Small Cap Value Report (Thu 5 Nov 2020) - QE, Furlough. ZOE, SDRY, D4T4, JOUL, WRKS, PCIP, BWNG, DFS, ZTF, HEAD, WIN

5th Nov '20 by Paul Scott

78 comments 13413 reads

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

** Breaking News ** The Chancellor, Riski Sunak, has just announced in Parliament that the furlough scheme (recently extended from end Oct to end Nov, will now be extended to 31 March 2021. I haven't seen the small print yet, but will look out for that. Support for the self-employed has also been extended. The most important aspect of this, is that it should prevent some of the mass redundancies expected in sectors such as retailing, hospitality, travel, etc., and the knock-on impact that would have on the economy as a whole.

Although it does raise the question as to whether this means the Govt might be considering extending the lockdown of some sectors well into 2021 perhaps? At least this gives employers a chance to plan ahead with a bit of clarity. Begbies Traynor (LON:BEG) will be disappoint! Their tsunami or was it an avalanche or a hailstorm, I forget, of job losses & business failures has been pushed back by a few more months. I cannot see why the Govt would pull back on its support packages for businesses & staff. They're in too deep, hence continuing support seems logical. Especially when you can shake the magic money tree (QE) to finance it all - see below.

US Election - Markets generally have been quite settled, considering it's been election time in the USA. We're not sure yet, but it looks as if Joe Biden is highly likely to be the new President. Then of course how Congress looks will determine what he can actually do. I studied US politics as part of my degree, but have forgotten most of it! For our purposes here, all that matters is what impact it has on the markets, and so far anyway, markets seem happy - US and UK indices having now recovered the late-Oct pre-election dip. That stands to reason, as some traders might have moved into cash, and are now returning to the market once the election result looks (almost) settled.

QE - I saw on the news this morning that the Bank of England's magic money tree has created another £150bn in order to buy up more Gilts. As before, one arm of Government buying up the debt being issued by another. What a clever wheeze! It's working because all the…

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Dojosan

5th Nov '20

Arix Bioscience (LON:ARIX) - Per RNS - The sale of VelosBio is expected to deliver net proceeds to Arix of approximately $185 million (£142 million[1]), representing a 12x return on Arix's £12 million invested capital. This equates to a £121 million (89p per share) increase in the gross value of Arix's holding in VelosBio of £21 million[2].

Pre Announcement price 108

Incremental Cash to be realised from sale (i.e. over and above fair value @ 30.6.20) +89p (Fair Value c and p below )

Post Announcement - should be 197

Interesting...

Thanks for raising this.

The realisation amongst investors that H & T (LON:HAT) was indeed permitted to trade in lockdown came later in the morning when the SP jumped as much as 16%+ . To be fair, the SP had drifted to its 4 yr low when it was in its doldrums in the past week at around 200-210 area, with PIs expecting deterioration in trade due to c19 + possible lockdown. I hold.

Whoops me bad - SP jump due to RNS at 11am rather than investor realisation (cross reading from Ramsdens Holdings (LON:RFX))!

Called up one of their branches today to confirm that they were open. During lockdown - Pawnbroking side is open. Retail side - i.e. jewelry stuff etc - not open. Pawnbroking side is their largest rev generator

Made decision to buy at 208 after making a cross read of Ramsdens Holdings (LON:RFX) ! Very blessed.

I have tried to bottom fish H & T (LON:HAT) 4 x now. Once in June at 330, then at 317 this Aug prior to TU, then at 250 (thinking that it was a 4-yr low). Then today at 208. 1st 3 times, very hard to "go against PI sentiment". Perhaps with pawnbroking as usual (no retail biz allowed said a H & T (LON:HAT) staff to me), they can really go stronger from here (albeit with new ceo but John will still be around for a little bit more I understand.

H & T (LON:HAT) I hold. SP was trending downwards until 1. today's annoucement + 2. able to trade during lockdown (1st lockdown it could not) - I reckon today - these 2 are the catalyst. Potentially, with a Simon Thompson article , further acceleration.

Having bought just before the most recent trade update, I think there were a few factors that have made the SP bomb out

1. Artemis dumping shares - the SP had a weird action, and the same action could be seen with H & T (LON:HAT) just before August update (Artemis disposed shares again)

2. Non release of provisional figures until later this month. Makes PIs suspicious.

3. The bit here in the recent TU was so badly worded - since if one is to read the RNS quick to get an overall feel given the limited time constraint prior to deciding whether to chuck the shares or buy - it could have been misconstrued as that the overall biz was to breakeven in 2022 (I know that it says "digital" but given the short time frame, I believe many PIs interpretated wrong) - The impact of Covid-19 on the overall business has impacted the trajectory of Morses Club's Digital business to profitability and, whilst performance compared to last year is very positive, the trajectory of cash and sales has been impacted by the fall in customer demand, as Morses Club's focus on the quality of its lending has led to much lower volumes of sales than our pre-Covid forecast anticipated. It is now expected that the digital business will reach a break-even position in Spring 2022. The fulfilment of significant re-engineering activity in our digital business is broadly complete, and the introduction of a new loan management platform which allows for the integration of linked banking and credit products is due to be launched in H2 FY21

On an encouraging note - bank debts were not that bad during most recent TUs for banks, so maybe Morses Club (LON:MCL) are not so either ..just maybe ...

The potential fine of up to 10% of revenue by Ofgem is scaring of investors!

Paul Scott

Hi Jon,

Thanks for flagging up the Liberum note on Research Tree, I hadn't spotted that.

Liberum are forecasting 3.6p for this year, FY 05/2021. Whereas Stockopedia (Thomson Reuters data) is showing broker consensus of 7.9p. That seems at odds with your comment.

For the following year, FY 05/2022, Liberum forecasts 6.7p, whereas Stocko says 6.45p - not much difference.

So I don't really understand your point.

I'm really impressed with how JOUL is handling this extraordinary year, and it's a share which I am inclined to almost ignore this year's trading, and think of it more as a long-term investment.

Although at the moment, I think there's possibly better upside on some other things. In particular, I'm seeing Saga (LON:SAGA) (I hold) as a potentially quite big multi-bagger, once the cruise ships are sailing again, maybe Q1 or Q2 in 2021?

Also of course there's Boohoo (LON:BOO) which I find highly attractive at this level.

I'm also a recent convert to Redde Northgate (LON:REDD) which looks terrific value.

Therefore, to me JOUL looks good, but the others look better.

As always, just my personal opinion, and as you know me quite well, I get plenty more speculative things wrong! But the odd big winner sorts everything out.

Best wishes, Paul.

Hi wimbledonsprinter,

I'm not sure I agree with your take on things. The BWNG fundraising is being done at a pretty good price, compared with what might have happened in a distressed fundraise back in April - maybe 10p per share, and massive dilution?

It seems to me that having a key major shareholder can be a very good way to protect shareholder value, as they want to preserve the value of their existing stake, and not look daft. With fund managers, it could be seen as buying them time to find another job, whilst they prop up their bad investments! Or is that too cynical?!

Regards, Paul.

6th Nov '20

Hi barnetpeter,

Just to be pedantic, but QE "money printing" would not have any impact on De La Rue (LON:DLAR) either way, as the new money is created electronically, there's no actual money printing.

Just noticed - Revision to my figures will be required to account for corp tax @ 19%

I'm ignoring all Director share purchases of Superdry (LON:SDRY) , especially by Julian Dunkerton. The reason being that they could be emotional, not rational. Same with other Director buys at SDRY - people sometimes feel under a lot of pressure (even from themself) to demonstrate their commitment, when part of a team, led by a dominant figure, and in the heat of the moment, in times of trouble, people sometimes do highly irrational things.

I've done it myself on a much smaller scale - signing documents, guarantees, and paying in money to distressed businesses even when you know in your rational brain, that you're pouring money down the drain. But the short term relief to the tension, and the adulation from everyone else, at meeting the payroll costs again, can be quite addictive.

I'm not saying this is what's happening at SDRY, but the psychology might be similar maybe?

In summary, if a business is loss-making, and burning cash, and the founder is desperately trying to turn it around, then their Director buys are probably meaningless. Or even a contrarian signal.

abtan

Joules (LON:JOUL)

Hi Paul

Just a quick addition to your commentary.

70% of RETAIL sales are now e-commerce.
So retail revenues for H1 look likely to be £79m vs £80m last year.

However, a note of caution. As far as I know the company has not released any figures on their Wholesale or Marketplace channels, which accounted for £32m in H1 last year, so quite a big chunk of the business.

Without these figures it's very hard to work out how much cash the company is actually generating, or burning.

No position (yet)

matylda

Hi Paul,

Thanks for the reply, much appreciated, I too hold Redde Northgate (LON:REDD) - Initially brought to my attention by Richard Leonard on PI World.

Regarding Joules (LON:JOUL) I was indeed more so looking at the EPS, which doesn't show a dip (to negative) in the Liberium note and that the growth from 2.8 (20A) to 3.6 (21E) to 6.7 (22E) to 9.2 (23E) looks very attractive - For a low double digit forward PER for a mostly online business. I ended up taking an opening position yesterday.

Interesting to see the US website traffic up 2x in the past 6 months - https://www.similarweb.com/web...

Thanks again and have a great weekend.

Jon

shauniekent

All countries are debasing their currencies. This shows up in the huge asset inflation we've seen the last decade.
Anything that is useful as a store of value will continue to hold its purchasing power
- Gold
- Stocks
- Prpoerty
- Scarce collectibles
- Provably scarce crypto currencies - ie Bitcoin

Government borrowing seems fine while the public stay relatively quiet about asset inflation or until it seeps into CPI. If we see inflation across wages and consumer items or asset inflation increases pace - all hell breaks loose and central banks and governments have a hard time keeping interest rates at low levels.

It's a confidence trick. It's all fine until the dam bursts. Which it will eventually :-/

Terry Dickens

I have a smallholding in N.Brown, and I would like to know from more wise men if I should take up the offer? The price is currently 54.20p so I could buy it cheaper than take up the offer? Is this correct? I may be wrong, so some advice would be greatly appreciated

PS the offer is 57p and the buy price is currently 54.8p

Wimbledonsprinter

Paul

I agree it depends on the situation - but Rule 9 of the Takeover Panel Code is there to protect minorities and I do worry it seems that shareholders are being asked to waive it seemingly more and more regularly - admittedly shareholders do get a vote to waive.

There was also the extraordinary situation at Scancell Holdings (LON:SCLP) who raised £33m this month. 29% shareholder Redmile was offered 2 year 3% coupon convertible bonds at the same conversion price (13p) as shareholders were in the open offer - despite the advantages the convertible offered. It also allowed Redmile to increase its grip on the company without going over the 29.9% limit forcing it to bid for 100% of the company. [Conversion would result in Redmile owning 43% of Scancell.]

As a connected party transaction, the convertible issue to Redmile needed the support of the minority shareholders as a special resolution. On the day of the GM, the board realised they did not have enough votes - as one of the large shareholders had voted against. The board decided to postpone the GM by a week, while scurrying around to get the extra votes it needed - and all the motions were duly passed yesterday. This also highlights the potential conflicts of boards, when they are not disinterested parties, being in charge of the organisation of the votes.

Rusty2

For anyone interested in the US election, Biden is now ahead in both Georgia and Pennsylvania, if that stays the same then he will have a fair majority. As the margins are small there are bound to recounts and legal challenges, so expect some volatility in the markets but they are pretty calm at the moment, surprised how much they went up in the last few days.

Small Cap Value Report (Thu 5 Nov 2020) - QE, Furlough. ZOE, SDRY, D4T4, JOUL, WRKS, PCIP, BWNG, DFS, ZTF, HEAD, WIN

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Paul Scott

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