Small Cap Value Report (Thu 31 Oct 2024) - FTC, KNOS, PPH

Who are you referring to caf ? 

Whoever it is, you are right thou. 

After I finished being a full time FD in private equity backed businesses I used to look after a small handful of growing SMEs on a part time basis. Anymore than 3 or 4 and I would start to get confused about which business was which and the numbers all got mixed up in my head.

How on earth Paul manages to get into the detail of hundreds of businesses and keep on top of it all is just beyond me ! 

Your last rant ( or maybe it was five or six rants ago - only joking ! ) was about how there was a cliff edge coming up regarding the lack of the next generation of entrepreneurs and future business leaders . 

Apparently it was all going to end with you and yours 

Seems thats not the case

So many examples of upcoming youngsters who want to be their own bosses, in the daily press every single day

Great to see you are doing your bit 

So the question is what exposure does Secure Trust Bank (LON:STB) have?  Have they made any provision in the accounts? 

US & EU bond yields also sharply up over the past month. 

Don't think we can blame Rache for that...can we?

Yes Topvest - I noticed this earlier. Sky news showed they were starting to move yesterday as the budget notes were released. As you say - they have kept on moving today.

Stagflation has been mentioned today on this board. I would guess that the markets are considering this possible unfolding disaster.

I dont think the TV appearances by the Chancellor and PM have helped today. Our PM once again does not appear to have his PR gene functioning correctly. One would have thought he would be on safe ground visiting a hospital after awarding the NHS 23 billion.

Not so - he is reported as saying that NHS staff would have to work harder when asked if there would be more staff available to reduce the burden of work.

I dont think we have had the full fall out from this budget yet.

No, nothing like Truss!

Michael 

There isn't an AIM threshold - BPR is restricted to 50% i.e. the IHT charge will be 20% on all the portfolio so it impacts all AIM investors even of modest means

The £1m relates to agricultural property relief and business property relief, here business property refers to property such as business equipment (e.g. tractors) or unquoted companies (i.e. not AIM stocks). 

Irrespective of the value AIM stocks which qualify for BPR the value will be subject to BPR of 50% (i.e. with IHT at the current rate of 40% such AIM stocks will be subject to 20% IHT).

See "The rate of relief for shares designated as “not listed” on the markets of recognised stock exchanges will be 50%." Extracted from https://www.gov.uk/government/...

I has taken a year to get probate on the estate of a member of a family with a large holding in an Aim listed company I know of. I can only assume the delay was down to valuation in recent volatile times, my informant didn't say.  So best to bear that in mind and plan ahead.  The Grim Reaper can strike without warning and you want dependants to be taken care of without delay.

This is political diatribe and has no place in this forum

Card Factory (LON:CARD) is clearly finished as a business, no?

mr market has decided and that's that!

(/s of course!)

While I have every sympathy with family farmers is it not the case that  the price of farm land had been driven up to £10-£12k/ acre not because of the return you can make from farming but because it became a means of avoiding IHT.

How much has agricultural land gone up in value over the last ten, twenty, thirty years?

I think the biggest worry about farming now has to be that less and less food will now be produced in this country. The farmers have already been hit too many times by regulations and standards making it near impossible for them to make profits from farming food. Then they have seen trade agreements made with the likes of New Zealand whose farmers are not regulated to our same high standards making it impossible for our farmers to compete price wise. 
What then worries me, is if for some reason we had another world war, we would not have enough food in this country to feed us without importing. And for those old enough to remember the last world war, they will remember how short food was and that ships that imported food to us became a target. 
it is all very well being in a world of globalisation  but there is something to say for being self sufficient. And when people buy products from outside of their own country, a little bit of that money goes out of the country, which then makes us all poorer. So we may pay a bit more for products made in this country but we all benefit from it as the money stays in the country. Perpetual circle that is in our own interest to not break. 

By way of balance, the respected tax lawyer Dan Niedle of Tax Policy Associates has published information today on X showing that very  few farming estates should in actual fact be impacted by yesterday's budget changes. He backs this up with various evidence, stats and examples which seem plausible to me.

Not my area of expertise by a long way but its always interesting to see a detailed fact based assessment of the impact of change in order to take the  heat out of the understandable initial emotional reactions

We have gone from a government of incompetent Eton pupils to an incompetent bunch of former civil servants and union officials. As a small business owner I am now seriously considering shutting up shop. My labour costs from next April have shot up.

Apparently none of the front bench have any commercial experience/ run a business/ etc.  

No apologies necessary.  As I stated yesterday, I have sold all my U.K. portfolio and indeed my investments in a restaurant and wine merchant ( both before the budget in anticipation of a disaster waiting to happen ) .  Now planning to exit U.K. and live max 90 days here . 

The counter argument would be that businesses will also respond by being less generous in wage/benefit growth and in making new hires, which would have a deflationary impact

As I said before and is a counter to your anticipated swathe of forecast cuts is that I think the budget is inflationary.

to me its obvious from the  budget and the route taken my labour is inflationary i doint think that can be doubted - the question is whether thats against a  backdrop of stable inflation otherwise. Poor workers have suffered period where prices costs  gone up more than earnings  - and they have basically helped keep inflation down. I see nothing wrong in the opposite happening and inflation being a bit higher than it would have been due to real world wage increases as they catch back up - if the backdrop of other stuff is low i dont see the need for wages being one segment of the whole tipping us into any area we should not be. My opinion is that real world wage increases are probably better for the economy than even growth as its likely  thatthe much neded extra cash being spent in the uk that will aid business to grow - sometimes the logic of minimum wage rises always being bad seems so plainly nonsensical to me - i dont understand why the benefits are normally completely ignored. I do understand its complicated and runaway wages can cause inflation. No one ever seems to claim  when higher earning people are able to get better jobs  earning more and that employers cant afford these good staff - but an increased in minimum wage will destroy business. Perhaps for minority it will but overall i like the average worker having more in their pocket via their real graft.

This is the OBR's verdict on the behavioural changes that result from raising Employers NI

3.11 The indirect effects of the measure in aggregate reduce the yield by £5.5 billion in 2025-26, rising to £9.6 billion in 2029-30 (36 per cent of the static costing). This results in a post-behavioural yield of £16.1 billion in 2029-30. These comprise:

• The indirect behavioural effects of the measure on nominal and real wages, and profits. We assume that firms pass on most but not all of their higher tax costs to employees. In 2025-26, the year it is introduced, we assume firms pass on 60 per cent of the higher costs to workers and consumers, via lower wages and higher prices, leaving 40 per cent to be absorbed by the employer in lower post-tax profits. Further adjustment takes place thereafter such that, from 2026-27 onwards, we assume, based on demand and supply elasticities for labour,^[15] that 76 per cent of the total cost is passed through lower real wages, leaving 24 per cent of the cost to affect profits. Of the long-run pass-through of this cost to employees’ real wages, we assume four-fifths comes through lower nominal wages and one-fifth via higher prices. The pass-through to lower nominal wages results in a £3.4 billion reduction in yield in 2025-26, rising to £7.5 billion in 2029-30 (29 per cent of the static costing).
• The indirect effects of the measure on labour supply, as workers and firms, respectively, reduce labour supply and demand in response to lower wages and higher employer costs. We expect the measure to reduce labour supply by around 0.2 per cent, or a little over 50,000 on an average-hours equivalent (AHE) basis, by 2029-30. This is evenly split between a reduction in employment and a reduction in hours by those who stay in work. Because not all of the rise in costs is passed on to workers, firms also reduce their demand for labour. Overall, this reduces potential output by 0.1 per cent by the end of the forecast horizon. There is also a small reduction due to higher universal credit spending as a result of lower net incomes and reduced labour supply from the measure (which increases universal credit spending by £0.4 billion in 2029-30). These effects further lower the yield of the measure by £1.1 billion (4 per cent of the static costing). We also made a small adjustment to the composition of employment to reflect that the measure will increase the tax incentives to be self-employed.

Hmmm sort of 

Raising enormous sums by loading the burden onto employers' NI seems a neat solution which won't hurting the average employee, right?

But  what are the consequences?  Well, it's a cost burden to business and can fairly be characterised as a tax on employment, likely to inhibit job creation.  

When companies are impacted by increased costs they will pass this onto their customers (if they have pricing power and are able to) or will cuts costs, and if the Genesis is employment-related it will be through wage containment or initiatives to right-size their workforce through reducing headcount or over times increased automation.  Clearly a boost to some company such as MPAC (LON:MPAC) whose packing solutions replace low skill workers with machines. 

If they can't do the above it impacts profitability, cash flow and the capacity to invest and remain competitive.  

None of the above is helpful for “ordinary working people” . . . . . . and most people working in the private sector work for small businesses who are run by real people whose livelihoods are being squeezed.  

Points taken David, but I suspect it will be a lot worse than you think, because many big employers are very low margin businesses with little pricing power. Competitors might not increase prices, or delay it, in the hope of gaining market share. The CEO of XP Factory (LON:XPF) told me that's what they had done in the last 2 years' high wages inflation - absorbed the impact, to gain market share. Mind you, the end result is that XPF doesn't actually make any real profits at all!

There's an interesting article here on Sky, saying that the reduction in the employers NIC threshold is the real killer for big employers of part-time staff, which has resulted in the impact being far worse than their pre-budget modelling. Excerpt  (refers to the major supermarkets) -

"An executive at one of the quartet said their immediate calculation was that they would have to pay "between double and treble" the additional sums they had modelled following pre-Budget reports in the media that the chancellor was preparing to increase the employer NICs rate by two percentage points."

So on balance, I think my prediction of profit warnings & sharp broker downgrades is looking more likely, but only time will tell!

Regards, Paul.

Well said. The SCVR is consistently excellent. Saturdays' podcast adds extra value.

I'm still v unclear as to whether the SIPP trumps AIM or vice versa.  If AIM shares within a SIPP don't get relief, then that's a big issue.

And I don't see a lot of point in leaving non AIM money in a SIPP if one is above £500k individual/£1m per couple - left in, it will be hit with IHT, then Income tax at the recipient's marginal rate.  Taken out of the SIPP and donated, just income tax at my marginal rate - if I survive 7 years.  Seems to be win if I survive, don't lose if I don't.

I'd  

When huge sums of new money are given at once it tends to go largely on pay rises - I would estimate between a third and a half. Obviously this won't produce much in the way of growth, which really needs to come from incentivising the private sector. 

Basically Farmers now have to give their Farm to their surviving spouse on death or gift it to their children under the 7 year rule to avoid IHT. Given Farmers often will often work beyond retirement age, there are bound to be tragic cases where these new rules will penalise those who were taking a more relaxed view under the old regime. 

Basically trailing  high tax rates as productive is I think likely to prove a fallacy. Unfortunately you cannot disassociate productivity from the Benefits system, and an NHS system which facilitates sickness (remember the new sickness rights) by doctors being able to write off people from work for 'Mental Health' reasons is an open door to abuse, notwithstanding the smaller amount of genuine cases.

So major reform  of the system would be needed.  Unfortunately that will be slow if it happens at all.

I don't see the steely toughness of those involved to reform practices, as with the Union awards. 

Thanks. When the smoke and mirrors are taken away, this is the gist of the budget. A large rise in NI levied given to the NHS with no strings attached. 

Although the American system is useless, i think a move to something like the Scandinavian system is a solution for the NHS. Instead of a county with an NHS,  we are now an NHS with a small economy attached. 

CGT was yesterday.  IHT April 26 for Aim, April 27 for SIPPs I think.

Wow, thanks Phillip, that's made my day!  :-)

Given your experience, I hope we'll hear a lot more from you here in the comments section in future now you're retired! As we always say, it's a team sport here, with the main reports being the conversation starters, but then often more detail and insights coming from readers.

Best wishes, Paul.

As far as PPHE Hotel (LON:PPH) goes, less than half EPRA NAV seems like the wrong price for operators with a good track record, readily marketable assets , valuations to increase with falling rates (although debt fixed in short term). Have to question why they bother paying dividends or building new hotels when they trade at such a lowly valuation, surely the best capital allocation decision would be to buy back truckloads of  their own shares 

The large listed staffing companies have mostly non-UK earnings.

A lot of money flows to the advisers who intermediate SEIS/EIS fundraisings. So they always have an incentive to sell an opportunity, whether it's a decent business plan or not. Also, they have no incentive to realise the investments so your money is locked up for many years and you have no control over when it is realised which usually requires your company to be bought or significantly recapitalised. There are many zombie EIS investments out there.

I agree it is profoundly depressing for farmers. Round our way agricultural land is edging up to £12k/acre. I believe you need at least 150 acres for an economic size, so serious family farmers will be well beyond the threshold. Not forgetting their barns full of expensive kit. This Government appears to have no coherent policy for land use and food security. As Jezza Clarkson said yesterday to his fellow farmers - Don't top yourself, just survive five years and this lot will be gone. Or words to that effect.

If landowners plan ahead they can avoid inheritance tax. Another reason for farmers to complain....and I should know cos I work for one,

What do you think of Seedrs now named Republic as a seed platform?

Always really enjoy your posts, thank you. 

"What an absolute disgraceful kick in the nuts for the faming community ."

Hopefully some sense may be seen somewhere down the line - hopefully farmers have their pitchforks at the ready - i think most working people would understand that passing on of farms from generation to generation at lower level should not be prevented from happening - in that regard stupid policies that have almsot nil backing will hopefully get the chop sooner or later.

Note as if the other bad news wasnt enough - they have also in the detail of the budget kicked farmers in the nuts by reversing the reversed decision of the tories not to treat double cab pickups as cars - the tories scrapped that propsed change less than 10 days after they announced it - labour have decided to go ahead.

I cant see Starmer trning up at any farmer meet and greets any time soon.

"I have altered the deal. Pray that I don't alter it any further." Labour has form for raiding pensions. It's a big juicy grub.

As I recall, Blair said that since they were offering tax perks for pension savings it was fair that they laid down terms for its use. In other words, it's not your money, it's theirs.

In my early 20's I was training as an accountant. One of our clients was a pension consultant, IIRC. There was some deal whereby he could talk to the staff to persuade them to join whatever nonsense he was trying to flog. Naively, I ended up contracted out with one of those with-profit schemes. In retrospect, I wish I hadn't.

Roll on to about 2015. It was a time when the gov't were trying to shove private pensions down everyone's throats. I was a little wiser this time, and already had contracted back in. I got some paperwork from my employer. The deal was that it would be invested in bonds/gilts. Yes, bonds. At a time when  interest rates were near zero.

The logic is that bonds were "risk free". Yes, fine, but you're locking in low interest rates. If interest rates were to rise for any reason, those bonds would go down in value.

It has been my observation that insurance/pension companies always have a logic as to what they do, but that logic is always wrong. Useless.

So in the dustbin the paperwork went.

I have long come to the conclusion that pension schemes are a waste of time. I don't want other people telling me what I can and cannot with money I've contributed. So I save as much money as possible in ISAs, buy and sell when I want, draw down whatever I want whenever I want.

We go through periods where insurance companies are being investigated for mi-sselling. I have a simple heuristic: if they're selling it, then they're mis-selling it. These companies love their "schemes".

So that'll be my spleen vented for the morning.

great post, socialism is hugely destructive to creating a self reliant society the  benefit culture will suck us all dry in the end.

I recommend robert Murray brown who has written extensively on this over the years.  He also set up a group that never gained critical mass.

However most people with assets have done exceptionally well since the banking crisis/QE 2008. Those with no assets, at the low income end, have had a crap time. Even during Covid they were out there working while others hid at home on better pay so can understand why they wouldn't give a monkeys about IHT etc.

Well said its pretty simple provide jobs , have decent minimum wage keep things ticking over and build some affordable housing and keep the lights on - its a complete disgrace that whatever the promises there is not enough affordable housing in the country - labour are making the right noises in that direction but they have  very hard job to deliver anything useful bearing in mind the rate of population increase we have. the moaning us us lucky ones matters not a jot what maters is that your average person who wants to do a  working week can get bye and can have a reasonably price roof over their heads to have some privacy in life - they real heroes are the poeple who put in working week dont moan and get on with their life without asking for the earth of others.
 

Thanks Brookeda,

Yes I also noticed that most of the shares on my recent bargain ideas watchlist earlier this week, seemed to put in a large surge yesterday afternoon, so looks like between us we found some nice opportunities. In my case it was more about holding my nerve on shares that I already held (in particular larger positions in Beeks Financial Cloud (LON:BKS) and Intercede (LON:IGP) ). It's so important to not let wider market or macro problems (esp if short-term, like a budget) scare you out of conviction holdings.

Trying to sell in advance and then rebuy right at the low often fails with small caps, because price movements can be so quick, and lack liquidity. As we saw yesterday, blink and you missed a c.15% rise in some of these things on my ideas list.

I remember a similar thing happening in March 2020 at the covid low. I was lucky enough to have a cash pile, from shorting the indices, but when I tried to deploy it in bombed out small caps, there weren't any sellers left, so I could only buy scraps, then the prices rocketed as everyone trying to time the market attempted to buy at the same time!

My view is that risk:reward was good this week -

Upside scenario - attacks on ISAs & AIM IHT not as bad as feared, result would be a rapid & strong recovery in bombed out small caps (which is what has happened).

Downside scenario - AIM IHT scrapped, ISAs capped, etc, would have led to further short-term downside, but wouldn't really matter longer-term as good companies at reasonable prices would end up with a positive outcome through either takeover bids, or moving to the full list. Also would provide fresh buying opportunities.

Well done to people who grabbed some bargains, but maybe a bigger well done to those investors here who simply ignored all this background noise and didn't do anything!

Regards, Paul.

Indeed an absolute bugger for our next generation, we switched to SIPP's for exactly that purpose. Thankfully we did this a couple of years back when rates were uberhigh so the buy out some was a no brainer. Still glad we did it, if you pass away early a DB pension just goes up in smoke bar spouses pension if applicable.

Many of us probably sighed a little relief and can stomach extra spending but the kicker is the total lack of growth a very far cry from all the hype. OBR numbers and OFS's Paul Johnston quite damming of it all. 

I'm 44. Everything I buy now, where possible, will be in the kid's names. I fail to understand why many people wait until death to pass things over, when the reality is on average passing an estate to your children who are in their 50's+ does little to help them. I want my kids to have everything I have whilst I'm alive so maybe they can take me to Disneyland.

...EIS schemes look interesting, but have the returns been any good?

So far as far as I can tell for mine - ok (beat asx)  but this is a long term illiquid investment with time horizons that are *much* longer than most are OK with.

I started this 12y ago instead of a btl.  For me a moral decision.  I wanted to support British small companies. Btl would have made more money.

The tax free bit only applied if you were <75 when passing away.  Given the average age is higher than this at the moment this won't be a massive income stream it was only 8 years post state retirement.  I am struggling to see why they did it, it will put a cap on how much people put away I suspect going forward and result in even less income for the government...  The farmers one is the big one in my view and this will receive a massive political backlash.  As an aside where is the growth coming from... a budget for growth... how can you say that when there is minimal growth during your term in government!!

"For me the impact is that I will want to sell shares and pass on money now, in the hope of surviving 7 years and the money becoming IHT free."

Until they stop that!

I left the UK a while back and where I now live (and am tax resident) France, you can gift in simple terms €100,000 in your liftime and then it becomes taxable at the time of the gift.

That said, while I think the threshold is too low (it is $13,610,000 in the states) I am fairly relaxed about it. For one I'll be dead, but secondly I inherited about four times what my mother inherited from her mother and my son will cop at least 10 times what I inherited.  Would I rather he did not have to pay tax yes, would I rather, if does, it didn't go to government who are hopeless at allocating capital yes, but is there is not much I can do about it? I don't qualify for Monaco, Jersey etc so no, I just have to live with it.

Regards

Michael