Small Cap Value Report (Thu 30 June 2022) - UBG, WYN, HTG, MSI, CAR

30th Jun '22 by Paul Scott

64 comments 7715 reads

Good morning from Paul & Graham! Today's report is now finished.

Agenda -

Paul's Section:

Unbound (LON:UBG) (I hold) (£11m) - this is the second "in line with expectations" trading update since Unbound became a separately listed company (using the former Electra PE listing). Change of NOMAD looks positive. Marketplace strategy for third party brands is launching imminently. After a lamentable start in terms of share price since listing, I now see probably more upside than downside, so am happy to stick with it. Sorry this share has been such a lousy idea so far, but it has potential I think.

Hunting (LON:HTG) - a trading update which sounds positive, but has caused an 18% share price fall. The problem seems to be that some broker forecasts (which we can't access) were too high. That doesn't come across at all in the positive-sounding commentary from the company, which seems a bit misleading. It seems a lot of company for the market cap, currently trading just above breakeven, but with good sector tailwinds meaning profit is set to increase. Looks interesting, for sector experts to check out maybe?

Carclo (LON:CAR) - results for FY 3/2022 look superficially good at the headlines, but digging into the detail shows that liabilities to the pension scheme, bank debt, and heavy capex, mean shareholders are very unlikely to see any income. The equity looks worthless to me, nothing more than an option on a big turnaround.

Graham's Section:

Wynnstay (LON:WYN) (124m) - this agricultural supplier confirms that it had an excellent H1. Revenues soared due to inflation, and the company made exceptional profits from selling its fertiliser stock, where the price had skyrocketed. Profits are expected to normalise in H2 and next year. This stock is a dividend hero where risk management has enabled it to trade profitably, nearly every year. While the valuation is increased, I would suggest that a multiple of c. 13x is not overly expensive for someone who wishes to build a long-term position.

MS International (LON:MSI) (£49m) - This company pays its directors very well, but external shareholders have also been rewarded handsomely as the share price is back near its all-time high, and a long stream of dividends have been paid out by this cash-rich company. The underlying businesses are involved in a range of heavy activities including…

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ridavies

30th Jun '22

Re Unbound (LON:UBG), I'm responding to Sheeza specifically, but I'm also responding to the other several comments referred to above, and I look forward to Paul Scott's conclusions later when he has had a chance to chat with the management, especially on the specific figures of reach, repeat purchase etc.

In the meantime, I will add a few personal and anecdotal comments. My wife and I are both Hotter users, and I think she was when they were in shops. She is currently late 60s, I am late 70s. We both go for comfort as No 1 and Hotter are strong on that IOHOs. At the same time, my wife regards some of their ladies shoes to be stylish. We are both repeat buyers.

As for the expansion of brands on the site, I would have guessed that they will be aiming to use their reach to attract buyers of other brands, and some of the ones quoted are strong for us. Again, admittedly a personal example, my wife is wedded to Rohan as a brand. However, it is a fair point that you can buy these and others like Hush Puppies (made famous by veteran politician Kenneth Clarke!) can be bought on their websites or on comparison sites.

I doubt that they will be stock holders, leaving it to the other brands to deliver.

One thing is clear. the management need to tidy up their communications for investors, especially more facts and less wordy / more punchy in terms of statements re direction and means to get there. I look forward to getting them to Mello for example.

Wimbledonsprinter

Paul has been warning for a while about companies with funding issues. Shield Therapeutics (LON:STX) is today an example of this.

Shield raised £30m in 2021 at 30p (itself 70% below previously recent levels) to fund a launch of the product (Accrufer) in the US, after it failed to attract a US licensing partner.

Now the money has nearly run out. Shield admits it has tried to raise another $30m in equity - but so far unsuccessfully. Today, it has raised $10m as a loan (convertible into shares at a 10% discount to a look-back share price)! Unsurprisingly the shares are down another 40% today to be well in single digit territory.

danjamesbaker

Chrysalis Investments (LON:CHRY) posted their interims today, albeit the NAV has been known about for a few months for 31/03 so investors were well aware of the writedowns in Klarna, as well as the falls in listed investments Wise (LON:WISE) , Revolution Beauty (LON:REVB) and THG (LON:THG) . Using the latest share prices for the listed investments the share price is now at a c50% discount to the NAV which looks highly anomalous but symptomatic of the battering all companies holding PE investments are taking, despite a significant increase in the valuation of The BrandTech Group and a restatement of Starling Bank's valuation from April's funding round. Although some of these companies remain unprofitable, most are with significant growth (for example with Starling, they now have half of the share of the SME banking market of Barclays) I continue to hold and starting to look to add more to average down.

Would also highlight that TMT Investments (LON:TMT) - more of a VC investor - is now approaching a 60% discount to NAV using the latest £BLZE share price, meaning that at the current share price you are pretty much buying TMT's investment in Bolt (biggest holding) only and getting all other investments and cash pile for free. I continue to hold here also and looking to add.

Graham Neary

Thank you for the informed comment on £MSI! Much appreciated. Graham

Bouden54

WithIn the venture space Molten Ventures (LON:GROW) is on a similar discount but a much more established track record and better looking portfolio. I know with Chrysalis Investments (LON:CHRY) there are also serious question marks about how they took an absolutely massive performance fee for unrealised gains on several investments which have since collapsesd in value - of course they haven't returned any of the performance fee. This doesn't feel right.

Supermarket Income REIT (LON:SUPR) there was a pretty bearish note from Peel Hunt which reduced target price to 115p.

planetx

Few strange happenings at National World (NWOR) my biggest, my most confident and my most ever declining underperforming investment .

Yesterday Non Exec resigns at end September and is thanked.

Today COO resigns and is not thanked.

A good chunk changed of 500k shares hands yesterday at 19p wonder if that was the COO of market.

Then today an RNS saying in line presumably to steady the ship.

Still looks bargains of the decade to me with market cap now 39 million, 23 is cash in the bank and circa 8-9m profits putting it on an EV/EBIT in the 2 region.

Maybe David Montgomery shouted at them or something and they took umbridge.

Incredibly low volume on this but if its gonna make 9 million quid a year I cant see any reason to sell .

BnB

Timarr, I know youre good on technology stocks, do you think former popular stocks like Teladoc or SoFi have reached bargin prices or their day in the sun has gone. Nasdaq has been so hard hit surely theres a bounce due

With a hat tip to Timarr for the name check, I would say that the potential within unprofitable tech for a bounce is less important than their potential to be left behind by strong free cash flow generators while the market remains uncertain about the course of rates. There are so many beaten-up tech stocks, why pick the unprofitable ones that rely on liquidity for price support? The Nasdaq is full of great semiconductor stocks on very low PERs anticipating an inventory glut/demand drop. And you can buy pricey but moaty/growthy ServiceNow, Palo Alto Networks or Veeva at pandemic bottom prices.

Meanwhile, I’m meeting my bank’s IT analyst on Monday so will have more thoughts to add but I know already that he is hiding in lower-rated legacy enterprise software like SAP, systems integrators and cheap games developers like EA which offer a combination of value and dividend. That reflects an abundance of caution (conservative Swiss bank) but perhaps it’s best to wait until he turns more bullish.

abtan

Belvoir (LON:BLV)

Hi planetx

Biased Belvoir shareholder here.

Last year the company generated c£8.3m of underlying free cash.

This year there will be a few adjustments to that figure, such as the annualised impact of acquisitions, but overall I imagine the company will probably produce a similar amount of cash.

The current market cap is £87m, so that gives me an FCF yield of just under 10%.

---

Sales revenue will undoubtedly start falling at some point and I'm prudently assuming revenues here drop 50% in H2 vs H1.
But 60% of Belvoir's gross profit comes from lettings, which are resilient and still on the rise throughout most regions:

https://homelet.co.uk/homelet-...

I think management recently said that lettings rates were up 4.4% vs last year, so presumably lettings revenue is up even more than this when accounting for acquisitions.

I've read several reports of the re-mortgaging market taking off this year, so hopefully there's additional upside in the Financial Services segment that I haven't accounted for.

As for FY23, which is of course harder to predict, I imagine that management will do what they've always done, and make some tasty acquisitions to keep the gravy train rolling. They certainly have the resources to keep growing.

The share price is rubbish right now, but I've no plans to sell whilst that FCF yield is so high and there's such a strong and recurring underlying business.

Good luck with those weeds and whatever you decide to do with Belvoir (LON:BLV) .

Cheers

Hi BnB

I'm going to throw in a brief comment on SAP if that's okay.

I've used their software at a couple of companies in the past. It had such a horrible interface and I was shocked by its popularity. I was recently told that it hasn't really changed much in the last 20 years.

Sadly this all shows how deeply embedded it is in the financial ecosystem of the corporate world.

Revenues continue to rise each year, net profits have risen even faster, and they've done well with their expansion into cloud-based services. They buy back shares and have a small dividend.

Cash generation seems to have been c7b EUR over each of the last 2 years vs a market cap 107b EUR/EV of 115b EUR. I imagine that cash generation might come down this year with SAP pulling out of Russia, but overall the valuation doesn't seem overly expensive for such a quality company.

I should add that I only hold a small amount here as one of those safe, hidden away holdings that I don't ever really plan to do any work on.

Barry Addison

Their target market is women aged over 55. My wife used to frequent the Horsham shop and I went in to complain why there was nothing available for men. I think their brand is successful and it is that which has enabled them to attract and get quality brands on board.

I don't know you sex (and obviously no need to tell) but if you are an over 55 lady then I am genuinely surprised you’re not aware of them. If you're male then you probably wouldn’t have heard of them unless your missus dragged you in!

I do hold as a result of holding Electra shares, admittedly mainly because of Fridays.

I agree with everything you say about SAP. Truly horrible software but a cussedly resilient company. I too have a small stake in my GARP contingent.

Tommy H

Thank you, picked that up this evening as usual after everyone else!

mainlydown

I always worry about a 'platform' so I checked out the board. I don't see anyone with a digital background or even an idea on what a platform might bring them, so it seems like the kind of idea thrown around in the board room 'we need to be tech enabled' I am skeptical £LON:UBG

The Phoenix

True pearls Paul I wouldn't beat yourself up to much I remember you saying you were in a dark place in 08/09 well fast forward to now and you are doing a job you love (most of the time), living by the sea and hopefully enjoying life.

You may be down for the year but most importantly this time around you have capital to be still in the game rather than having to rebuild from scratch and also regain trading confidence to execute big calls when needed.

Maybe with to self notes put down next time i buy a nice expensive motor go 50% to cash :).

I'm mainly here for the bulletin board these days as I've given up trading small caps and fish in investments trusts and FTSE 100 stocks but the quality of the board especially now is top notch with a sprinkling of outstanding posters.

I've also been through three bear markets and actually was well positioned in cash going into each of them but where I was sh-t was getting back into the markets and missing probably half the rise off the bottom each time.

We won't recognise the low this time around until possibly 3-6 months past when it happens so like one other poster mentioned i am averaging into positions in stages on big down days then if we get a rally and a position goes to break even I sell 50% of the stake rinse and repeat the process to try and bring my average starting position price down.

One big learn for me at times like these is to start accumulating what will hopefully be long term core positions but without betting the farm to quickly and equally being way to slow to accumulate as previously has happened

If the stock drops by more than 10% I sell half and then look to try and average back in lower down at some point this process will stop working and prices won't keep falling back after every mini rally and that should hopefully signal things have turned.

I wouldn't risk averaging down to much in stocks but with decent investment trusts like Smithson, Black Rock World Mining etc the risk is much less as its unlikely the whole portfolio will fall over.

Regards Andy

epo001

Am a chap and 2 of you have proved my point I think. You were introduced to the brand via retail outlets. Now there is only a website and it is one amongst many websites so how are they going to build up a present and future customer base who will make repeat purchases? There is a mens section but it seems somewhat, ahem, pedestrian.

I agree it is just ludicrous to they can create a platform at low cost to compete with the real hot brains and tech .

The owner of gymshark was asked if he feared the likes of Adidas or Nike coming after them, he said not a chance but he feared the next 15 year in a bedroom.

Paul2148

it’s a real shame this is struggling as by all accounts the product is great and really benefits people in need.

A 100% increase in prescriptions Q1 vs Q4 and a change in strategy to really focus on womens health will hopefully help sales along, although a lot of damage done from dilution and the loan facility.

Paul Scott

Hmmm. your sweeping statements yesterday turned out to be completely wrong, planetx. See tomorrow's report.

Maybe do some research in future, before publishing strident & factually wrong opinions?

Tonysaparito

1st Jul '22

Hi Timarr..Thanks. I read this section and those from Paul, Jack etc but whilst I know many are running for the exits , I , probably like you am just getting on with the business as normal. The reason why I have not been posting as I have and still am very busy in my others businesses, which are making money, unlike my Sipp. ISA or other investments are like sinking ships. However, whilst many will be fretting about this bear market, at present I know from dire experience over the years, that there is little we can do when Mr Market has lost his focus.. I am just sitting this market out, as I know no matter what I do, my input has little effect. Overall, my total investments are down over 30%, and I have a mix of Fundsmith, Sipps, SASS, and ISA investments.. I am not even remotely thinking of selling, as I did that in January,Feb, as I anticipated a cold wind was going to blow in from the East...Whilst I do not profess to be an expert, WHO IS?. I think we all have much worse to come and fear what worse will mean for some newer to-market investors. best to all on hear

Small Cap Value Report (Thu 30 June 2022) - UBG, WYN, HTG, MSI, CAR

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Paul Scott

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