Small Cap Value Report (Thu 25 Jan 2018) - RTN, LAM, MYSL, VANL, TMMG, VTU, HYNS | Paul Scott

24th Jan '18 by Paul Scott

68 comments 21879 reads

Good morning, it's Paul here.

Please see the article header for the trading updates & results that I shall be covering today. It's very busy for updates today, so I'll be writing all afternoon (I've come down with a cold, so this morning was a wash-out).

Forex

I mention forex occasionally when there have been big changes, because these changes in exchange rates have a big effect on some companies' earnings, and growth. My worry is that the benefit of cheaper sterling might now drop out of results, or even go into reverse in some cases. Cheaper sterling has boosted earnings at groups with overseas subsidiaries, and for UK exporters. It's hurt UK importers, e.g. retailers. However, those are one-off impacts on growth. So we need to be careful about over-estimating future growth at companies that had previously seen profits grow a lot from overseas earnings translation into weak sterling.

Amazingly, sterling against the US dollar is now back to the same sort of level it was just before the Brexit vote;

(chart courtesy of IG Index)

However, this seems to be more about dollar weakness, than sterling strength. Against the Euro, sterling has not risen very much at all, nothing like the move against the dollar anyway.

Stronger sterling against the dollar should start to help retailers, once their forex hedges are used up, which could be 6 months to 2 years, depending on their hedging strategy (which can be checked, as it's often mentioned in the Annual Report - just open it online, then use CTRL+F to search for specific terms (e.g. "hedge" or "hedges").

Inflation in the UK should also gradually reduce, as the one-off impact of sterling devaluation unwinds. For that reason, I'm more relaxed about the likely direction of consumer spending, and hence am more bullish on (carefully selected) consumer shares than other commentators seem to be. There could be some bargains around now, if as I expect, the consumer is likely to be more confident & spending more later in 2018.

As an aside, I think a couple of readers got the wrong end of the stick last time I mentioned forex. I'm not interested in trying to predict what exchange rates will do. However, we do need to watch, and be aware of the impact on company earnings/growth from forex movements…

Unlock with Email

Unlock with Google

Already have an account?
Login here

LeoInvestorUK

25th Jan '18

Regarding Vertu Motors (LON:VTU) , you need to be aware of the following note from the last accounts:

A particular feature of the working capital movements relating to inventory is that, as the pipeline of Manufacturer new vehicle consignment inventory expands, the Group benefits from the cashflow relating to the VAT reclaimed on this inventory which has yet to be paid for in cash.

Net assets at 31st August 2017 were £264.6m, of which £94.6m are intangibles, leaving £168m TAV. I think the cash you have quoted is as at 31st August 2017 and I suspect there has been a net cash outflow (excluding freehold sales) since then due to share buybacks, a dividend and potentially VAT from further reduced new car stocks. On the other hand, their pension surplus may well have increased.

There will be significant unrealised profits / losses on freeholds and used car stocks. In a liquidation situation they would need to pay someone to take over the pension scheme even though there is a surplus based on ongoing business.

The share price has been lower recently.

They were talking about gearing up and buying distressed competitors, which had the potential to go wrong. However it looks like the strategy has shifted to buying back their own shares and not so much as to significantly increase gearing.

Overall, yes, it looks like a no-brainer to me too.

HornBlower

Paul or anyone else,

any thoughts on Foxtons (LON:FOXT) - difficult market backdrop and sector disruption but still generates decent cashflow. I am short but think it might have reached a bottom?

DurhamMike

Vertu Motors (LON:VTU) - I think you do need to be a little careful. The day that car showrooms stop making any money is the same day that the freehold land that they sit on might be worth a lot less than it is today. There will still be value if there is an opportunity to sell off for resi development but if it only has commercial use and you can't generate commercial profit from it then I can't see why the land would be worth anything.

Long winded way of saying you need to know the freeholds in detail to really understand if there is value there, which I for one don't.

Vertu Motors (LON:VTU) freeholds. Indeed, I know of car showrooms with large surface car parks in fairly popular residential areas which would actually be prime residential areas were it not for the presence of the self-same dealership. But I have also seen ones on busy roads in the middle of nowhere that IMHO have no land value (as evidenced by nearby abandoned Little Chef's and petrol stations) and may (should) have decontamination liabilities.

At the extremes the former might be worth 10x book given that planning has been freed up recently and the later might be worth -1x book. I'm assuming they have a mixture of sites, and my gut feel is that the overall value is above book, but yes, it is a risk.

clouds

re Foxtons (LON:FOXT) I'm long. Basic idea is that they have significant operational leverage in the business, due largely to the sales side of the business, and high fixed costs, however they seem to be able to weather the current storm (lettings business is resilient, no debt, still profitable I think), while they also have a number of branches maturing / recent roll-outs. Therefore, like a coiled spring, when better times return they may produce substantially higher profits, and achieve a much higher valuation. Time will tell whether this theory has merit though! There is clearly lots of competition, and as you say, some disruption in the sector, although I'm not sure how much of a foothold Purplebricks and the like will get in higher end / London property.

There is an interesting write-up here: https://valueinvestorsclub.com/idea/Foxtons/138949

Genuine question on Volvere (LON:VLE) , roughly how much do you think it's worth?

In Graham's September report (https://www.stockopedia.com/content/small-cap-value-report-fri-22-sep-2017-part-1-dx-vle-221518/) he suggested the liquid value of £20m, plus a multiple on the Impetus / Shire PBT which he mentioned may be around £4m.

Zipmanpeter

Re Vertu Motors (LON:VTU)

Good bet at new price level (43p) if you believe SECTOR will flourish LONG term . Clearly got the free cash currently to choose between acquistions and/or buy backs as opportunity presents. More cash each year once CAPEX peak passes this year. Good to have this choice.

Conceived as a long term consolidator and with a decent record of not over paying and improving businesses to date. Relatively in the sector they look to be ahead of the game in terms of evolving and following consumer eg >100K MOT service plans, investment in used car selling brands. In next few years I think we will see a big drop in small independent dealers reducing capacity as has occurred on pubs and petrol stations as interest rates recover. On the freehold discussions in this column today, they have managed to sell at a profit recently and the trend of encouraging housebuiling on brwn sites can only help.

I am therefore happy for VTU mgt to keep what they are doing and thus for me to to be a long term holder. Forecast divi of 3.2% covered 4.4 times is re-assuring that we can afford to wait for these long term trends to play out. (I am less also aggressive in my growth expectations than many here!)

Short term, as the UK consumer goes, so will they ! Focus on CD consumers outside SE means that impact of investigations into PCP plans, Brexit and real wage growth will be key. I am modestly optimistic on all of these so think it wont get too bad for them.

Wimbledonsprinter

I hold Redstoneconnect (LON:REDS) , probably for similar reasons to you (and others): low P/E, well positioned in the “smart buildings space - which intuitively feels like a solid area for growth, the Connect IB acquisition and the movement into software (One Space) and less emphasis on contracting looks promising and the senior management disarray prior to Mark Braund’s appointment as CEO (Jan 2016) would indicate there are easy wins to be had.

But of all the stocks in my portfolio, this one probably unnerves me the most because of 1) historically poor FCF generation - and while broker notes have kept profit forecasts up at the end of last year they reduced materially cash flow forecasts; 2) the “approach” from AP Systems last year did not smell right and 3) Dave Braund’s record as CEO of Interquest (LON:ITQ) , although he left before the recent goings on.

thanks for that Foxtons link. interesting EBITDA margins bottomed at 12% in financial crisis. just delivered 13% for 2017. I agree that Purplebricks won't hurt Foxtons model directly but pressure on fees generally in a soft market will be hard to resist. coming regulation banning some fees charged to tenants won't help either.

Hecato

A,ny chance of commenting on RedstoneConnect Reds? Looks cheap and forgotten.

FREng

I have no idea what Volvere (LON:VLE) is worth and I'm looking forward to Graham's views when we get an update from the company.

mojomogoz

Hello DurhamMike

Property value realisations aren't the reason to buy. Let's say they're overstated and they are only 0.75x the market value. That's pretty solid underpin compared to most retailers who are about to go through the process of needing to take leaseholds on balance sheet due to new accounting rule. Vertu Motors (LON:VTU) have much of their property needs paid for, capital committed and so lowered ongoing capital required for maintenance (of course manufacturers require refits every few years to fit with new branding etc).

To expect the average value of 120 sites around the already relatively cheap non SE England to be marked down a lot relative to book value seems unlikely unless the UK economic situation gets quite a lot worse.

There is likely commercial value in the sites in the sense that if a new LIDL wants to open then permissions on an ex VTU site will be easier than somewhere else. Sites are likely to be well situated from a customer access perspective etc. And if its on the outskirts of say Burnley (VTU territory) the property value is a much lesser outlay than a similar site in Greater London. So the property cost relative to prospective operational cash flows is relatively low compared to SE...which means that perhaps a book value near market cap suggests that market cap is low, or they should sell more property (and, to be fair, could indicate you are right and they have overpaid....seems unlikely buying in the North and west over the last 10 years).

Its all balance of probability stuff...but I think its safe to assume there is good underpin in property but I am not terribly excited about it, potentially nice bit of cash flow upside from sales and focus on the operating metrics which I believe prospectively are better than the market prices.

best wishes

iainc

Exactly this question was asked on the advfn bb yesterday about Volvere (LON:VLE). Here was a response as to a sum of the parts after the interims in September. Interested to see any comments on it (since the interims there has been a £3.4m share buyback at 835p of 408,000 shares which improves the SOTP further).

"After the interims, Simso produced a "sum of the parts" valuation as follows which gave an NAV of 1,389p per share:

"1. Shire: My profit assumption for H2 is that it will match last year's H2 of £1.02m. We are now past the anniversary of sterling devaluation, so the negative impact on margins has worked through. The re-pricings they have progressively done through H1, and also the fact that sterling in H2 may actually be better than H2 last year, may make the out-turn better. A full year out-turn PBT of £0.78m, I apply a lowly rating of 5* Post Tax Earnings to derive a value of £3.1m.

2. Impetus: I am hoping for at least £3.7m PBT as already explained. I would value this much more highly, and think a market average P/E of 14 times is prudent given the growth and contractual backing for the earnings. Value £41.4m.

3. Perhaps harshly I give no value to Sira.

4. £2.6m of NTAV given that it is mostly freehold property.

That gives a Gross Value of £47.2m, from which I deduct 20% for Minorities and a further 10% for Bruvva's Bonus for the increase in value created....so net net £31.2m. I would expect year end cash to be at least £22.5m, so my total SOTP valuation of the business is £56.6m (£13.89 a share).""

Lloyd Garvey

I like your thoughts on Restaurant (LON:RTN) I currently hold Patisserie Holdings (LON:CAKE) . Which at the moment seem on a different trajectory to Restaurant, and have been watching both for a while now.

Thanks

Lloyd

bsharman

Vertu Motors (LON:VTU) is a company that in the near past i would have bitten your hand off to buy because it's got a fantastic balance sheet, cash and on most metrics looks undervalued. I have just finished reading Mark Minervini Book Trade Like a Stock Market Wizard: How to Achieve Super Performance in Stocks in Any Market however... (i know i'm one of the last to read this excellent book!). Notwithstanding the technical analysis that Mark talks about in the book *one of the main points is do not buy when a stock is in a downtrend (trading below the 200 day moving average for example) I would point to the dangerously low (almost none existent) operating margins as a massive red flag. Yes as a value proposition it looks good and in the past i probably would have been seduced by this but I would now ask: where is the safety of a moat/competitive advantage and where is growth going to come from?

daveinthelakes

Matylda,

Don't forget with freehold/long leasehold property, if they sell with vacant possession they lose the revenue and if they take leasebacks at say 7% yield the circa £12.5M rent less any interest they would save on reducing debt will make a dent in the annual profits. Of course the capital released could be reinvested in the business but not sure now is the time to be expanding in this sector?

Dave

Thanks for this. I haven't looked in enough detail to comment properly, but if the above valuation is sensible for Impetus then it looks like a lot of value has been created here over the last 10 years.

Good points bsharman! I haven't read Minervini but I will (on my pile). Vertu Motors (LON:VTU) does not stack up well for a trader or short term perspective...and get the short term repeatedly right and you will make more money than someone slow like me :) I do feel dumb...which is probably why I am writing a lot...perhaps I'll wise up and sell :)

In the past I worked for a company called Russell and as a consequence I interviewed/analysed a lot of fund manager around the world. Many in the US. It strikes me that the liquidity and interest in US small cap is very extensive and so more ideal than anywhere else for Minervini style investing. My guess his small caps are also often stocks in a $500m-$2bn range with much more local headroom for simple organic growth (okay online can leap that somewhat).

I wonder whether the UK market is quite deep and broad enough to sustain. Okay there's a lot in the sub £150m sort of range with high growth potential but how much can that be traded in anything approaching scale even for a private investor?

I reckon there is some scope for Minervini-ing it in the UK of course...but more eye for capital and market cycles maybe needed too for ballast....and the sharp downside end of a sub £150m stock in the UK can be very sharp!

Just some thoughts. I look forward to reading the book. Currently finishing old school Peter Lynch book (his 2nd one). In many ways I reckon he has parallels with Minervini but with less cutes on the timing and more diversification and taking the lumps.

Best wishes

GrahamF

Re: Blue Prism (LON:PRSM)

I note the comments above from people who work in IT who are skeptical. I also have a friend in IT who has dismissed it as having nothing to offer. I accept that you have specialist knowledge that I don't and am thus cautious.

However, why did 100% of the customers who were up for renewal renew if it is useless and laughable?

Why is it that the partners in the consultancies and cloud services are happy to be partners if it is such rubbish?

How is it that customers across the world are being attracted to it in increasing numbers?

How is it that these sophisticated IT people in blue chip companies such as banks are having the wool pulled over their eyes?

Either the Blue Prism people are some of the best sales people the world has seen, or the customers are all idiots, or..............perhaps the product really does have something to offer that appeals to certain customers but has little relevance to others.

I'm not an IT guy but it seems to me that the customer market place has spoken at least initially. The company is now engaged in rapid expansion to build the support system of consults, cloud service partners etc that will help it become the most widely adopted RPA solution.

For people with no need for RPA, well it was never intended for them from what I can tell.

For people who want AI, well it is not that either, but as things evolve I expect it will work in conjunction with AI offerings.

Old Mutual have a major stake and they have an excellent track record in the small and mid-cap UK companies. It seems that other institutional investors were also ready to enter in the placing at just a small discount to average recent price.

So, taking into account the rapid growth in customers (many blue chip organisation), outlook that is said to exceed expectations, world class partner network, backing by Old Mutual (outstanding record in small and mid-cap space), entry in the placing by other institutional investors at a small discount......I am happy to be long and happy to put up with the lack of profits while they are in the rapid investment and growth phase to establish a dominant position in their market.

jules2k6

Blue Prism (LON:PRSM) I work for a a company that advises organizations on IT strategy, implement technology and manages its customers' infrastructures who have used Blue Prism. So that gives it credibility in my view. Also many IT folk don't get business, if the decision makers like it and feel they understand it they don't care about the technical sophistication.

Small Cap Value Report (Thu 25 Jan 2018) - RTN, LAM, MYSL, VANL, TMMG, VTU, HYNS

Forex

Unlock the rest of this article with a 14 day trial

About the Author

Paul Scott

68 comments

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

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