Small Cap Value Report (Thu 30 April 2020) - SHOE, NANO, UPGS, CNKS

30th Apr '20 by Paul Scott

74 comments 10678 reads

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

Estimated timings - I'm running late today, so will keep going until about 6pm. Apologies for any inconvenience. Edit at 20:05 - I'm wondering why I put in estimates for timings. Anyway, today's report is now finished.

De-listing risk

In the small caps world, we always have to be wary of the smallest companies, as they sometimes (often without warning) announce their intention to leave the stock market and become private companies (known as de-listing).

This usually does instant, and major (typically about -50%) damage to the share price. For this reason, it's vital to avoid buying micro/small cap shares where there's a risk of de-listing.

Off the top of my head, these are the main reasons (hence risk) of a micro cap de-listing;

Running out of cash, and no appetite from the market to provide fresh equity funding
Story stock that has gone stale - i.e. everyone's heard the story, and it's never worked, so impossible to get even gullible investors to back it again
Little to no liquidity in the shares - hence there's no point in being listed
Costs - often linked with the other points above - all the various costs of a listing can mount up to £100-200k, even for the smallest companies - e.g. broker/NOMAD, listing fees, PR, NEDs that probably wouldn't be employed at a private company, regulatory burden, wasted mgt time, etc. If there is no discernible benefit from being listed, then why continue with it?

It's worth checking our existing holdings, to see if any micro cap holdings display those traits. Covid-19 & the recession it's triggering, could well accelerate the de-listings of some micro caps. Hence why I mention it - this is an increased risk that could us money.

Getting rid of bad investments

It's tempting to allow bad investments to languish at the bottom of our broking account. I had one situation like that this week, Malvern International (LON:MLVN) which issued an update that sounds terminal. Without refinancing, it says cash will run out in May, i.e. imminently. I had previously bought quite a lot in a 4p placing during the bull market, but the turnaround plan didn't work. Thankfully I got much of my cost price back, by top-slicing when it initially rose to about 7p. However, the rest are now almost worthless…

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Paul Scott

30th Apr '20

The exception that proves the rule maybe?! ;-)

ed_miller

And I'm not sure about the charity shops.

barnetpeter

Portugull. Some were panic selling this at 60p just a month ago. Up 14% yesterday and 9% today at 250p offer.

dealtn

Care to explain?

Beginner

Flowtech Fluidpower (LON:FLO) bought out two companies I formerly dealt with. In both cases they were, more or less, family members working together from a big shed. They paid, in my opinion, way too much for both businesses. They have bought businesses in the good times, paid top dollar, and now have to run them through the bad times. They have issued at least three profit warnings in the last four years, and will probably do so again soon. The house broker cut its EPS forecast by 20% in January. This should be a good company, but it isn't. It moves up and down like a fiddler's elbow, so by all means trade it. But to me it does not seem to be a viable long term investment (said the man who stuck dosh into Intu Properties (LON:INTU) and Carillion (LON:CLLN) !)

The Phoenix

No worries Paul maybe one of the directors saw your ramble a few months back and nicked the no win no fee idea. As you say utter punt one would have thought claim must be of reasonable value to go to the bother of putting in a claim in the first place.

Thanks for flagging, I hadn't spotted the news about Warehouse & Oasis.

I recall that Oasis got into trouble many years ago, and did a pre-pack administration to ditch its loss-making, problem leases. It then went on to trade very well indeed for years.

I wonder if the profitable stores might continue again, under a new pre-pack administration? Although given lockdown, even if it's partially eased, I wonder if any of their stores are likely to be profitable in the short term?

Maybe we'll see Boohoo (LON:BOO) pick up both the brands, and bolt them onto their online only juggernaut?

Jim Wall

I have been a holder of Flowtech Fluidpower (LON:FLO) for a while - and its not one I've been particularly tempted to add. I don't sell much but this one has always been on the block. I never quite pull the trigger but above £1 I'd let go. learned the somewhat painful lesson of how careful you need to be with acquisition-intent companies - over-paying for businesses being a cardinal sin. also their insistence on a absolutely daft dividend has left it a bit vulnerable on the debt side. I do think they'll make it through now and there are signs that they're a bit more serious about cashflow conversion and balance sheet. it may well end up being a decent steady-state business but the jury is still out.

Jamie Green

Ditto Carillion, we live and learn...

(I hope)

Laughton

I had hoped that Boohoo (LON:BOO) might pick up Warehouse & Oasis but I see:

Hilco, a capital restructuring firm, have bought the brands and all the stock. for Oasis/Warehouse

Not sure what they intend doing with either.

Sounds like a pre-pack then - i.e. ditch the loss-making stores, and emerge a profitable business. I think Hilco tried that with Comet, but it didn't work?

ken mitchell

Thanks Paul for the Cenkos update.

Bearing in mind that cash and other assets cover most of the market cap, a recovering business is in the share price almost for free. So it looks astonishingly cheap.

So though agreeing current market gains look unsustainable surely a good chance that Cenkos share price will hold up anyway. Indeed today the share was up 1p on a big down day.

Already they are getting a few more contracts and as long as that continues, or better still frequency and fees increase, surely a good chance the share price will at least double in time?

And they have always paid out a large chunk of profits in dividends. So could again become a great income share too. With business almost in for free, surely downside is limited as long as they do get a chunk of the many likely fundraisings ahead.

Mark L.

I agree with Paul's comments about the feel-good factor that comes with clearing off a horrible, loss making position. It's pretty hard psychologically to crystalise a loss. ( I say this despite having read numerous investment books, years of experience and "knowing" the sunk costs fallacy.)

No problem for me psycholologically in dumping at the first sign of accounting scandal or even doubts. Or doubts about management oversight. Allied carpets (from years ago) springs to mind. More recently for me Avast - not accounting, but they'd been wrongfully harvesting user data. Avast have bounced back since that incident late last year.

I find cheap, large companies that go on to get cheaper very hard to cut loose. In fact I generally don't - to my cost. So after the COVID crash, I got rid of WPP at at very big loss and part sold ITV (ditto), but foolisly continue to hold Lloyds on its graceful descent.

Yes I agree, I don't hold any Cenkos Securities (LON:CNKS) at the moment, but writing the above section did start my twitching buy finger moving! What puts me off, is that I think the overall stock market is crazy right now. Hence I don't want to buy anything, until there has been a cathartic general sell-off. Look how most charts look exactly the same right now. Stock-picking doesn't even come into it.

FWIW (nothing), I've re-opened my hedges, ie shorting the Dow. It's almost the only thing I've made money on this year, before people tell me how dumb that is!

jonno

Hi BullsnBears

Apologies for the lateness in getting back to you. As beginner has said the goodwill arises from the acquisitive strategy adopted by Flowtech Fluidpower (LON:FLO) when it first listed. The aim being to consolidate a fragmented industry. This left the company with too much debt for comfort much of which resulted from earn outs paid to acquired businesses compounded by an over generous and naive dividend policy. Both of these are now in the past

The penny started to drop about a year ago, when debt reduction became a primary focus. The acquisition driven strategy was primarily undertaken under the previous CEO, Sean Fennon, although in fairness Bryce Brooks, the current CEO was part of the management team at the time.

In some respects I perversely think that the current crisis, whilst a disaster both in human and economic terms has a silver lining for Flowtech Fluidpower (LON:FLO) in that it has further forced the company to focus on debt reduction and consolidation. Hopefully if it gets through the current crisis and I think it will, the company will hopefully emerge financially more prudent and chastened. Despite the obvious misgivings I believe that it is a half decent company capable of being a market leader in a niche area of the construction/engineering industries

I have been in and out of Flowtech Fluidpower (LON:FLO) on at least two occasions being fortunate to sell when the price ran ahead of itself. However I am about 25% down on my current holding.

Flowtech Fluidpower (LON:FLO) has in fairness been a bit of a marmite stock. I can see Beginner's point of view, although I think that his assessment is a little harsh. Also I agree with Jimbonambo41 regarding the historic generous dividend policy. I would have preferred the company to have been less generous and used cashflow to pay down debt.

On the plus side the company continues to trade profitably; net debt has reduced by £3.3m to £16.6m over the last months and is expected to reduce further during the current year. Gross margins are in excess of 35% and cash flow and cash conversion have increased significantly. The details are in latest broker research released to day by Finncap which can be downloaded for free, once you register, at

https://researchlibrary.finncap.com/

These are my views which as you can are markedly different from those expressed by Beginner, but it takes two to make a market and I may well be wrong, as I have been in the past. As always DYOR.

Best wishes.

johnbutler1

Paul writes in a way that shows he cares for his readers.He reminds me of Jeffrey Bernard who wrote in the Sporting Life in the seventies.He tells us about his ups and downs and his personal problems in a way we can relate to.I certainly can .Selling too soon ,hanging on too long are just a few of the things I have done.Holding on to Shell for the dividend being my latest error.

m3taphysics

1st May '20

You didn’t highlight this bit from SHOE which is key:

”assuming that stores are allowed to open gradually during the summer months and return to a high proportion of previous sales over the next year”

that is a big assumption! A return to a high proportion of the previous years sales? Given the reduction in jobs, salaries, footfall I can’t see it being a high proportion. Or maybe it’s cheap shoes will do well? If it’s online business improves it may stand a chance.

peterthegreat

Hello purpleski, I also bench mark against Terry Smith and can confirm that it is possible to produce exceptional returns by applying his methods to smaller companies as I have been doing this since shortly after he launched his flagship equity fund. I suggested to him that it would be good to start a smaller companies fund and he did indeed launch Smithson but I was actually thinking of companies which were smaller than those in the Smithson universe. I also treat Nick Train and Keith Ashworth-Lord as mentors and borrow their ideas heavily. I was pleased to learn recently that Mr. Ashworth-Lord has plans for a smaller companies fund in the pipeline as well as the previously announced Global Buffetology fund. My approach is to directly copy some of the investments selected by these managers as well as investing directly in their funds in order to get exposure to their foreign companies (excluding US) without the high currency conversion & witholding tax costs which I would incur as a private investor. This is in addition to using their ideas to invest directly in smaller companies like you do. This seems to work well. I use Small Cap Report to identify interesting companies and it is also very useful to see the perspectives of successful investors who use methods which are substantially different to mine.

Good point, thanks for highlighting.

I did mean to emphasise the above point, but it slipped out of my mind whilst I was typing the report. So great that you flagged it! :-)

Thanks John, that's really nice. I'm an open book - it's just better that way - more interesting for readers, and often cathartic for me! :-)

Small Cap Value Report (Thu 30 April 2020) - SHOE, NANO, UPGS, CNKS

De-listing risk

Getting rid of bad investments

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Paul Scott

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