Small Cap Value Report (Thu 24 Nov 2022) - HEAD, XPS, MBH, HRN, CTO, MACF, DOCS

24th Nov '22 by Paul Scott

72 comments 8355 reads

Good morning from Paul & Graham! I got the date right, that's a good start! Right we'll leave it there for today. Thanks for reading & commenting, some interesting discussions today.

Agenda

Paul's Section:

Headlam (LON:HEAD) - a very mild profit warning, with FY 12/2022 results now expected to be slightly below expectations. Not a cause for alarm in my view, although it might put a stop to the recent bounce in share price, maybe? Volumes are down, as consumers retrench, but commercial is partly offsetting this. Plenty of self-help measures are also helping. I remain a long-term bull on this share, with some shorter term uncertainty due to macro. The tremendous balance sheet means little to no solvency risk, even in a recession. Good divis. Still a thumbs up overall from me, on fundamentals. No idea what the short term share price will do, that's just down to market sentiment.

Michelmersh Brick Holdings (LON:MBH) - this is becoming a brick-themed week, with me taking a positive view of larger competitor Forterra (LON:FORT) in Tuesday's SCVR. I also like MBH today, with a share buying, acquisition, and positive trading update announced today. It also has a lovely balance sheet. Despite macro conditions, brick manufacturers seem to be in a good position. Thumbs up from me.

Macfarlane (LON:MACF) - in line with expectations, although the revenue growth rate has moderated a little from H1. This looks a resilient company, and has shown it can pass on cost increases to customers. Valuation seems undemanding. I like it, a thumbs up from me.

Dr Martens (LON:DOCS) - brief comment below, in reader comments section, as too big for main report.

Graham's Section:

XPS Pensions (LON:XPS) (£279m) - the outlook for the full-year is slightly ahead of expectations at this provider of pensions services and investment advice. Revenues are up thanks to acquisitions, inflationary price increases, and higher levels of client activity. While I’m always cautious in the professional services sector, XPS appears to offer more to investors than your typical advisory business: it also provides a range of non-discretionary services, and its contracts allow for annual, inflation-linked price increases. The balance sheet offers no support but cash flow is not bad and there is a dividend yield of nearly 6% to keep investors interested.

Hornby (LON:HRN) (£47m) - this model…

Unlock with Email

Unlock with Google

Already have an account?
Login here

MrContrarian

24th Nov '22

I have a cornycopia.

Silver Moon

I think Small Cap PI's need to get their market moving upwards by actually making investments instead of keeping on saying that there's recession coming.

illiswilgig

Macfarlane (LON:MACF) (I hold)

Thank you for the writeup on Macfarlane Paul.

According to this mornigns update sales are slightly ahead of market current market consensus.

11% up on FY21 is £293m ( slightly ahead of the £284m consensus) pretty much in line with my own estimate of£292m. By some random freak. Though I do have the advantage of having watched management for some years.

Not sure it is that much of a slow down in H2 - as there were two acquisitions part-way through H1 FY21. The two acquisitions have done very well and will have slightly boosted H1 FY22 with a full contribution?

Management tend to be quite conservative with updates and numbers. So 'in line' earnings I tend to take as 'at least in line' all other things being equal.

Mark

Ternheim

just listened to a call whereby the CEO said Permira weren't under any pressure to sell down( no time considerations) and they understand the true value of the business which we presume would be at least 395p ...the last price they sold . Lots of inventory but they couldn't supply enough last year in USA and Japan and don't want to be in that position again

mojomogoz

Discoverie (LON:DSCV) pullback day after a positively received interim a bit odd. Random or reason?

sharw

Yes, I find the magnitude of the SP fall of Discoverie (LON:DSCV) (-14.8% at close) particularly puzzling. Yesterday's results were as expected and the full year is expected to be inline. finnC kept its forecasts and 1220 TP unchanged. Most trades are 'A' so I can only think that the bots have programmed themselves into a downward spiral!

TheFloatingInvestor

Hi Mojomogoz

Downgrade by Nimbus to 'Hold' sparked it off I think, Finncap seem happy with it and maintain EPS for 22 and 23. Perhaps other brokers will follow Nimbus suit. Level 2 has the big boys Buy Orders around the 750 mark from 800 earlier on.

0,91% short position unchanged from what I can see.

I took an opening position last thing there, I could see it down a bit more, down to maybe upper 600's but you never know, so tend to buy in tranches nowdays.

Good company record order book, seems oversold to me.

ridavies

Thanks for all on Tclarke (LON:CTO) but one point they raised and given the low operating margin sends shivers down my spine is the talk of penalty clauses in all their contracts - they weren't the words they used but that was what was meant. They say they are well covered with insurance backing ......but with the small margins....like Paul I just think there is better and easier money to be made elsewhere.

Is it a flirt/trade or marriage/investment? If the latter what do you like about it out of curiousity? Discoverie (LON:DSCV)

rwh3ue

Brickability (LON:BRCK)

One of my holdings will announce interims next Monday. The recent news from brick manufacturers is supportive of decent expectations but it's worth bearing in mind that Brickability is not solely a manufacturer of bricks. Indeed it may not actually make any bricks, I need to take a closer look. The group describes itself thus:

"Brickability Group PLC is a market leading supplier of facing bricks, blocks, cladding systems, roofing tiles, radiators, tiles, doors and windows to the UK construction sector.

The Group distributes, and in some cases installs, superior quality and strategically important building materials from major UK and European manufacturing partners, to provide solutions to a range of customer groups including architects, national and regional developers/housebuilders, merchants and retail."

So it's clear that much of its business is distribution rather than manufacture and that it casts its net widely so far as what it can supply.

Interesting question....

Its been on my watch list for a few months.

So for me its historical growing revenues and profits with EPS upgrades last three months, with strong EPS growth/profits forecast next two years, which if achieved look to be a step change.

Debt less than 3 x profits is my rule, margins on the low side but growing. Short positions below 1%. Strong current trading, good RNS.

Dilution a worry, but growth has continued.

Looks good value around the 700's, some tail winds in its favour.

I like the look of the share and its market potential, we are not in love, but its more than a trade, as I am prepared to take some downs with the ups, but alas more ups than downs would be nice, so maybe a marriage of types :-D

What's got you interested in it, or do you hold?

Effortless Cool

It's the moral hazard that concerns me with £CTO. I posted the comments below on ADVFN on 29 April 2021. Additional to the below, there is no indication from records at Companies House that T Clarke had any shareholding in Gooee, so it is not at all clear where this £2m investment actually went. I would also question, in the context of a £50m market cap company, whether a £2m investment would count as "small".

_________________________________________________________________________________________________

On 30 January 2020, CTO announced a “strategic partnership” with Gooee, in the form of “a 5 year UK exclusive agreement … to sell, install and maintain the revolutionary Gooee suite of smart building products”. The announcement also advised: “As part of this agreement, TClarke has made a small but strategic investment in Gooee”.

https://www.investegate.co.uk/tclarke-plc--cto-/rns/strategic-partnership/202001300700043401B/

At the time of that investment, the latest set of published accounts for Gooee, which were the unaudited accounts to 31 December 2018, showed it to be technically insolvent, with negative total equity (shareholders’ deficit) of £5.7m. The movement in the ‘profit and loss account’ line on the balance sheet indicated that a loss of £2.1m had been booked in 2018.

On 21 July 2020, CTO published its interim results to 30 June 2020. These quantified the Gooee investment at £2.0m and it was recorded as a non-current asset in the balance sheet accordingly.

https://www.investegate.co.uk/tclarke-plc--cto-/rns/half-year-report/202007210700055447T/

On 14 August 2020, Gooee published its accounts (unaudited again) to 31 December 2019. These showed a further severe deterioration in Gooee’s finances, with an apparent loss of £7.5m in the year taking the shareholders’ deficit to £13.2m.

On 24 March 2021, CTO published preliminary full year results for 2019. In these, the £2.0m investment in Gooee had vanished from the balance sheet, replaced with a £2.0m write-off against retained earnings of ‘minority shareholding equity investment’. This was reported in the ‘consolidated statement of changes in equity’, thus avoiding the income statement. There was no explanation of this in the prelims.

I emailed Trevor Mitchell, the CFO, on 29 March to enquire as to the change in accounting treatment of the Gooee investment. I received a reply from his Executive Assistant, giving the following explanation:

“Under international accounting standards we are required to fair value our investment at year end. This is very difficult when it comes to unquoted investments and so we took the decision to carry the investment at zero and let any profits from our offering go through the profit and loss account as and when they arise”.

My response to this was:

“Thank you for this prompt response. By way of feedback, given the materiality of this management decision, I do believe that it should have been specifically identified within the “Group financial review” section of the full year results statement. Its omission makes it seem like it is a subject that management preferred not to address directly. I am sure that is not the case in practice, but it is important not to give this impression, even inadvertently”.

On 28 April, Gooee entered administration.

https://find-and-update.company-information.service.gov.uk/company/08495558/filing-history

The sequence of events set out above do not sit at all comfortably with me, and I have sold my entire holding in CTO today.

Pat W

Hi Paul, Have you got any thoughts on RE.? REA Holdings was one of Edwards 2022 NAPS - its now more than 44% down but the information in the company reports is very encouraging. Do you have any thoughts? I still hold RE. Thanks Pat

Discodave4

I don’t have a “decent and solid accounting background” and appreciate all the accounting tutorials that Paul and Graham give on here….that’s one primary reason I signed up.

AstonGirl

I asked Andy Brough the very same question (as to what it’ll take to get decent IPO’s again) when I interviewed him at Mello last week

His answer was excellent I thought, “when everyone at the party leaves with a balloon

yiannos1

I do appreciate their work as well and this is the reason I try to find the time to read them. Especially I value and always read in detail Graham’s comments ( as I did with Jack’s ) as I find them more closer to my investment approach.

But my comment was not meant to cause any offence or upset anyone and it was directed towards Paul only , as I was answering back to his previous comment and by now I am sure that he must have realised that I have an accounting background. Trying to explain to me that the company in question did not burn any cash because they have increased their inventory it is bonkers. Unless Paul has inside information that this inventory will all be sold and generate a positive free cash flow.

BUMP plc is not investable for me as it does not generate any cash , and has a debt more than its market cap. This is my personal opinion and I truly hope that I am completely wrong and all existing shareholders make good money from it.

Hi Effortless Cool ,

I have done the same today as they have lied as well about their revenues while it seems that they already knew that they will not be met.

Aislabie

I have held £DSCV for several years as it has matured from (as Acal plc) a low margin electronics distributor to a steadily higher margin provider of customised design and manufacture electronic solutions. The impressive thing to me is that the CEO, Nick Jefferies had laid this out as a strategy and doggedly pursued it, with the final distribution business being disposed of this year.
The market for their products is worldwide and widely diversified by uses. They have made sensible acquisitions that help them grow profitably. The operating margin has grown from 8.1% in 2018 to 11.7% in H1 23, and when they say it will grow to 13.5% by FY25 I am inclined to believe them. While not a shooting star, there is an impressive steadiness about the business as it grows in all metrics.

Interesting. I don’t know it but interested in understanding it’s business model around chip design and outsourcing

Fegger

25th Nov '22

Someone else also nervous https://www.stockopedia.com/sh...

Small Cap Value Report (Thu 24 Nov 2022) - HEAD, XPS, MBH, HRN, CTO, MACF, DOCS

Agenda

Unlock the rest of this article with a 14 day trial

About the Author

Paul Scott

72 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...