Small Cap Value Report (Thu 4 August 2022) - NXT, SCS, DUKE, RNO, GYM, TTG, SDG

4th Aug '22 by Paul Scott

56 comments 8356 reads

Good morning! It's Paul & Graham here again today.

Agenda - we've done mostly shorter sections today, to get through more companies, and more quickly -

Paul’s Section:

Next (LON:NXT) (6746p - £8.7bn pre-open) [no section below] - Q2 (May-July ‘22) trading update - always of interest for sector trends from the best in class operator that also reports so promptly.

Trading better than expected (especially in physical stores) - due to less competition on high streets, and warm/dry weather in June/July.
FY 1/23 EPS guidance raised 7.2% (range: 543p-588p, PER = 11.5 to 12.4 = cheap IMO!).
Pre-pandemic trends returning in product mix (formal wear up, sports/home down)
Online returns rate back up to 42%.
Is online in decline? No - just returning to long-term growth trend after a boom during pandemic - this is absolutely key, and confirms my theory that bombed out online shares could now be oversold, as market has wrongly assumed they’re now ex-growth!
H2 guidance is cautious - sales growth slowing from +12.4% in H1 to +1.0% in H2 - due to impact on consumer spending from higher inflation.
Share buybacks continuing, reduced share count by 2.6% so far this year. Amazing long-term strategy, boosting EPS considerably over time.

My opinion - I’m highly encouraged by Next’s update, as it confirms what I always thought - that the pandemic pulled forward demand for online shopping. We then had a hangover in calendar H2 2021 & H1 2022, but things are now returning to a (more modest) long-term growth rate for online. This could trigger a potentially big re-rating of bombed out eCommerce shares - one of my main investing themes for the rest of this year & next year, as the market realises they are actually still growth stocks (the ones with decent, differentiated product anyway), but many are currently priced too cheaply as if they were ex-growth.

SCS (LON:SCS) (147p down 4% at 10:09 - mkt cap £53m) (I hold) [no section below] - FY TU 52 wks ended 30 July 2022 - profit ahead of market expectations, due to positive trading, strong margin, and cost management - I’m impressed, as I was expecting another profit warning here. Although it does warn for FY 7/2023.

Cash of £70.8m (no debt) is above market cap. £7m share buyback continuing. Also note forecast 9% divi yield, which looks sustainable to me.

Orders…

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rmillaree

4th Aug '22

Sanderson Design (LON:SDG)

simoan

To be honest, I found the update pretty hopeless in mentioning revenue only. In the current inflationary environment, for any update to be useful to us, companies should be giving a steer on margins. As the saying goes: "Sales are vanity, profit is sanity". It is like they are operating in a void with no details on cost pressures, product pricing etc.

It's what companies are not telling us in updates that most concerns me. Companies should always be monitoring margins, especially now more than ever, so if they don't say anything you can only read that possibly as a negative. Most of all I want to invest in companies led by up-front and honest management teams, not those that want to pull the wool over my eyes.

I think this criticism is ultra harsh and expecting too much in some respects - i would agree they could have perhaps been more upfront if accelerated licences have come to the rescue here ref meeting expectations.

Company have specifcially confirmed they are on track to meet current expectations so for trading update its job done - overall nothing is being hidden as they are on track !

Despite this, full year trading currently remains in line with the Board's expectations.

Ref getting more detail - thats exactly what the intermin results are for - they are hiding absolutely nothing we simply need to wait 2 months ish (sometime october) for those figures to come along. To me its pretty bog standard to wait for full figures before providing more detailed info - we are only 4 days past half end and we will get 6 monthly figures within 90 days of period end - probably 75. Thats certainly not tardy ref providing the necessary ectra detail and very similar to what many other companies do.

all imho of course - todays update does seem to have gone down like a sack of spuds considering that in the current environment being "on track" is actually a good outcome compared to what soem others have been delivering. (poor made.com) - so your pont about perhaps not being as transparent as they could have been seems very fair comment - if this is a sneaky back door profit warning ref the future years prospects.

yiannos1

You are correct , revenues explained in detail and cash balance is given.

But , that was a big miss in revenues ( at least for the 6 months ) , as market expectations are for them to grow for the current financial year. This is the reason the price has fallen , and will continue to fall , if revenues are not metro accelerate in the near future.

Bouden54

Thanks for the update on Duke Royalty (LON:DUKE) I am broadly positive on this one which I think looks well placed in an inflationary environment. I agree the cost of the debt looks too high at 7.25% but I understand the company is trying to reduce its cost of debt. As they scale up they should be able to achieve both a higher equity rating and a lower cost of debt.

I must admit its total guesswork on my part - but i suspect you if are giving away your crown jewels by giving others the ability to sell your stuff on tick - you would want an hefty upfront payment . I would therefore guess that if sanderson have strong hand - they would secure large upfront payment that would be based on some sort of "minumum agreed volume" - if the other party doesnt then sell what they promised or doesnt pay or rips of your products by copying at least you have had some pound of flesh upfront. I cant believe that the term accelerated could mean anything but payment now for future presumed sales. With such sales if there is no provision for refunds to be made later (ie sanderson keep the cash if targets arent met) it would make sense that these sales are fully booked now rather than applying normal rules to prepay as appropriate - all assumptions on my part i could be totally wrong.

Firstly, you seem to completely misunderstand how IP licensing works. Sanderson Design (LON:SDG) are only providing the licensee (Next or whoever) with the rights to use one or more designs, maybe even a whole catalogue of designs, for a limited time period. The licensee is not selling any of the Sanderson Design (LON:SDG) crown jewels and they still own the Intellectual Property. Think ARM Holdings. The licensee is merely buying a license to use the designs to produce their own products. So there will be an up-front license fee paid by the licensee and then maybe a stream of royalties based on volume of products shipped.

And of course, when in doubt referring to the FY22 Annual Report is always preferable to guesswork:

Licensing arrangements. These comprise a combination of both minimum guaranteed incomes and time and sales-based royalties receivable from Licensing Partners under contracts for the licensing of our products and designs.

and

Licensing contracts give rise to performance-based variable consideration. Income dependent on the performance of the third-party operations is recognised when it is highly probable that a significant reversal in the amount of income recognised will not occur. Fixed minimum guaranteed income amounts receivable under single-year or multi-year licensing agreements from Licensing partners are recognised from the point the licence and hence control has transferred to the licensee, provided there are no further performance obligations to fulfil, and the recoverability of the income is deemed highly probable. The income is recognised as revenue and accrued income reduces as the balance is settled when an invoice is issued upon delivery of the performance obligations.

portugull

Paul I just bought into Renold (LON:RNO) again so it will be very interesting to hear about your interview with the CEO tomorrow. No doubt your comments will be part of your excellent Saturday Podcast which I highly recommend to any Subscribers who may not have heard your Saturday morning musings on the weeks results and news.

Fair point maybe but they only mention cost pressures in the CEO statement at the end of the RNS. So they exist, but we are not told what they are! I just believe more information is better than less and they must have important information on costs, pricing, margins etc. that they have chosen not to disclose. As such, I personally did not find this update that helpful. I only bought in very recently and was hoping for some disclosure on costs, instead we're all left none the wiser. It seems to me there is decent likelihood of a profit warning here at the interims so I won't be buying any more for now.

All the best, Si

Graham Neary

re: £DUKE

you're welcome! They do need to keep scaling, reducing the LIBOR margin would be very positive news indeed.

ridavies

A propos of nothing specifically related to today's company news, when one might well feel thoroughly depressed, I was reminded of reading recently a thoroughly uplifting RNS from Morgan Advanced Materials (LON:MGAM) for their half year results to the end of June. I intended to return to them with a view to watching them carefully and buying in at the right moment (if there is likely to be one soon!). I commend it to everyone.

MiserableJacktPotato

I wouldn't worry, people can thread the replies. That they choose not to isn't your problem.

There again, SDG customers really won’t be worrying about food or utility bills - have you seen their prices?!

Paul,

I think you need to be careful characterising end customers of a company in this way. I’m sure they also make sales to plenty of ordinary middle income households, wanting some nice curtains and blinds, who will be effected by the increased cost of living.

You also have to take into account that they are not shipping an end product to an end customer, and most people I know do not make their own curtains, blinds etc. So once you add on the increased costs of manufacture and fitting, to the cost of the fabric it seems to me the overall final cost will be too high for all but the very rich. I think that’s a problem.

As you mention , it seems very cheap and has net cash. As an exporter, it will also have benefitted from the strength of USD year to date, so in that regard maybe this update is a little more disappointing than it first appears.

TheFloatingInvestor

Nice pullback on ME International (LON:MEGP) formally Photo-me last couple of days, considering there is a special divi of 6.5p per share X11th Aug, never look a gift horse as they say, as this share must make 120's going forwards, with a further divi to come.

Risk reward seems acceptable to me, as my gut feeling is they have the pricing power to ride this phase out.

Down 10% today as I write

(I now Hold)

peterg

Yes people can thread the replies, but many don't find it the best way. And yes it's partly our problem if we choose not to, but I've always assumed posters want people to read their posts., thought perhaps I'm wrong? But if they do then excluding unthreaded readers is their problem too. Stocko helpfully makes it easy to add a company reference, as BnB has already made plain he knows and usually does..

But what's the point of adding the company reference when you're replying to a thread about the company when it doesn't have the context of the original. You end up having to click on the "In reply to" link just to make sense of the conversation.

Of course, some people like to play teacher and tell others off, I find it tedious especially as the tools are there to make it unnecessary.

Revs8

ECO Animal Health (LON:EAH) (I hold)

Earnings release tomorrow. I’m not expecting a complete reversal of fortunes but there are a few reasons to be optimistic going forward. In particular the surge in pork prices in China. EAH put their past underperformance down to poor pork prices in China so a significant reversal might reverse the performance of £EAH.
It still a high quality animal drug producer and has a good R&D pipeline.

Here is an excerpt from “The Pig Site” (there is a site for everything!).

Since March 18, 2022, China Slaughter pig prices have risen from RMB 11.98/Kg ($0.85/lb.) to a national average of RMB 16.01/Kg ($1.08) by May 20, up 27%. At the same time, culled sows prices are an indication of direction the market is heading were up from RMB 7.79/ Kg ($0.55/lb.) to RMB 10.41 ($0.70/lb.) representing 27% increase.

Perhaps what has been capturing the most attention in the headlines the last few weeks has been a huge surge upwards in the weaned pig market. Weaned pig prices have always been seen as leading indicator of the hog market to come. Recently there has been a lot of demand from small, medium and large-scale producers alike to add more piglets to their barns.

Since April 22, the National Average price of 7kg (15 lb.) weaned pigs rose from RMB 398 ($61.34) to RMB 543 ($81.28) on May 20th, a month on month increase of 32.5%. Reports are that weaned pig prices in some markets have broken RMB 650 ($100) per head. This is quite an astonishing turnaround since according to the chart below, the lowest price or piglets in 2021 was RMB 70.14 each or ($11) per head on October 12.

Since the rise in pig prices starting in April, many producers have rid themselves of their long-term losses and returned to profitability. Reported profit from finishing weaned pigs now is RMB 194 ($30) per head. There is much discussion regarding the market in the second half of the year. We expect as fewer and fewer hogs come to market as a result of the month’s long liquidation, prices will continue to increase. Price is the truth.

"But what's the point of adding the company reference when you're replying to a thread about the company when it doesn't have the context of the original. You end up having to click on the "In reply to" link just to make sense of the conversation."

Personally i find it pretty easy and useful to skim read stuff - i never use threaded and i can easily scroll down and find what i need and quite often the post speaks for itself (when you know the company) - no need for threads its easy and i only come a cropper when i dont have the ticker - so it massively helps me when ticker is present end of - not the end of the world when as you say the rely to link can take you there but i am deffo a fan of the tickers - pretty sure i am far from being alone here and the powers that be go as far as saying the following each day as a polite request.

please be civil, rational, and include the company name/ticker,

I will never moan if someone doesnt use the ticker - but it does get my goat up when peeps say the ticker doesnt serve any purpose for others when it clearly does for me and presumably others too.

As a punt Eco Atlantic Oil & Gas (LON:ECO) may provide to be mega cheap now - but they have been a well established company for many years and have consistently struggled - they have many purple patches but those good streaks have always come crashing back down soon after with bad news outweighing the good news. Having said all that they made £10 mill profit ish 2017 and 2018 so a return to the glory days and the shareprice i am sure would do very well.

Anything china related and there is also the worry about being screwed over by their china partners to boot.

Do i have confidence in this company delinering ??????? - errrr passs

Discodave4

Hi.

With regards to Facilities by ADF (LON:ADF), their Admission Document in December 2021 stated that their order book for 2022 was fully booked, however, in trading updates including todays they are now saying it’s nearly full, which may simply be a case of a poor choice of words or worse, and it leaves me somewhat uneasy in what they are saying. Particularly as their order lead times (7 months to 15 months or so) should not be resulting in a nearly full order book 6 months into the year (if that makes sense!).

Rusty2

Threaded replies is such a mess. If there are new posts where are they? I have to scroll down the whole report looking for them. If there are many replies then the width gets so narrow, its just long and thin. If there are several stocks then its not clear what the reply is to. with many replies its not clear who the person is replying to.

Rob Lancaster

Hi Paul, what other bombed out e-commerce shares do you have on the radar? I saw your post on Seraphine (LON:BUMP) recently, what about the likes o £ASC and Boohoo (LON:BOO)?

Old Bear

5th Aug '22

I've looked at Duke a few times without investing. My main issue is: with all the cheap money around for the last decade why would companies use this type of finance if they have a sound business as it is inherently more expensive than other forms of funding .

Small Cap Value Report (Thu 4 August 2022) - NXT, SCS, DUKE, RNO, GYM, TTG, SDG

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Paul Scott

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