Small Cap Value Report (Thu 29 Sept 2022) - EMAN, XPF, LOOP, NXT, ATQT, LOAD, VLE

29th Sep '22 by Paul Scott

111 comments 8457 reads

Good morning from Paul & Graham!

Mello Results Show - is today, starting at 2pm - full details here. "Our Graham" is doing a spot at 15:00-15:30, so we’ll have to tune in for that! Plus there are several companies which interest me, and it’s so much more relaxing to watch/listen to a company presentation, compared with ploughing through an RNS.

Organiser, my old friend David Stredder says -

“We have a cracking results show tomorrow with about 20 companies being covered and five presenting. Plus David Stevenson from Amati and Peel Hunt talking about REX so worth watching “

I would add that we don’t have to watch the whole thing. I tend to have it on in the background, and zone in & out, depending on what interests me or not, whilst getting on with other things.

Agenda -

Paul's Section:

XP Factory (LON:XPF) (I hold) - a rapid roll-out of the Boom Battle Bars concept is underway, along with the existing Escape Hunt business. Deals from landlords are spectacularly good at the moment, and TripAdvisor shows high customer satisfaction at most sites. Interim figures show positive EBITDA, but a loss before tax. However, forecasts from Shore show profits from 2023 onwards, as the business is rapidly scaling up, helped by franchising many sites on good economics. Good current trading, with no downturn in demand noted. Could be good, once stock markets normalise.

Loopup (LON:LOOP) [no section below] - announces a small, discounted placing - at 5.0p (22% discount), to raise at least £3m. The trouble is, I don’t think that’s enough. LOOP is fond of issuing upbeat updates, but if you look at the results statements & broker forecasts, it’s still a heavily cash-burning business. The last update trumpeted a big contract that was supposed to generate a lot of cash, but here we are just a month later, and it’s trying to dredge up more money from shareholders. Forecasts also show that, whilst it sounds promising, the cloud telephony new business is still tiny, and cash burning. There’s debt as well. I think LOOP could really struggle, now that investors are not keen to continue pouring money into loss-making, speculative ventures. Very high risk now. Even just a small £3m raise will increase the share count from 106m, to 166m. Expect a lot more dilution after that too.…

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Harry Hindsight

29th Sep '22

No pick up on £THG. A large Cap in the Small Cap territory.

Charles Allen, Lord Allen of Kensington CBE, a Non-Executive Director of the Company, has
purchased 1,250,000 ordinary shares at a price of 41p. Around 0.5m.

Probably not some fundamental changes but maybe some buyer interest. I'm tired so not following it.

I hold from IPO 2021 hence burn't which is a shame for the system - but at least Mr Market made hay.

mojomogoz

I've not read all the comments in here today so not aware of what's been said about pensions and LDI. But fwiw I believe this to be a total storm in a teacup that a lot of commentators and 'experts' have latched onto and associated with something like GFC and solvency issues we saw then run in banks and credit markets. Totally bogus analogy, not even educationally useful. A better analogy would be the portfolio insurance of 1987.

Its not even clear that any pension funds that faced stress posting margin variation calls will be net losers over the past month. They may not have got the full liability hedge if they were forced to liquidate near the top in yield before yield came down. BUT THEY HAVE NOT BEEN ON BRINK OF INSOLVENCY

Comments about pensioners being poorer and done by Kamikaze Kwasi are really idiotic. These are final salary schemes. if there was any cost to recent days for a scheme then sponsor will be asked to increase contribution over the next decade. This is not a mark to market thing.

All other pensions are unaffected. They are just lower as markets have been falling. Nothing to do with Mad Liz

Paul2148

Considering with some (if not most) lenders you can lock in a rate 6 months prior to the end of your current one and that it was well publicised that inflation was creeping up, I suspect many people renewing now will have done just that earlier in the year.

The coming 12 months could see a significant slowdown plus some risk for those who took out a cheaper 2 year fixed during the last stamp duty freeze seeing a big hike when renewing soon.

Boon

This is the thing with financial crisis right? Its often not the first thing that goes bad that causes the collapse, but the knock-on effect; due to the complex derivatives/instruments concocted that were flawed and couldn't stand up when there are abnormal market conditions.

Did the UK's LDIs become the first dominoes for a global worldwide financial crisis? Hmm. We'll see in a few months!

I have it on my list to properly update my analysis later this week.

But I would say the covenant danger is getting too close now for £SYNT

If I remember correctly, the last results showed the covenant level at 2.3x (Debt to EBITDA I think), and that the max point was 3.5x, until early next year when it is 3.2x.

Today's announcement that EBITDA (in GBP) will be 10-15% lower.

Then there is the fact that the debt is in EUR and USD, which has now increased 10-15% in GBP terms since the results date.

So we're probably looking at a live covenant ratio of maybe like 2.8-3.2x currently. Which is very uncomfortable. There is a strong risk that this is not the last profit warning. Nor that the pound will get weaker.

Having read through the results today, I have reached the conclusion on £MCB that despite the debt now not becoming an issue, this is not investable as all the profits will get eaten up by pension contributions, increased interest, and debt repayments for the next decade.

Unless they can pull out like some solid growth (another 30% revenue in the next year or two) and get net profit margins up to the mid single digits (which they have never done in the near history).

There might be a strategic acquirer that could be a possibility, paying 0.25x EV/Rev. Maybe a contract manufacturer in the USA, looking to geographically expand.

This stuck out for me: "we've enjoyed three of the ten highest-ever box office releases in the past twelve months"

Unless they're expecting increasing number of new box office records every year, then the Everyman Media (LON:EMAN) financials with 3 new box office records, doesn't sound very good. And we're about to enter a recession; surely difficult for new box office records to be set?

Tommy H

Thank you for the link is appreciated

simoan

I see H & T (LON:HAT) is looking to raise £16.9m at 425p to raise funds for expansion. Offer available through primary bid

Placings are Also available directly now through AJ Bell which means no need to use Primary Bid. Main advantage is that you can take part within SIPPs and ISAs, which you can’t with Primary Bid.

Paul Scott

I'd hardly call it a storm in a teacup, given that it forced the Bank of England to abandon its plan to do Quantitative Tightening, and instead do up to £65bn in (effectively) QE (emergency buying of Gilts) over a fortnight, to get a grip on gilt yields.

Surely this is a good example of how all the instability that central banks have introduced into the system (starting with the Fed), triggering massive wealth destruction in shares, bonds, and property markets, in a short space of time, has inevitably triggered unforeseen and potentially dangerous consequences.

I see this as being potentially very similar to the start of the 2007-9 GFC actually. Namely a large drop in asset values, which then forces liquidations of assets, triggering further declines. All magnified by gearing and derivatives. Then a key market player (e.g. Bear Sterns, Lehman) goes bust, triggering a crisis of confidence, as nobody knows who has suffered the giant losses & could be next to go bust.

In 2007-8 they let the situation spiral out of control, because far too many people waffled on about "moral hazard". They were totally wrong, you can't just let systemically important organisations go bust, or the whole system shakes itself to pieces. Decisive action is needed, and early, to flood the system with liquidity.

That's why I think we're probably not long away from a reversal of interest rate hikes, and a return to QE. The world is addicted to zero interest rates, and it seems to me we're finding out the hard way what happens when they try to normalise things too quickly.

Regards, Paul.

Yes, I recall that Renewi (LON:RWI) had a lot of debt, when I last looked. So the key thing to check, is whether the borrowings are fixed or floating interest rates, and the expiry dates, as they might cost a lot more to refinance when they expire.

The debt structure was unusual, in that at least some of it is "Green bonds", so were quite cheap I recall, because ethical investors were keen to lend money to a recycling company.

Good points Trident.

Also remember that many house buyers are cash buyers now. There was a fascinating chart in the Times recently, showing that the number of owner-occupiers with no mortgage at all has been steadily rising for many years, and is now a majority of all owner occupied households.

Another point to consider, is that I understand why house prices might, or are likely to take a tumble as interest rates rise. However, that could prove temporary, because inflation is forecast to rapidly decline in 2023, and central banks would then be likely to cut interest rates again, particularly if (as seems likely) we're in a recession.

I remember in 2008, house prices initially tumbled, and the confidence fell out of the market, but once interest rates were slashed, it shored things up pretty well.

All guesswork of course, but I suspect higher interest rates could well be a temporary phenomenon for months, rather than years. If I'm right, then property, and housebuilder shares could be a good place to hunt for a recovery in 2023.

30th Sep '22

I suppose I am guilty of dramatic understatement! Clearly there was an acute technical issue in gilts market driven by idiosyncrasies of liability driven investing/hedging. My 'storm in teacup' point was more general in a UK inc sense and the reaction to Kamikaze Kwasi where I think we've seen general hysteria including from people who should be more sober (looking at you Mark Carney). The budget consequences should always have been a repricing of yields and interest rate trajectory in UK and weakening of sterling. Truss and advisors had made it clear that they thought interest rates should be higher.

I'll stick to this is more 1987 portfolio insurance blow up than 2008. 2008 was driven by insolvency (admittedly relative small in scale compared to global markets but there was a lot of leverage connected to it directly... and indirectly eg AIG) and a huge ricochet liquidity transformation and short term funding problem from now on strike eurodollar markets it unhooked in banking. There is no solvency issue in the pension debacle. It is purely a liquidity mismatch driven by rapid moves in long dated bond instruments. These instruments are not liquid enough for the hedging purposes of the pension funds so investment banks have 'kindly' made a market in derivates for them. That lead to variation margin requirements feeding back too quick in less liquid real portfolio and creating the drama. In effect, the investment banks are using their balance sheets to generate liquidity for the pension funds in long dated risks. technically the pensions could default as they didn't generate the liquidity to make margin variation...but they would have made good on the payment with a bit more time as the pension funds had abundant assets. The leverage/liquidity here long predates zero interest rates...but zero interest rates make for outsized moves in long dated bonds due to higher convexity effects at low rates.

I agree we will have liquidity injections coming...I go further and think we will see outright debt monetisation pick up scale (as you point out elsewhere the BoE has done a lot of that). However, I'm unsure re interest rates. I think we might see liquidity injection with higher rates...partly as I think Mad Liz is right that we need growth and for it we need stimulus. Europe inc UK has followed a sort of self harm austerity playbook since 2010. Liz wants stimulus, higher rates....and implicitly imo that means liquidity support ultimately including debt monetisation.

The negative 'expert' and european policy maker response to her is interesting. Its overblown imo...but that is as she has challenged a 'wise person' status quo. If one wished to be geopolitical and paranoid in thinking you could say Liz is trying to hurl a grenade into the EU/EZ as a move to outright stimulus (implicit in embracing deficits as a tool), with higher rates/yields to counter existing and further inflationary pressures but also recompense for the extra risk borne by the sovereign. This policy brew is dynamite to the european debt-fudge system in play since the euro crisis.

IMO the logic behind the Mad Liz strategy is better than the continuation of the austerity, low growth, debt increase road to nowhere...so I think even if Mad Liz is killed off for the affront she has caused her policy redux will live on

Exciting

Bluesky Ventura

Really? This is the only bit I was serious about I'm holding on to all my rupees!!!

M48

Sorry, director buy was different co Renew Holdings (LON:RNWH), ignore me. Still on my research/watch list though. Have started to try to see what their gas consumption looks like, that could be another factor but can’t quickly find an answer.

BnB

I’d have thought that energy prices were already “in the price”. The macro issue for Renewi is that recession reduces industrial demand for waste management services. Long term, provided the company survives the coming quarters, demand for recycling and recycled feedstock is likely to be strong. Debt is the other question mark. Sharepad tells me to expect a TU on Monday.

welwichia

I have not read the report, but in the context of accounting/valuation Cost of Capital generally refers to WACC (weighted average cost of capital i.e. the cost of both debt and equity to the company). Here is a decent write up: https://corporatefinanceinstit...

Does that fit with what is being referred to in your specific example?

Michael Tee

Paul,

Interesting.

So 'Mad Liz' is not mad and 'Kamikazi Kwarteng' is not a suicide bomber.

They have a plan for growth, a ladder which could lead us out of this post QE / inflation conundrum. And to top it off, her plan kicks the EU in the goaolies.

I agree it could work, although I'm not sure if she is clever enough to plan it quite that well.

Shame these policies were delivered in such a politically decisive fashion, when could have been handled much more sensitively.

Michael

1st Oct '22

MICHAEL

your post reminds of who's the greater fool. The fool or the fool or the follows her. MAD liz spend £150b on the energy cap and she does not understand its bills can be higher the then the £2500 avg bill. I agree on she's not mad just plain dumb.

Keep the faith the chaos will eventually end.

BSV

2nd Oct '22

I made no comment on their (so far embryonic) plan for growth, never mind the right plan for growth. My simple point is that actively and unabashedly seeking growth is the right orientation. There are then costs on the trade off between higher growth/investment and low growth/austerity

People calling Truss or Kwarteng dumb are being puerile / butt hurt / hysterical / political / frustrated at their circumstance (delete as fits)

I'm happy to elaborate more on my view however some questions first to see whether its worthwhile (all the hysterical commentators on this SCVR feel free to provide answers to these)

1) How much of the coming mortgage payment rise can be pinned on Liz/Kwasi from 23 Sept?

2) Can we have low interest rates like the last 14 years with a healthy economy?

3) In what way did Kwasi cause the the pension fund stramash? (And can you actually explain what happened there rather than repeat hysterical circular fire squad in media)

4) Assuming we have an unavoidable short run energy supply hiatus do we let the market set the price so as consumption adjust accordingly?

There are many more things to question/establish but those 4 are good as scene setters

Small Cap Value Report (Thu 29 Sept 2022) - EMAN, XPF, LOOP, NXT, ATQT, LOAD, VLE

Agenda -

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Paul Scott

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