Small Cap Value Report (Thu 3 June 2021) - FOXT, MBH, NRR

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

Apologies for the self-promotion, but here's my latest chat with Tamzin at PIWorld, which was great fun! I've asked that the next interview be me interviewing Tamzin, to mix things up a bit!

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Timing - should be finished by about 1pm today.

Agenda - all written by Paul today, as it's quiet for news, and Jack has other stuff to do -

Foxtons (LON:FOXT) - trading update - ahead of 2019 & 2020, but doesn't tell us if ahead of expectations or not. Holding an online Capital Markets Day (CMD) today from 14:00-16:00, not clear if private investors can attend or not, I'm trying to find out. Overall I'm neutral, as it looks expensive on current broker forecasts (but maybe those will rise in future?)

Michelmersh Brick Holdings (LON:MBH) a positive trading update, but only in line. Is it limbering up to a forecast raise later this year, perhaps? This share looks quite good - decent quality scores, and seemingly positive market conditions in its sector - rising selling prices could trigger an operationally geared rise in profits?

Newriver Reit (LON:NRR) - a quick look at this interesting value retail property REIT. Resilient performance, but maybe fairly priced now, after doubling in the last 6 months?

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Foxtons (LON:FOXT)

61p (pre market open) - mkt cap £199m

Trading Update (& Capital Markets Day)

Foxtons Group plc (LSE: FOXT), London's leading estate agency, will today hold a virtual Capital Markets Day for institutional investors and analysts.

This event is from 14:00 to 16:00 today. Why aren’t private investors also invited? These events should be open to all investors, not just institutions. We often ask better questions than the institutions, I’m told, by many companies that I do speak to.

Let’s hope Foxtons at least publishes the slide deck of the CMD on its investor relations website, or better still publishes a video of the CMD. Everyone should have access to the same information, anything less is unacceptable.

I’ve emailed investor relations to confirm if PIs can, or cannot attend the online CMD today, will report back here if I get any response.

UPDATE at 08:41 - I take it all back! Just had a reply from IR at Foxtons saying;

Yes of course, all investors are welcome to join the capital markets day.
Users need to follow this link, which was also included in the RNS, in order to register and be allowed access to the presentation: https://www.foxtonsgroup.co.uk/investors/capital-markets/

So there we go - if you're interested, sign up for it! End of edit.

Current trading -

Since the Group's Trading Update on 14 April 2021, trading momentum within the business has continued to be strong. Following a 49% increase in Foxtons Q1 sales revenue versus both 2020 and 2019, the sales commission pipeline has continued to grow and is now 65% ahead of last year and 17% up on 1 January 20211.

As a result of the strong trading momentum, adjusted operating profit for the first half of the year is expected to be significantly ahead of both 2020 and 2019.

The footnote says that a large acquisition (of Douglas & Gordon estate agents) has been excluded from these figures, to make them like-for-like comparable.

My opinion - this is not satisfactory as an update. It only mentioned part of the business - residential sales. What about the important lettings business?

Also, the whole point of trading updates is to tell us how businesses are performing versus market expectations (i.e. broker consensus earnings forecasts). Foxtons doesn’t tell us that today, it just gives a fairly meaningless comparison against 2019 & 2020. It was loss-making in 2018, 2019, and 2020, and existing consensus shows a bounce back into profitability in 2021, hence the update today doesn’t tell us anything has changed in that regard - an increase in profits vs 2019 & 2020 was already expected.

I expect they’ll go into more detail at the Capital Markets Day, which you can sign up for here.

Foxtons did very well in the London property boom a few years ago, but as you can see from the Stockopedia graphs below, profitability collapsed long before covid struck. Forecasts show modest profitability this year (the lighter blue blobs below), but at a level which makes the shares look expensive (FY12/2021 forecast PER 53.1, falling to 29.8 in FY 12/2022).

Therefore the investment case for Foxtons currently, is good if you think it’s likely to smash forecasts. Many broker forecasts are way too low at the moment, so that’s a distinct possibility. However, I’m looking for companies to be issuing “ahead of expectations”, or “substantially ahead of expectations” updates, along with big increases in broker forecasts.

We’ve not seen that from Foxtons today.

There don’t seem to be any brokers publishing FOXT research on Research Tree, so we’re in the dark.

Yes, the sales pipeline is good, partly helped by Govt schemes to boost housing transactions (e.g. Stamp Duty reductions), but what about the rest of the business, and what happens when Govt support schemes end?

I’m told by a sector expert that an influx of affluent people from Hong Kong to London is expected in the coming years, which could give a nice boost to London. Plus of course, London is already coming alive again, as many people are now returning to offices, and general activity is on the up. I would never bet against London recovering from the pandemic, it’s far too important as a business, and social/cultural/holiday hub.

As you can see below, broker forecasts have been rising, so it’s worth keeping an eye on this graph, to see if it updates again in the coming days, when brokers have attended the capital markets day, and been given more colour on how the business is performing.

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I don’t currently hold FOXT, as I decided it looked fully valued some time ago, after a strong rise.

However, I’m perfectly receptive to the idea of buying back in at some stage, if the valuation becomes attractive again. The balance sheet is strong, it seems to have made some good acquisitions recently, and recovery in London could see forecasts continue to rise - hence it might grow into the valuation. Note that the share count did rise, as it raised cash from shareholders during the pandemic, hence be aware of dilution.

Overall then, I’m neutral, but keeping an eye on it.

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Michelmersh Brick Holdings (LON:MBH)

147.5p (up 1.4% at 09:53) - mkt cap £139m

Trading Update (AGM Statement)

Michelmersh Brick Holdings PLC (AIM: MBH), the specialist brick manufacturer…

The current financial year is 12/2021.

Today’s update says -

"Since returning to full production capacity at all of our sites during the summer of 2020, the Group has experienced strong demand from its customers, with the construction market remaining very active.

During 2021 to date, the Group's performance has continued to be robust and production volumes have been ahead of expectations.

"Acknowledging this encouraging performance to date in 2021, and the Group's strong and balanced order book, the Board is confident that the Group is firmly on track to meet full year expectations.

Putting together strong demand, production ahead of expectations, and press reports of rising brick prices, I’m surprised this update today is not ahead of expectations.

Reading between the lines, it sounds as if an upgrade in expectations could be in the pipeline for later this year?

I can’t find any broker research.

Valuation - looking at the usual Stockopedia graphics below, the quality scores are good, although the valuation scores are nearly all middling, suggesting that the current share price could be about right?

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Upside could come from forecast upgrades, which sound fairly likely.

My opinion - this looks quite good.

I suppose the key question is whether rising prices of bricks is a short term supply squeeze, or a more permanent thing? Also I don’t know to what extent MBH’s input costs are also rising, and how readily it can pass on price rises to customers? I.e. are there long-term contracts, are prices flexible, etc.?

Overall, it looks worthy of a closer look.

Brick distributor Brickability (LON:BRCK) has done very well too, and insiders at BRCK banked some profits in a recent secondary placing - suggesting that maybe the upside there is already priced-in?

Looking at the long-term chart for MBH, shareholders had to endure a 5-year sideways move before the recent surge.

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Newriver Reit (LON:NRR)

100p (down 5% at 10:48) - mkt cap £306m

We don’t normally cover property REITs here at the SCVR, because it’s a specialist area, and they take too long to analyse. However, NRR is an interesting one that we have covered for years. It specialises in sub-prime retail property, and pubs, often with development potential.

Whereas larger REITs have been under enormous pressure, eg INTU went bust - so did (different sector) ENTU actually. So if you spot companies called ANTU, ONTO, or UNTO, we should probably steer well clear!

Preliminary unaudited results for the year ended 31 March 2021

Follow this link to see the company results presentation pdf slides (the video isn’t working at the time of writing)

Resilient performance

Reinstating divis - 3p per share

Market-leading rent collection

Unsecured balance sheet

Disposing of Hawthorn pub business

Like-for-like (LFL) valuation decline -8.2% in H1, -5.6% in H2 (13.6% for FY 03/2021) - nowhere near as bad as many other retail properties - so the focus on value retailers on modest rents, has paid off

EPRA NAV per share down 24.9% to 151p - well above current share price of 100p, but that’s a steep decline in NAV, not helped by the effect of gearing. Once you factor in another possible drop in NAV in 2021, then the discount to NAV might not be that much

Bank refinancing not due until Aug 2023

Net debt £493.3m - still looks quite a lot, but I think that will come down when Hawthorn disposal goes through

My opinion - I’ve seen enough to get the gist of things. NRR has done really well during a brutal period, and crucially has not had to dilute shareholders.

Will EPRA NAV go up or down from here? I imagine in the shorter term a further decline could be on the cards. Hence that limits the likely upside on the share price to a level where I wouldn’t be interested.

The rise from 50p to 100p looks fully justified. At this stage, I’m not convinced that a rise from 100p to 150p would be easy, or come any time soon, hence I’ll pass on this one at the current price.

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