Small Cap Value Report (Thu 25 Feb 2021) - G4M, RCDO, MACF

25th Feb '21 by Paul Scott

54 comments 11888 reads

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

Agenda -

Gear4music Holdings (LON:G4M) - yet another increase in guidance for FY 03/2021 - this share looks cheap at 725p, expect a decent rise today.

Macfarlane (LON:MACF) - resilient results from 2020. Big increase in divis, and net debt paid off. Looks good value to me.

Ricardo (LON:RCDO) - improving conditions and reinstated dividend from this engineering consultancy (this section by JAck)

Gear4music Holdings (LON:G4M)

(I hold)

725p - mkt cap £152m

Trading Update

Gear4music (Holdings) plc ("Gear4music" or "the Group"), the largest UK based online retailer of musical instruments and music equipment, today announces the following trading update.

This is the latest in a long line of above expectations trading updates.

We are pleased to report that Group trading performance in the 2021 calendar year to date [Paul: FY 03/2021] continues to be strong. Both our UK and European Operations have performed well post Brexit, helping to drive revenue growth and support margins that have exceeded our previous expectations.

The Board now expects EBITDA for the 12 months ending 31 March 2021 ("FY21") will be not less than £18.2m, up from the guidance provided on 14 January 2021 of not less than £16.5m.

That’s a useful increase in forecast EBITDA, especially coming near the end of the financial year. G4M seems to be going from strength to strength.

Forecasts - I can’t see any updated broker notes yet, but using a previous note from N+1 Singer, I can manually update it to adj PBT of £13.1m, or 50p EPS.

That means the PER is only 14.5 - clearly the wrong price. It should be on a PER of 20-30 in my view, implying a share price of 1000-1500p - good upside from 725p currently.

My opinion - I think broker forecasts here look way too cautious. The assumption seems to be that G4M has had a one-off boost from lockdown. That’s probably true to some extent, but bear in mind that once lockdown lifts, then live music should return with a vengeance. That means customers wanting to buy new equipment. Therefore some categories such as speakers, might see a boom, even if others fall back a bit.

I really can’t see EPS falling from 50p FY 03/2021 to 27.73p next year…

Unlock with Email

Unlock with Google

Already have an account?
Login here

Mark Penney

25th Feb '21

Superb reflections Paul-we all have a tale of one stock that went to the Moon and we sold out early - as you quite rightly point out its what is the next 10/100 bagger and whether we can be disciplined enough to wait. Time favours the value investor.

Really enjoy reading your articles -watch out John Le Carre..

gwilli68

One solution for bars might be to offer their tables / spaces out to rent in the week for people who are working remotely but dont have the office space at home or dont want to be at home (cos of the kids). Pay a rate for a day, and get free wifi, water and coffee all day. Plus networking with others in a similar boat. Or even rent out to companies who no longer need as much office space. Im sure it could be a nice little earner if done right, especially for those bars who get very little revenue during the week.

Tommy H

I think that there are a lot of frustrations out there at the moment, the build up to results and a large spike down the day that they come out, even if they are good news. Then a large move upwards.

I can say the same as you selling Sylvania Platinum (LON:SLP) for example then watching today

I still have not worked out what I am trying to do, other than buy high, sell low, buy back higher than before, sell even lower than before seems to consistently work for me FOMO

MightyPedro

There is a start up I know which offers just this service Andco www. andco.life. For 20 a month you get your pick of bars/restaurants/hotels etc to pop in and work from.... Works well or did when they were open. Worth a look

mesb

I don't see why packaging should necessarily have gone up so much. Not going out much, I'm buying far less than I normally do. I might have more home delivery, but all the packaging to get stuff to shops will have dropped significantly. Think MACF should be looking at share buy-backs now with all the cash they will be generating. But, based on the cash flow performance, I have to think they will become a takeover target soon if management don't do a better job at getting the business value reflected in the share price. Being cautious and overdelivering on promises is good to a point, but most other management teams would have been hailing today's results from the rooftops.

Gromley

Pre pandemic you call already use Wetherspoons as a virtual office, for the princely sum of something like £1.10 for an all day refillable coffee.

Not much of a money spinner I would imagine!

davidallen77

is £card on igg list shorts being closed?

Rusty2

Macfarlane (LON:MACF). Because of lockdown, more people are ordering online, so more packaging. I live is a small road, can't believe how many deliveries per day the neighbours have and it's not food either.

Shops tend to have large deliveries, not one package per item?

nickchivers

Paul - feeling your pain re ASOS.

Could be worse, you could be the guy that threw away a hard drive with 100's of Bitcoin on (now he is offering the local council millions to dig the landfill up). Every time BC goes up must open the wound even further :-(

https://www.bbc.co.uk/news/uk-...

Silver Moon

Sylvania Platinum (LON:SLP) is quite the Value share. I see in my spreadsheet that I bought at 10.35 pence in 2017 and sold it at 22.35 pence in 2018. Re-bought into my ISA and there they have been added to from time-to-time. Last Friday was the last date to have bought, at 118 pence and no regrets. A rare occurrence in my portfolios though, it is mostly as UK_Investor_8888 does.

UK_Investor_8888

A major fustercluck for UK_Investor:

EVRAZ (LON:EVR) has had a good day closing @598p. A 30 cents Interim Dividend to come for holders.

My error has cost me about £18K, about 9% too early not including the yield missed. Believe me, I will be taking this out on myself, and analysing my error for weeks to come.

XLMedia (LON:XLM) has closed +9% which helps me. Patience of a saint required.

Today, I've bought £50K in Centamin (LON:CEY) @106p.

Centamin is looking very unloved, is Number 4 on my Magic Formula screen. Centamin has been depressed since its profit warning of September in 2020 re a potential mine collapse.

I figure its been dead quiet on Centamin, and so after 5 months of negative momentum, the chance of a turn around is increased in the next 3 months.

(This is how my best profits usually begin... pure blind jumping... based on StockRanks and Magic Formula. Who knows? Not I!)

SR83 Q99 V93 M13 Yield 5.9 PE 10.4

I've parked £30K on British American Tobacco (LON:BATS). BATS is Number 2 on my Magic Formula screen. Again, it looks unloved, has deep value, has growth indicators,

SR 84 Q81 V94 M30 Yield 8.6% PE 7.7

A look at BATS history, suggests to me it falls in Q1, has a revive in April typically. It looks weak to me on its yearly chart.

I seriously had a look at Boohoo (LON:BOO) - Not sure its the right moment to jump in. I prefer a little more weakness in the price, if I was so lucky.

I regret missing my chance on Saga (LON:SAGA) - Again, not so sure about now as the timing. (I don't quiet trust HM Government / The Media narrative that the faux crisis is over yet - I fear more nonsense to come.)

With my 24% in cash today + book, I am within 0.5% of my highest valuation ever recorded.

Perhaps as dear Paul rightly said... one shouldn't be too greedy!!!!!

Amazing outcome on Sylvania Platinum (LON:SLP) for Silver Moon above! Well played!

navigatornick

With ref to Macfarlane (LON:MACF) and having been in the packaging industry for 30 years, I'm not at all surprised by their results (I don't hold). The sheer demand for home deliveries in 2020 due to Covid has been a godsend for many existing and "covid-converted" e-commerce businesses - the packaging industry has followed. Since the start of this year, the price of paper and plastic raw materials have rocketed so unless packaging companies are able to pass those costs on to the end user, the 2020 levels of profitability are going to be hard to repeat in 2021.

Gareth C

My lead time for a lot of the Packaging I order has gone from next day to up to as month and beyond. I would say around 25% of our warehouse is used to store cardboard boxes at the moment to guarantee supply, it is unusual and costly.

Paul Scott

Hi Nebraska1977,

That's a sad story, what a pity, and a waste of a life.

I try to channel my mind into thinking positively, and never looking back, other than to learn lessons from my mistakes. But time spent agonising on what ifs, and if onlys, is time not only wasted, but also self-destructive. We can't change anything in the past, so there's absolutely no point in having regrets at all.

I see my Asos story as more amusing than anything else! Of course I couldn't have possibly known that it would go up over 1,000 times from my 4p original purchase price. I made a logical buy decision, it was a tiny speculative company that looked interesting, and my sale at 9p was also logical at the time - I'd made a nice, fast profit, and it looked expensive on a PER of 29.

What could I have done differently? Probably a smaller position size would have been better, because my portfolio was small at the time, and putting £20k into one stock, which quickly became £45k, was too big a temptation to bank the profit. Hence it would have been better if I had put say £5k into Asos at 4p, then just treated it as a small speculative, long-term position, and just put it away & forgotten about it.

Ironically then, maybe 100 baggers are more likely if we originally just invest a smallish amount, and forget about it?

The other thing was, that I resolved to sit tight & not sell too early, when I found the next Asos. Hence when Boohoo (LON:BOO) (I hold) came along in about 2015, I was raving about it here when it bottomed out at about 23p. But I made the same mistake again! Instead of just buying a smallish position & forgetting about it, I put £100k into it, and then when it had more than doubled, the temptation to sell became too strong, and I sold out between about 50-100p.

Thankfully, the supply chain issue provided a nice opportunity to buy back in last year, at 200-300p, and I'm still buying now.

Trouble is, I've probably made the same mistake for a third time, of over-sizing the position size again, and hence the next big leg up will probably prove too tempting again, and I'll no doubt sell BOO too early again, if it gets up to say 600-800p, where it would be very tempting to sell, in the shorter term anyway.

Maybe I should resolve to designate a certain percentage of my BOO holding as being forever, and only make the balance eligible for selling before say 10 years?

All good to ponder, for future strategy. But never worth wasting a moment over, in terms of "if only" I'd done something different.

Regards, Paul.

Phuntt

Quick note on the continuing IG saga.

I had sold out of my Polymetal International (LON:POLY) position on IG yesterday at a profit (a £7b company - this isn’t about size for them, it’s about what is profitable). I was expecting the price to recover so decided to reopen the position as it fell but market was closed all day on SpreadEx and Spreadco. Called SpreadEx in the afternoon and was told they had suspended trading on the 900 companies in the IG list and might be a month+ until they worked out what they were doing moving forward.

3 points:

1) IG changes forced my sale yesterday and not getting back on Polymetal International (LON:POLY) today saved me money as price didn’t bottom as I expected and gold is yet again flirting with bottom level. No bitterness from me.

2) This will have a major effect on small cap trading over the next few months. It’s been an incredibly profitable hunting ground for me over the past 10 months but might be that is gone. If IG removing markets effectively causes rest of players to do same, trade in small caps must reduce. If access to cheap credit (at IGs expense) is being withdrawn, effectively the ability for PIs to influence prices is significantly reduced. I’m surprised how far this is reaching...

3) I couldn’t be more complementary about SpreadEx here. Picked up the phone on the third ring, it was a voice and name I know, he happily spent ten minutes+ talking me through their position. I can’t ask for more than that.

4) While this business is obviously not profitable enough versus risk taken on for IG, this is the core offering/ differentiation of SpreadEx’s business. It’s important to them so my guess is they will solve this although this trade is likely to become a lot more expensive for PIs.

MS1967

Hi Paul

Your commentary reminds me of the Raider versus Connoisseur style of trading as outlined in the 'The Art of Execution' by Lee Freeman-Shor.

If you haven't read this book already, I'd suggest you might find it very interesting given his contention that execution approach makes a fundamental difference to overall returns.

Regarding stock analysis, I think you've pretty much got that covered!

Cheers,

Mark

Wilbraham

Re. changes in working patterns, interesting snippet on the wireless today that Network Rail is contemplating moving essential track-closure maintenance to weekdays, rather than the traditional weekend, as the travelling population is likely to be lower during the working week for the foreseeable future while leisure travel will recover sooner https://www.theguardian.com/uk...

samanddee

Powerful - well said, forever forward!

davidjhill

Paul

I think top slicing is the key to very big multi-baggers. As you say just because a stock starts to make it and doubles/trebles doesn't mean it will continue in perpetuity, no matter our confidence in it, or its prospects. How many of us have the foresight to pick the precise very few companies this will happen to over a decade and stick with them through thick and thin? History is littered with far more stocks that appeared to be doing well and then didn't than those that continue to power ahead!

My strategy is to top slice. As an example I was lucky enough to own Argo (LON:ARGO) at sub 10p and understood the company well enough to know it could easily go up 10 times. As it started to fly and got to 75p I sold 1/3rd. At 150p I sold 20%, then 10% at 225p and 10% at 275p so although my 75p sale looks somewhat early my average sale price to date is 150p or 15* my money and I have some stock left I can leave on if I think the company can justify it going forward.

I find this strategy does 3 things.

1) If I'm ultimately wrong on a share I've still made money

2) I don't sell too early and look wistfully on as the stock powers ahead. Instead I take a good chunk of the available profit on offer.

3) I don't sit there anxiously trying to decide if I should be selling every time the stock moves a few % down because it has become such a large portion of my portfolio. It allows me to take that longer view - ie if I think a macro trend will give them a strong tailwind for a few years.

26th Feb '21

Cheers to you Investor 8888 , I've been quietly confident all along about Sylvania Platinum (LON:SLP) while I hold Centamin (LON:CEY) and think there could be a political taint beyond the landslide. Maybe governments want a bigger slice from miners even as big as Rio Tinto (LON:RIO) so I tread carefully. Xlmedia (LON:XLM) is a personal disaster are having greatly increased my stake just as Google bashed it about. British American Tobacco (LON:BATS) was put on my buy list last week, now to look for some funds!

Silver

Small Cap Value Report (Thu 25 Feb 2021) - G4M, RCDO, MACF

Gear4music Holdings (LON:G4M)

Unlock the rest of this article with a 14 day trial

About the Author

Paul Scott

54 comments

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

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