Small Cap Value Report (Thu 29 July 2021) - VLX, WATR, EMAN, HEAD, TPFG, VTU

29th Jul '21 by Paul Scott

82 comments 10843 reads

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

Timing - today's report is now finished.

Explanatory notes -

A quick reminder that we don’t recommend any stocks. We aim to cover 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 out to be right, and sometimes wrong, because it's anybody's guess what direction market sentiment will take & nobody can predict the future with certainty.

We stick to companies that have issued news on the day, with market caps up to about £700m. We avoid the smallest, and most speculative companies, and also avoid a few specialist sectors (e.g. natural resources, pharma/biotech).

A key assumption is that readers DYOR (do your own research) - don't blame us if you buy something that doesn't work out. Reader comments are welcomed - please be civil, rational, and include the company name/ticker, otherwise people won't necessarily know what company you are referring to.

Agenda -

Paul's Section:

Volex (LON:VLX) (I hold) - an encouraging trading update for Q1, "slightly ahead". Some potential headwinds are mentioned, more generic than company-specific. Valuation looks reasonable. Remains a "coffee can" holding for me.

Headlam (LON:HEAD) - I'm feeling a bit smug about this one, which has panned out exactly as predicted here - broker forecasts were way too low (fairly obvious, it has to be said), and divis are resuming. Still good value.

Vertu Motors (LON:VTU) - astonishingly good H1 guidance announced today, with car dealers seemingly enjoying a bonanza, driven by buoyant used car prices. Although this looks a one-off, exceptional effect, but even on a more cautious outlook, this share looks outstandingly cheap. And it's fully backed with freehold property as well. Very attractive value share in my view. Potential for takeovers?

Jack's Section:

Water Intelligence (LON:WATR) - very strong momentum here and the group remains upbeat about a global opportunity. Valuation remains high but over the longer term this company can continue to grow.

Everyman Media (LON:EMAN) - premium cinema operator is making its way out of lockdown and looks ready to continue taking market share, but the stock is illiquid and pricey.

Property Franchise (LON:TPFG) - trade has…

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rmillaree

29th Jul '21

The question is how will the new car regime evolve over the nest few years given electric is now the only game in town.

This certainly is the elephant in the room - its a question to me of whether the franchise model will still exists and if it does what % of car sales will be with companies that have full vertical integration and sell everything direct under their brand. My worry would be that the car manufacturers will all look at teslsa and see a car as being akin to an apple iphone where it probably is more about the associated services rather than the car itself ref making future profits - keeping in house should maximise any monthly revenues that can be extracted for auto driving upgrades / remote maintenance checks etc etc etc . Are any of the car companies up to doing it themselves - probably not many at present but i see the franchise dealers as being really at risk that the brands they deal with may say asta la vista baby i will not be back. I would much prefer to hold somethig like motorpoint as they don't have a master that they rely on. One could possibly just as easily argue - subcont it all out like it has always be done and split the revenue fairly and don't have the hassle of having the sites on book - so perhaps my asumption that franchised dealers may die away to a lesser or greater degree could easily be wrong.

gus 1065

Further to my earlier comment on the Samarkand (OFEX:SMK) results vis a vis the recent sell off of Chinese related equities, I it might be helpful to share this commentary from the Fidelity China Special Situations Investment Tust Portfolio Manager about his thoughts on the reasons behind the sell off.

https://www.investegate.co.uk/...

Gus.

illiswilgig

Made.com (LON:MADE) - doublelutz - are these share sales notification of the over-subscription allotment announced by JP Morgan on 16th July?

RNS - 16th July - 'has today given notice to exercise the over-allotment option (the "Over-allotment Option")
granted by Level Equity Growth Partners I, L.P., Level Equity
Opportunities Fund 2015 L.P., Level Equity-Made Investors, LLC., Partech
Growth FPCI, Haka Investments Limited, Europe Ventures II LP and By
Design (UK) Limited in respect of 2,878,701 ordinary shares in Made.com
Group Plc at the offer price of 200 pence each.'.........

............Giving effect to the exercise of the Over-allotment
Option, the final total size of the Offer is £199.6 million (99,793,745
Shares), in total representing 25.7 per cent. of the Shares in issue.'

Seems to me that they are?

cheers

Mark

Breakout Trader

Hi Paul,

I know you're not a fan of charting, but fwiw, I think the downwards action on Boohoo (LON:BOO) may be about to turn. It seems to be gravitating to the blue area I've highlighted below (where I'm looking to top-up), which is a happy confluence of:

- 250p (round number)

- weekly 200MA (which price has bounced aggressively off in the past)

- upwards trendline of the long-term pennant

- Previous significant support / resistance level

It wouldn't surprise me if we hit that area, then see a fairly rapid recovery in the SP.

Use or ignore as you prefer.

BT.

Effortless Cool

Hi Graham,

I'm well, thanks. I took my first trip back to our office in The City for 16 months today, mainly to dispose of paperwork that I haven't missed having access to, so presumably don't really need.

Have no fear - I'll be back manning the WATR pump at the weekend!

Paul - Made.com (LON:MADE)

You knew I was going to say something like this didn't you! :-D

Well I didn't know, but I am not surprised. You make the bear case very well.

I have bought a very small position - 0.5% of my folio for 3 reasons:

[1] As far as I can work out they lost money in 2020 but generated cash. Not a lot. But some? In the first 3 months of 2021 they generated more than 25m of cash. More than they generated in the whole of 2020. Still an operating loss - as you point out. But more cash in the bank. Which interests me. Way too little information to know anything for sure.

[2] The company raised £90m in the IPO for specific reasons - £20m for European expansion, £20m for working capital, £20 to establish a home-wares market place and most of the rest retiring the debt. And of course the balance sheet was in dire need to some strengthening!

[3] Existing shareholders did not significantly sell down on the IPO - roungly 10% was sold to new institutions - the likes of NFU mutual, who are not short term investors? Most of the share sold at IPO were to raise capital for the company. That intrigued me, as its not very common for an IPO?

And I suppose there is a 4th reason

[4] As you described so well today - I have taken a small position so that its firmly on my radar and I have now got to do some work with funds at risk.

None of my thinking comes close to balancing out your well made argument that this is a loss-making company that may not go anywhere or make a profit ever. My gut sniffs an interesting opportunity - but my head is refusing to allow me to invest more than a tiny position without more data. This was always likely to be a wild ride - and its not looking like its going to disappoint on that. Interesting times........!

Harry Hindsight

Water Intelligence (LON:WATR) - there is no magic bullet for insurance companies to deal with claims in a 'non-invasive' way. Thermal cameras and other high tech equipment has come a long way but with modern building techniques (timber frame in UK), basements, double basements, roofs of all sorts - there will always be a need - unfortunately. But if their marketing department is on top form then gold medal time.

Boohoo (LON:BOO) - good call, the knife may have hit the floor - but putting money in would mean an uptrend and volume. I'm nursing a loss as are many others.

PS. We can all make charts work to our view. Just put an ALERT in stocko and wait for the email.

doublelutz

Yes, Level and Partech are two of those involved in the over-allotment and as they are the two to sell while retaining very considerable holdings that would seem a reasonable assumption.

Garry,

The Water Intelligence (LON:WATR) USP is to locate the leak in a non-invasive way. It may then require a hole to be knocked in the wall to get in to repair it, but at least it is just one hole.

Additionally, I believe that a lot of their work is to do with swimming pools. I don't know anything about the plumbing of swimming pools but I imagine that a lot of the pipework is underground, so the benefit of accurate location before you start digging is clear.

Avon Protection (LON:AVON) - I supported this at 3000 so we are where we are but always though some takeover target - i.e. better management. Nice volume here.

Mark - with regard to Made.com (LON:MADE) do we want it to make a profit soon? I would prefer it to use every penny to grow the business. This is a great brand according to my son and per the prospectus its target customers are relatively young and tech savvy. My son could write a few pages on this but no one would read it at this time!

nanotrader

I'm part way through that book right now and love it!

abtan

Made.com (LON:MADE)

Mark/doublelutz/Fool Hardy/Paul/every Made.com contributor today

Thank you for bringing this up today.

---

I wrote about this 2 weeks ago and had no idea the price had dropped by 25% since then. It's rapidly descended into potential buy territory for me now.

To save me repeating the entirety of my previous thoughts, here is a link to that comment from 2 weeks ago:
https://www.stockopedia.com/co...

The short version is that the trajectory for Made.com looks quite similar to WestWing (I hold) a German-listed competitor, but about 2 years behind in its evolution (or 3 years if we account for the covid-induced boost).

WEW made an EBITDA loss of 10mEUR in 2019; this year it's on track for +60mEUR profit (with a lot of cash generation.)

If Made.com (LON:MADE) can replicate this feat and generate, for example, £50m Operating Profit in 3 years (which doesn't seem overly unrealistic) then the current EV of £550m doesn't seem overpriced to me at all.

REASON FOR PRICE DROP

I've noticed unknown price drops in the past and wasn't sure what was driving them.

Then I discovered that many funds have access to anonymised email and credit card data, so get live updates of how sales are going.

So for example, if you bought a sofa from made.com you might receive an automated "order received" email in your gmail account. Google scoops up that data and sells it into the market to anyone interested in made.com sales.

Visa/Mastercard do the same with their credit card data.

Effectively the big hedge funds know how a company is performing well before any RNS or trading update. I've previously asked Stockopedia to look to buy this data in the future.

I do wonder if this is behind the current price drop? I wouldn't be surprised if there is some near-term slowdown that big players can see already.

So I'll be waiting for the next update before deciding whether to further investigate or buy in.

In any case thank you to whoever brought this one up today.

Cheers

30th Jul '21

Everyman Media (LON:EMAN)

Hi Jack

Thanks for your write-up on Everyman Media (LON:EMAN) .

I hold a sizeable holding and your measured write-up made me sit up and question my analysis - always a good thing.

For now I remain a happy holder and I'd like to explain why.

Possible Masked Optimism From Today's Update

The comment today on £21m of liquidity headroom was the only real indication of cash generation since May 17th, which for me is the most important thing.

And by my calculations it looks like it was pretty good.

Weekly cash burn pre-opening was stated as £0.4m.
We know that total debt as of April 1st was c.£22.7m, so debt on May 17th (7 weeks later) was likely close to £25.3m.
We also know that available liquidity was £40m.
Working through those numbers implies that cash generation between May 17th and July 1st was +£6.3m.

That actually sounds ludicrous, but given the number of leases negotiated down or cancelled over the last year, alongside what looks like increased ticket prices (I check regularly) and presumably higher beverage and food spend, perhaps this isn't so far-fetched?

To be honest, even if I've made an error in my assumptions, and the company actually generated half of this £6.3m I would still be impressed, given the rather short time period.

Of course, to caveat the above, there must have been some tax benefits/deferrals, but even including this, that appears to be quite a decent result.

Normalised Cash Generation + Refurb Capex

In 2019, aka "old normality," operating cash flow was +£14m.
Below is my calculation of annual refurbishment capex.

Each venue, on average, generates £1.2m of gross profit per year.
There isn't much data on refurbishments, but I saw that an extensive refurbishment at the Reigate branch cost c£800k back in 2015 (as per the company Annual Report.)

I think this is the "before" picture (from 2009):
https://www.villagehallcinemas...

vs what it looks like now:
https://hirespace.com/Spaces/S...
Given that no refurbishment was planned at Reigate for 2020 (as far as I can see) that implies at least 6 years between each refurbishment. It's probably longer than 6 years, but I'm happy to be prudent and assume it's every 6 years.

I'm not convinced it would cost £800k for every refurbishment either, but again, for prudence, let's assume that it does.
(Also this doesn't factor in the likely Virtual Print Fees Everyman would have received back from the studios - like a rebate - for upgrading to digital screening technology around this time, something I was involved in as I used to work for one of the major studios.)

That would imply <1 year payback on refurbishments and then 5 years of >£1m gross profit generation.

The above also implies £4.7m spent on refurbishments every year by the company (35 venues / 6 years * £800k).

So underlying cash generation, excluding expansionary capex, would be at least c£9m (£14m operating cash generation - £4.7m refurbishment spend).

To add some reality to the above (because note every refurb will actually cost £800k) let's assume it's a true range of £9m-£12m of underlying cash generation per year.
The EV of Everyman Media (LON:EMAN) is c£150m, so that £9m-£12m looks pretty good...if some sort of normality returns of course.

Let's not forget that the cash generation valuation multiple pre-covid was x20, which would imply a target EV of £180m-£240m.

Conclusion

Assuming no more lockdowns and cinemas remaining open, I personally don't think the valuation looks stretched at all.

I'm regularly on the bookings website and also continue to see many sold out showings throughout the week.

A cinema chain like Everyman also has the benefit that it can increase admissions and food/beverage prices and people will still want to come.

And hopefully growth can start again in the near future to help ramp up both that gross profit and the company's market cap.

The downside...well, I think that's pretty obvious, but for now, in this moment, I remain cautiously optimistic.

Fingers crossed.

Hi abtan/Jack.

Just want to compliment you both on the quality of your (soft) bear/bull discussion of the investment case for Everyman Media (LON:EMAN) . Makes such a change from some of the swivel eyed nonsense that sometimes graces these discussion threads of late. I don’t hold Everyman Media (LON:EMAN) at the moment although I’m an occasional customer at the Oxted and Reigate venues (which are excellent) but feel I have a much better handle on what makes the business tick now. Still think it looks a bit expensive as an investment - perhaps the share price has recovered too quickly compared to the underlying business on the ground and maybe has a few “hobby holders” i.e. customers that buy the shares based on their good vibes about the product (not necessarily a bad guide to investment) - but definitely more likely to consider it now.

Thanks again.

andywillz94

Re LON:VTU

I have been really bullish on this one since the SCVR brought it to my attention. The valuation is nonsensical to me for all the points you have raised Paul. Also, I would never buy a car online without having a test drive first. It has to feel right - the way it drives, handles, comfortable... especially if you spend a lot of time in it!

Can you imagine buying online, waiting for delivery, only to hate how the vehicle feels? I imagine its a faff to try get them to refund/swap, and even if its the most simple process, you still have to wait for them to collect it, look for a new one, and wait again just to risk it all over!

Car dealerships are going nowhere and im sure they can adapt to the inevitable switch to electric vehicles. Its something they should absolutely be planning for now - potentially a question for management at the next opportunity.

peterg

Can you imagine buying online, waiting for delivery, only to hate how the vehicle feels?

Well, I have to confess that my current car was bought new, online, after I'd test driven at a local dealer. Not behaviour I'm too happy with but in my defence I bought online from a different main dealer on the other side of the country for around 15% less, and before buying I went back to the local dealer looking for a compromise over the difference in price, and they refused to budge by even 1p. Faced with that I was quite happy to cut them out of the loop, and very happy with the result and the savings.

I'd certainly agree that there is a real role for physical dealers, and aI'd always prefer to deal with one, but online clearly does put downward pressure on what they can charge, and can't just ignore it.

smatthews1

31st Jul '21

Thanks for sharing this, never knew this was achievable but you can see how valuable it would be. Good suggestion!

Small Cap Value Report (Thu 29 July 2021) - VLX, WATR, EMAN, HEAD, TPFG, VTU

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Paul Scott

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