Small Cap Value Report (Thu 25 March 2021) - FNTL, MCLS, JDG, BOO, LTHM, TND, CMCX

24th Mar '21 by Paul Scott

139 comments 13877 reads

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

Timing - today's report is now finished.

Agenda -

Paul -

Fintel (LON:FNTL) - the new name for SimplyBiz - resilient results from FY 12/2020. Balance sheet still weak, but improving. Looks quite good overall.

Mccoll's Retail (LON:MCLS) - bumping along at breakeven, terrible balance sheet with tons of debt - I think the shares could be worthless on a conventional basis, but we're in a crazy bull market, so anything could happen. Very high risk

Judges Scientific (LON:JDG) - brief mention of the results, but let's start a discussion about 100-baggers, and how we can spot the next JDG? Please chuck your ideas into the pot, in the comments.

Boohoo (LON:BOO) - positive report from Sir Brian Leveson, and why I remain super-bullish on this share for the very long-term.

James Latham (LON:LTHM) - rather vague trading update, but I've crunched the numbers & like what I see, especially its fabulous balance sheet! A good one for value investors.

Jack -

Tandem (LON:TND) - strong trading from this cheap, off-the-radar bike and leisure goods company. Strong Covid tailwinds but building platform for longer term growth.

Cmc Markets (LON:CMCX) - not a small cap, but heightened trading conditions, increased guidance, and high returns on capital make it worth covering.

Here are a few catch-up items to start off the day

Fintel (LON:FNTL)

207p - market cap £200m

When I saw that Jack had put Fintel on our google docs which we use each day to collaborate on the SCVRs, I thought it was a typo for Findel. Wrong! Turns out this is the new name for SimplyBiz - an acquisitive group of professional subscription services companies - e.g. outsourced compliance for financial advisers.

I’ve always liked the business model (it makes sense to pay a relatively modest fee to outsource very specific & complicated regulatory work), high margins, and recurring revenues at this group. Although its over-stretched balance sheet put me off in the past. Also, I didn't fully trust the numbers, and wanted to see more of a track record established.

Fintel (AIM: FNTL), the leading provider of fintech and support services to the UK retail financial services sector,…

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timarr

25th Mar '21

The distribution of returns matters for obvious reasons. Most stocks underperform, so we MUST capture a massive bagger under this strategy or we are doomed to poverty in retirement, with no way out (the strategy prevents us rectifying any mistakes).

Yep, and this is the reason that the much vaunted 15-stock portfolio providing sufficient diversification is a myth - at least if you look at total returns. In any given timeframe if you fail to hit one of the handful of superstocks you will underperform. When William Bernstein ran this on the S&P 500 he found that 75% of 15 stock portfolios underperform the index:

http://www.efficientfrontier.c...

Of course, that 15-stock thing is a facet of the Efficient Markets Hypothesis which no one who quotes it ever seems to understand, but that's another matter.

To come back to the original point, though, the question is whether active investors tend to trade away excess returns by overtrading. The answer is probably that most do.

I keep a snapshot portfolio of the year end to compare with what I actually achieve. The results are pretty random, but a few big baggers that I let get away (as noted earlier) sadly makes a big difference. However, I'm also pretty good at getting rid of stuff that tends to underperform badly so the difference isn't that marked and I sleep a lot more soundly than I would with a few big winners and a lot of lousy losers.

Markonclose

Mothercare looking very interesting right now, but I need to review the new business model and market potential more. Does anyone know much about Richard Griffiths as he has a very large holding?

sharw

Strix (LON:KETL)

I began the day with a reminder of their webinar this afternoon. During discussion of the results yesterday wildshot asked for any notes. There are a vast number of comments about 100 baggers here today so I decided to start a new thread rather than comments on one event getting lost.

I will be writing up my rather random notes on it this evening (first the garden calls!) but have started the thread now so that anyone else can make comments if they also watched -

https://www.stockopedia.com/content/strix-from-2020-results-onward-786844/

Tommy H

So whilst this is not a massive value add.

I think that I am going to have to introduce a new strategy, sell the day before results and buy back about 08:30 on results day when things have dropped...

Life is complex, but it was like WTF when I just looked at the portfolios and the dominant factor was results day drop or has the copper price changed overnight and someone forgot to send me a Fax?

ps. Atalaya Mining (LON:ATYM) (I hold) OUCH!

mojomogoz

This is a story about nothing in The Standard re Boohoo (LON:BOO)

Marshall Wace are a big hedge fund. Many shorts they own can be more hedges to permit leveraged longs rather than conviction shorts. I think the duration of their short positions can be short term too....so its a minimum an indication that they think boo will underperform short term. 0.5% is £20m and that is not a big position for MW so it doesn't seem like a high conviction thing.

If a more renowned short seller firm takes a position then watch out.

ACounsell

Not a holder but have Atalaya Mining (LON:ATYM) on my watch list. However, the annual results don't inspire much confidence though I admit I am no mining expert. They achieved a very poor average realisation price for their copper production -virtually the same in 2020 as in 2019. The spot Copper price increased from around $2.06/Ib in the March 2020 meltdown to $3.60/Ib at year end so their realisations were close to the bottom on the market. In addition costs increased dramatically and therefore gross margins were down with consequent profitability despite increased production hardly changed YoY. The outlook is for lower production output and higher cash and AISC costs which is not good. The failure to secure permission for development in Galicia is also a negative and the issues around legal matters outstanding are also concerning. Perhaps Edmund Shing (the idle investor) who did a short presentation on the virtual Stockopedia/Stockslam could provide some further insight to the Atalaya Mining (LON:ATYM) situation.

ISAallowance

Average Cu price over 2020 was $2.80, so they weren't that far off it at $2.72.

(I don't hold Atalaya Mining (LON:ATYM), but do hold Central Asia Metals (LON:CAML) so have worked out the av 2020 base metal prices in advance of their results).

Wilbraham

I find browsers a bit unstable for this sort of quasi-permanent storage. Perhaps if I bookmarked with sensible categories it would be easier.

What I prefer now is OneNote. Dead simple to use - set up a new tab for each company or investment topic then just paste in either weblinks or chunks of text. No need even to 'save' each time. As an added bonus, advfn's ghastly typeface is far easier on the eye when read in OneNote! https://www.microsoft.com/en-g...

I expect there are more modern alternatives though.

Boon

On what Paul wrote on Boohoo (LON:BOO) : "Of course, Leicester wasn’t used for low cost, it was used for speed to market. Overall then, I doubt whether margins are likely to reduce, because imported product is likely to replace some of the Leicester production, and of course imports are cheaper."

The way I see it, Boohoo has lost a core USP, the one that was a major factor behind their huge success. Being able to get the latest styles, from Celebrity Instagram Post to shelf within weeks. That's now gone if they have to source from overseas.

Furthermore, ordering from Leicester meant being able to order small, and re-order if things sold well. Less stock wastage, less stock to clear at end of season. That's now gone too. Expect the usual headaches of stock not clearing, weather playing havoc with sales, margin hits from having to do extra sales at the end of the season, etc etc. The things that plague other fashion brands.

-------------

If Boohoo have to now (1) order stuff from overseas like all the other fashion retailers and/or (2) run their own factory, which is expensive and a big fixed cost liability, they're a whole different kettle of fish to what has driven their success in the last few years.

If (2) is so great, why is Boohoo the only large fashion retailer trying to manufacture its own products in the UK? It not a new idea - vertical integration, full control of supply chain end to end. But yet you don't see any other major fashion brand or retailer do that, except for high-end or niche ones. I'm open to hearing examples.

rmillaree

Boohoo (LON:BOO)

Well it won't be gone will it is my answer - i would imagine brexit is more of an issue than these enforced changes - they have for the last 20 or so years been finding a solution that works so they aren't suddenly going to get crippled long term by a minor inconvenience like this - IMHO - we should find out reasonably quickly if my assumptions are wrong.

On thing they have done by dragging out the whole affair over 3 plus yaers is given themselves time to plan for solutions to the issue.

Note the skilled workers who have existed in Leicester probably aren't going to be going anywhere soon - so the most likely outcome is that most of the key workers end up on the books of a legitimate organisation and continue doing what they were doing previously.

Looking at what labour costs as an overall % of the retail price i have very little concerns that any of this changes the fundamental outlook perhaps a slight hit to sales or profits for the marginal increased costs they cant pass on or reduced sales if prices go up where competitors prices stay the same.

transport_tycoon

I have spent £100 setting up an iWeb account separately. I will give the password to a friend so I won’t be checking

Gromley

Hi CBeg,

Good to see you putting up your rationale for investing in McColl's Retail (LON:MCLS) . I can add a few things that you might find useful.

It was making a profit every year except for 2019 (which I don't understand)

2019 - Their primary wholesale supplier went bust and it was all a huge mess, stock shortages, expensive, temporary alternative arrangements. subsequently Morrisons stepped in and this is now become a very deep partnership as I believe you know.

I would also add that aside from being consistently profitable they are significantly cash generative. For that reason whilst I recognise that the level of debt does present some risk, I think the description of "ultra-high risk" is for the birds

Sales have been increasing year on year (but they now plan on closing some stores)

Actually that has been the plan for some while now, their store portfolio was essentially a mix of newsagents, corner shops and larger convenience stores. Their plan is to just focus on the convenience store space, so they have been quite aggressively closing the smaller stores at the end of lease commitments and/or disposing of branches where they can find a buyer.

They had a partnership with Morrisons and I was hoping Morrisons would buy them (since buying my shares the partnership has been extended and all their goods will be Morrisons branded with 300 stores are changing to the Morrisons name - stores already branded as Morrisons had been making the most profit).

Actually the partnership with Morrisons goes further than that as I mention Morrisons are there main supplier. Also the non-Morrisons branded stores now stock a range of Morrisons own brand products under the "Safeways" label. You may recall that Safeways was a mid/high market supermarket chain that Morrisons acquired about 20 years ago, they rebranded all the acquired stores as Morrisons, but obviously retained ownership of the Safeways brand. I wasn't sure that the brand really had much value, but apparently the Safeways branded products have performed well.

I do think that a takeover bid by Morrisons is a possibility; indeed I have read an (unverified) claim that aside from selling the smaller stores there are also a few larger convenience stores that are in close proximity to Morrisons are also being disposed of, one reading of this could be that this move reduces any future CMA concerns.

However, I don't think that MRW will be in any hurry (they still bear the scars of an earlier disastrous attempt to enter the convenience market, under previous management). Perhaps even the current model of branded McColls (a bit like a franchise model) is the end game? I also don't think MRW would necessarily need to overpay as they increasingly hold most of the good cards.

If MRW were run by My Cashley, I would be 100% convinced that the game plan was to force McColls to insolvency and then pick them up for nothing. Perhaps I am being too trusting, but that kind of behaviour is just not in the corporate DNA of Morrisons. In fact coming back to the debt, once 300 (of a little over 1,000) MCLS stores carry the Morrisons brand then I believe that MRW would be supportive in the event of any dent/liquidity crisis in the future.

Anyway, coming up to date with my view. I hold a very small position at the moment. I dipped in with more last year, but subsequently was disappointed to learn that whilst they were apparently a Covid crisis winner this did not translate into improved profitability for a number of reasons. (Just as an aside, Paul mentions that the mix change on Gross Margin was significant : food / drink to eat on the go (workperson's lunch is quite high margin, lottery scratch cards are I believe 100% Gross Margin (because only the sales commission is booked as revenue) so the suspension of scratch card sales for a few weeks last year was quite costly.

The margin should rebalance but the question is whether the revenue increases from people shopping local will also subside. I am actually pretty certain that the answer is not much - I could elaborate on that, but I don't have the time and mental bandwidth right now, perhaps in a couple of weeks I'll revisit this at cube.investments .

IF McColls, can deliver on all that is going on then I could see them delivering Operating Profits in the region of £50-60m within 3 to 4 years, (Again I will elaborate at another time elsewhere). in my view that is multi-bagger (but less than 100) territory against the current market cap of £37m ( EV of £320m - excluded IFRS16 leases I make EV c. £140m!!)

Execution risk is the key concern for me; I want to see a clear indication that the corner has been turned. I am likely to have to pay more than the current price, but not so much more to convince me to risk execution being sub-optimal.

Anyway I have gone on for much longer than intended. (Hopefully some might think fruitfully.)

I hope some find it useful. If you did just consider this : I would not have written this post were it not for CBeg taking the time to post his/her rationale for investing.

As Paul likes to say, this is a team game. I agree and even if you are nervous that you're views are 'not worthy' on these boards; if you can at least provide some rational views, then you stand the best chance of triggering a meaningful discussion.

So I strongly encourage everyone to contribute to the discussion, even if you feel 'insufficiently expert'.

shanklin100

26th Mar '21

Buy recommendation for Cmc Markets (LON:CMCX) from Tempus.

"Place your bets on customer numbers"

https://www.thetimes.co.uk/art...

CBeg

Thanks very much for the detailed reply. Very much appreciated. I agree that the best way to learn is to ask questions giving your rationale and have them torn apart (or confirmed nicely) by others. Thanks again for taking the time out to explain some things to me.

I didn't get a notification that you replied so lucky I cam back to check if anyone had. Might be good if that was a feature added to the website?

I got lucky in that I bought my shares and they almost immediately gained by 25% meaning I didn't have the impatience factored if I'd invested in October or something. Already rejigged my portofolio 100s of times and I can't keep up on my Stockopedia portfolio. Hopefully get something settled soon. Been an enjoyable learning curve.

I plan to hold on to McColls for the forseeable future and see how things progress. As I said all my current cash is tied up in "safe" funds and my 6% a year dividend paying company that I work for which has been a good share to me, but if anything catastrophic were to happen I'd lose almost all my savings, hence the desire to learn and divest.

McColl's Retail (LON:MCLS)

cbeg

I will chip in with my thoughts on McColl's Cbeg - this business is a simple binary gamble IMHO - if you invest you should do so on the basis you may lose your shirt tomorrow - the balance sheet here is staggeringly bad - the company only exists due to the kindness of the suppliers that give the company credit (£215 mill trade payble and other payables v inventories of £77 mill) - thats walking zombie stuff IMHO.

I 100% get the reason for investing here - if the company can turn things around and say make £30 mill year profit and attach pe to that of sAy 4 thats mutibagger territory - so the gamble is simple and not necessarily a bad one.

I think the main thing with this share is to be upfront so that anyone who is less savvy who thinks it may be worth short term gamble doesnt do so at the wrong time when the company is wither given away to its creditors or has deeply discounted fundraising.

Note i am not attaching any % chance to any outcome here - i see not specific reason for shareyholders to panic here - other than the obvious elephant in the room that it lost money per these results and prior results - loss making companies have less options.

I remember not so long bad a few people where suprised that Flybe seemed to shaft shareholders by being bought out for a penny a share when the shareprice had been much higher and there were moans that they (shareholders) specifically werent warned that the hit would hit the fan - unfortunately thats the problem with these companies that subsist on the goodwill of creditors as soon as there is a discussion to be had the creditors have a large measure of control and if they remove their support that can be instant end game - the trigger here can be as simple as large suppliers not being able to get credit cover to be able to supply them. I havent looked closely into McColls i suspect they have long term good relations with suppliers - however i do get the feeling with this company everyones jobs would be more serure with complete refinancing and that would probably only be acheivable my mostly wiping out shareholders or shareholders picking up a huge tab with ridiuclous dilution - i am not convinced with such a low market cap thats is even feesible.

The good news is if they get the core trading right and can generate decent rpofits i would not be surprised to see shareprice shoot up from where it is now - so i do see the logic inthe gamble.

Thanks very much for the detailed response. Appreciated.

I'll have a closer look at the balance sheet as I've mainly been focusing on the stock report screen. Will try and make sense of all the numbers you've provided and get a through understanding of what's going on.

As I understand it Morrisons is the sole/main supplier so this relationship will hopefully means the kindness of suppliers won't dry up.

Its a good company to try and learn from if nothing else!

Trade payables can be the hidden cancer in any business and there is £215 mill here lumping in "other payables" - i am pretty sure tis doesnt include leases as there is mention leases are included in debt.

With regard to payables if its covered by inventories thats not so bad as its a matching exercise if they sell of stores or whatever - as far as i can see funds used from the benfit of buying stuff on tick have been consumed elsewhere probably covering losses or funding store refurbs (i would ascribe nil value to leashold imrpovement assets normally)

I guess the exercise for you is to work out how they would cope if Morrisons said tomorrow we want to take £30 mill year off your credit facility for 4 years - could that be managaeable - at present i ssuepct not or it would consume all the spare cashflow plus possibly more.

As you say the generosity of Morrisons may not dry up.

Note i make no mention of the more obvious and dangerous "bebt thay have" i am presuming you have fully factored that in and comfortable nature of that more obvious elephant.

If you want an example form history of how quickly things can go wrong for companies with high trade paaybles take a look at old HMV reports - i think Game group had similart issues.

peterg

I don't see that as the plan. Sure they will, at least short term, have to order more overseas, but they appear to be working to build up local supply from approved and audited suppliers. There's clearly flexibility there, and if successful they will be able both to continue to meet part of their supply needs, and have a positive impact on Leicester garment manufacture.

That is bound to have costs, which are as yet opaque to us. But I don't see them giving up UK production.

I'd say they are doing the right things now, and are likely to end up in a more transparent position than many of their competitors. Which doesn't mean I disagree with timarr, that they shouldn't have got here in the first place.

Yes I have factored in the debt, and I could see the amount made a massive difference to the valuations I could give the company (already over-valued at my purchase price going by my calculations purely due to the debt levels - so maybe I'm a bit silly).

Also from the stockrankings screen I can see all the debt rankings are disastrous. So I do accept its a big risk.

I've only got 2.5% of my ISA in here, and less than 1% of my non pension investments so its a small risk (maybe too small to have any meaningful returns).

29th Mar '21

Hi Benson

Firstly congratulations!

Maybe it is just very easy when you are sat with everything a long way into the Green or Positive territory and you are not needing to draw down or use up...

Or maybe just a green and furry moment of jealousy?

Tommy

Small Cap Value Report (Thu 25 March 2021) - FNTL, MCLS, JDG, BOO, LTHM, TND, CMCX

Fintel (LON:FNTL)

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Paul Scott

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