. Today's report is now finished.

Agenda -

Paul's section:

Naked Wines (LON:WINE) - shares have been clobbered today, on publication of interim results which show the growth story has shuddered to a halt. Full year guidance is cut. The bull case for this share really doesn't stack up any more in my opinion.

Finsbury Food (LON:FIF) (I hold) - AGM trading update is a bit light on specifics, but says the business continues to trade well, and is mitigating supply chain & cost pressures. Looks very good value, for a decent quality business.

Eagle Eye Solutions (LON:EYE) - an impressive trading update, with the growth rate accelerating, and EBITDA comfortably ahead (no figures given though). Although the growth is being recycled into higher costs. I like the company, but the valuation seems toppy - so it's up to you to decide if that's justified or not.

Begbies Traynor (LON:BEG) (I hold) - good growth in H1 profits, mainly from acquisitions. On track to meet full year expectations. I see potential upside here, as insolvencies are likely to increase as Govt support measures are phased out. Still reasonably priced. Looks good.

Jack's section:

Finncap (LON:FCAP) - many will know finnCap due to its retail investor-friendly equity research policies. The interim update today is predictably good given the conditions, although there are some signs of moderation. The shares are cheap on a trailing twelve month basis, but performance over the medium term is harder to gauge. Cyclicality is a risk, and the shares are not overly liquid, but trading continues to be strong, there's scope for upgrades, and a near 5% dividend is useful.

Asa International (LON:ASAI) - high risk microfinance provider to low-income female entrepreneurs in developing markets. Covid and lockdowns are still disrupting business, so the situation remains volatile. If the group can navigate these conditions it might be worth assessing the longer term prospects at some point, but more due diligence required.

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…

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Rusty2

18th Nov '21

Yes 1 or 2 cuts each day, wipes out all the good gains elsewhere.

Surprised how Naked Wines (LON:WINE) has bounced back, is around 640p now.

Simmo1a

It most certainly is! Yet another day where my entire portfolio is in the red! 20% down in the last 6-8 weeks. How much longer is this cycle going to last I wonder??

FREng

I know this isn't a share for Paul or Jack to comment on, but I'd welcome others' views on the update from Atalaya Mining (LON:ATYM) today. It looked rather positive to me.

iggs58

Agreed. I stopped being an angel many years back - the story was good, the wines weren't so much.

And then the whole mismanagemnt of the Majestic/Naked merger demerger made me think their business acumen was probably suspect to boot. (As a customer, I quite like Majestic, to be fair.)

mojomogoz

Market death by a million cuts?

This is much better and healthier environment IMO than the prior engorgement by smothering meme-bull asphyxiation. I'm going to guess though that most of you have this latter perversion?!

My performance for this year maxed out approx May and then the gain halved through August. Then another leg up just touching below the highs Sept, cycle back up Oct, back down a bit now. About a 1/4 of the peak ytd gain lost at this point. Portfolio being pretty volatile.

I felt really bad and stressed in May as it was too good and too easy. Thought about selling the lot as didn't feel right. It was too good...and 2020 was too good...and 2019. And many of the preceding years too since c.2015/6 for small cap/AIM punters (I never keep that close a record as the past is not that relevant and is a trap for false comprehension). TBH its been pretty easy going since 2009. The only way is up.

I don't know how things unfold from here (I have a view obvs but another time). However I feel happier about stuff. I feel more comfortable that everyone and their dog ain't a stock genius anymore (okay there is the occasional performance blowhard still on Twitter...bet they go quiet when down 30%). I like that people feel loss in loved stocks (maybe that they'd followed the hype and crowd on). Heck I'm hoping that some of the stocks I like and hold sell off some more just to make the opp richer. If stocks need to earn their future returns again then I can have better balance in my portfolio and differentiate things. It feels to me now that people are being confused and inconsistent on pricing stuff.

If people are feeling this last 6 months or so are bad then I reckon they shouldn't be picking their own stocks. Ignore the hype and people that always report mega returns year in year out. These people are probably not stock picking geniuses. They are likely taking massive single factor directional risks and exposed to potential big shocks.

I take enough risk to target 20-25% pa. IMO that is a huge amount of risk and I'm very risk tolerant (I get some big moves in stocks that are controversial). Some years I'll way outperform that (though typically still limited as I seek unrelated risks) and some years will be way below. Rough ride over time. If you believe that 20-25% can be smooth and easy then you're on crack.

ken mitchell

andrewb

I used to buy a lot of our wine at Majestic but these days the quality of many of the Aldi wines is exceptional for the price and imo way better value at £6 to £9, so we mostly buy there. Lidl is not as good for their cheaper wines, but they have regular additional what they call “Wine Tour” offerings and some of these are superb both for quality and value. The next such offering, their Winter Wine tour (limited number and when it’s gone it’s gone) in their stores from Monday. They give marks out of 100 from their resident Master of Wine for these specials, and grade them too, with 90 and above”Outstanding” high 80s “very good” etc. I’m not convinced it’s a wise marketing ploy as many just go for the wines with the highest marks so those can sell out fast.

What’s more they often discount any wines remaining from their previous wine tour a day or so ahead of the new wines coming on sale at just £3.99. I’ve had some incredible buys of wines previously as high as £9.99 at that £3.99 price.

This is what NW is up against unfortunately, and the big supermarkets too, and for them it’s across the whole offering.

davidjhill

what I mean is it feels like every step forward at the moment is accompanied by a slightly larger step back. Small and persistent - bit like an annoying mosquito you just can't get rid of! It is that confusion and inconsistent pricing that just irritates me in a market. I guess the flip side is that it does throw up some nice opportunities too.

Usually this time of year is better for stocks and gains though. I hadn't expected much from the last 6 months and to be fair I didn't get much either - reasonably pleased to have only given a little back after a very good Jan-Apr but I was hoping for a bit more of a late year rally. That seems to be reserved only for a handful of very richly rated big tech in the US though. So indices are close to highs but the vast majority of stocks are not it seems!

If I can average 20% p/a I'm more than happy. I target a little less, 12-18% and even that isn't smooth and involves a decent chunk of risk.

Funnymoney

Naked Wines (LON:WINE) Bill Brewster, US value investor guy who has a well followed podcast said some time ago that he thought the quality of the wine had gone down in the US so stopped his subs.

In the US at least, this is historically the worst day of the month. It's only on average of course!

AnonymousUser1822519

From April 2020 returns were fantastic as the short lived covid bear market ended and then began a bull market that is approaching previous highs for the UK markets(FTSE) and new highs for the US(Dow). I had stellar returns(500+ percent) from April 2020, but the last six months has been nowhere near as good for me performance wise. That make sense to me because UK stocks are near years long resistance levels on the FTSE 100 index charts and so upside is harder. Unlike the US index which powered into new highs, where the titans of Tech profited enormously during Covid as lockdowns forced working at home and increased use of US tech services.

My strategy has changed now that I have Stockopedia, which I've used now for just over a month. Using screens I've found more stocks and therefore can take smaller profits of 10 or 20 percent returns and because of compounding it does better than say one big 50 percent return which is much harder to find but I had to rely on when trading from a far smaller stock watchlist. I had a good 20 percent profit in SLP which using Stockopedia's research made me comfortable in holding. I think with tapering on the horizon, profits will be harder to come by in the UK markets as profit taking becomes more prolific and risk off increases , but with good screening of stocks and excellant timing, there will always be some good gems that will provide excellant returns in any market condition.

RichardK

In reply to Mojomogoz

Re Wiatrose and northerners - Waitrose has 7 stores in Yorkshire. But who needs Waitrose when we have Booths, the best supermarket chain in the country.

Happy shopping

Richard

No offence intended…I’m from northern Scotland….when someone’s says wine I assume they mean home-brew ;)

I go differently. I try to find things that I believe have at least 100% upside and then have patience as long as the underling fundamentals don't go against me. Time horizon indeterminate but means something like 2-3 years. The stock is likely disliked for some reason near term so the initiation period may be choppy and down. Its not infallible approach and can be volatile or testing...eg I will often go nowhere when everyone else seems to be having a party.

I think trying to clip 10-20% returns repeatedly over short horizons is a high level skill that most will not durably master (in a trending and good liquidity environment it may seem possible). If you can do it then you can make more than most though.

I believe that my approach has durability and a type of long volatility (-ish) in it assuming I don't take risk in things that go bust (note, it's not truly possible to be long volatility through straight stocks). Clipping smaller returns has a potentially nasty short volatility tail to it imo - more risk of severe locked in losses.

But takes all sorts to make a market...and maybe I'll blow myself up!

Tommy H

Hi FREng

I had sold out just before the dividend was announced, other things going on in life and took the profit off the table, obviously with my impeccable skills the dividend and holding of the price wrong decision.

Anyway looking through today, and I appreciate that I am a simple farmer by origin, this looks a good set of results, they are using the free cash to expand and fund the future expansion, always a challenge (I currently work on Woodsmith mine Anglo American (LON:AAL)) and know the history from living locally and the challenges of stakeholders, so it will always be a long journey to get to the promised land of production, but the information, without providing the drilling results seems promising.

The confidence to commence releasing funds is also a good sign from management, though obviously a lot will depend on future copper prices, but the slight rise in prices will eventually be offset by the Solar input, minus capex obviously.

Tommy

In the early to mid stages of a bull market or after a big correction, a buy and hold strategy for large profits,100% plus, is optimal I believe, but nearing market index highs, I think that a taking profits earlier strategy works better, simply because many have already made big profits on the run up to the highs and therefore are more likely to sell. The taking of smaller and more frequent profits is a strategy many fail to appreciate as the power of compounding can generate greater returns than the rare multi-bagger.

Buy and hold does work well at times. At the market bottoms, many stocks will muti-bag, and then it can be easy to believe that one is a trading genius, which I have fallen prey to but have learnt my lesson since, instead of just being in the right place at the right time catching a rising tide that raises all boats. So, I think one's strategy should depend on the market conditions rather than a one size fits all strategy. Clearly, owning a large portfolio for years into the start of a long bear market, I would imagine the drawdowns to be a nightmare.

Some shares are definately worth holding though for long periods, such as SLP, which has given spectacular returns from the lows. As long as you can find such gems, than a buy and hold strategy would work the best, but these are not so easy to find. Easier now though with Stockopedia.

But each to their own I'd say.

Wimbledonsprinter

Rmillarie. I agree there are lots of low hanging fruit for efficiency gains at Royal Mail (LON:RMG) - the most important is parcel sorting automation, where Royal Mail is still below 50% automated versus the comp at I believe >90%.

Caper4

19th Nov '21

Berry Brothers, Corney and Barrow,J and B, Tanners, The Sampler, Handford ———there are many fine wine merchants who offer excellent service and work on very fine margins. I should know being a Director for many years of one of them .

peterg

Just join the Wine Society as a consumer in the UK

And there's a dividend, that can only be inherited. The more you drink, the more your heirs get from them when you die. We got a few £100 from them after my dad died - mind you he'd worked hard for that!

simoan

The trouble is these are very serious large merchants where the average bottle price is way above that of Naked and The Wine Society, and seriously more than Naked customers are liable to pay. Unfortunately, consumers in the UK are generally scared of going into their local independent wine merchants, which is a shame, because they would drink much better wine for the same price if they did. Good examples round here would be Noel Young in Cambridge or Joseph Barnes in Saffron Walden. Noel Young actually makes some very good quality affordable wine himself under the Magpie Estate label in Oz.

Disclaimer: I have met both Noel Young and Joe Barnes!

All the best, Si

abtan

22nd Nov '21

Naked Wines (LON:WINE)

Hi MassimoJack, Paul, and all other Naked contributors here.

I'm a little late to the discussion but thought I would throw in some additional comments:

---

Repeat Customer Revenues are still forecast to grow b +10% this year, which isn't bad given the 63% growth last year:

As much as I would like to use the company's calculation of £37.2m Standstill EBIT, I don't think it makes sense to do so.

All of these figures are from the last 12 months, so, for example, using very low marketing spend back in 2020, or assuming a 101% payback rate, to project future profitability just doesn't make sense.

I also can't quite get my head around the £16.2m replenishment spend and what proportion of this relates to marketing or discounts, or how it is actually split between H2 FY21 and H1 FY22 - I see what the company is trying to do here, but it's not telling me very much.

Perhaps Standstill EBIT will settle somewhere between the pre-covid numbers and the current ones, maybe c£20m.

MassimoJack - I completely agree that this is like ARR, so I personally apply a high multiple, which would justify most of the current Market Cap of £485m.

Which leads me to growth...

It's hard to see where growth will come from, as so much cash is used on the growing administration costs and what's left will only generate a few £m of incremental revenue each year.

This is the main thing that puts me off investing. Hopefully the administration costs levelling off at some point so that excess cash can actually be generated will change the potential upside here.

Here are historical churn rates for any interested (NB: not completely accurate - some numbers changed and I couldn't be bothered to go back and update.)

It looks like 20% churn for a few years is normal, before this moderates off., which isn't bad at all if acquisition costs are recouped in the first 2-3 years.

If the company can generate the cash to spend more on new customer acquisition (not only on replenishing lost customers), then this would make the business model far more interesting.

Finally, a word on a newly listed competitor - Winc - https://www.stockopedia.com/sh...

This is a much smaller US-based competitor, but is has a P/S twice as high as Naked Wines (LON:WINE) . One of these valuations is clearly wrong.

I have no position for now, but I'll be keeping a close eye as I am intrigued about when (not if) the company will start investing more in its growth.

Cheers

Small Cap Value Report (Thu 18 Nov 2021) - FCAP, WINE, ASAI, FIF, EYE, BEG

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Paul Scott

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