Small Cap Value Report (Thu 6 Jan 2022) - DBOX, SOS, MADE, SAA, TEG

6th Jan '22 by Paul Scott

87 comments 11145 reads

Good morning, it's Paul & Jack here with the SCVR for Thursday. Today's report is now finished.

I typed up my mystery shop of TGI Fridays, in the coffee shop of a garden centre, yesterday afternoon, waiting for my Daimler Double Six to be MoT'd (Edit: I only drive it under 1k miles p.a. by the way, and average 18 mpg, before Greta Thunberg rolls her eyes at me, and hisses some insult). The good news is that the Daimler passed with flying colours, with the MoT tester telling me the car is in "mint condition" underneath, despite being 30 years old. The bad news is that my TGI's review is really boring, but I'll post it later, once I've thought of something a bit more interesting to liven it up.

Fed tapering - the US indices (esp. tech & small caps) took a knock yesterday, due to minutes from the last Fed meeting, which indicate the Fed is set to start reducing QE more aggressively than some previously thought. Stimulus from central banks has certainly been a big boost for equity and bond markets, by artificially suppressing interest rates. So if that stops, then it's likely to be bearish, especially for highly valued, more speculative shares. Bond yields (on Govt debt) look ludicrously low to me, but it's a rigged market, so why anyone would voluntarily hold bonds that yield far below inflation, is a mystery to me. That said, all of this is already known, so nothing new. Bitcoin also took another sharp fall, so it looks as if speculative assets could be coming under pressure. Maybe punters might rotate into value? Who knows. Anyway, we're heading for a down day, with FTSE 100 futures set to open c.100 points down.

Agenda -

Paul's section:

Sosandar (LON:SOS) (I hold) a reassuring, in line with expectations update for the peak Q3 period (Oct-Dec 2021). Not cheap for a business that's still (slightly) loss-making, but it's the stellar organic growth (at high gross margins) that makes this share interesting.

M&c Saatchi (LON:SAA) - announces it's now in takeover talks with Vin Murria (a recent major shareholder & Director).

Ten Entertainment (LON:TEG) - FY 12/2021 has ended at the top end of market expectations (not specified). Thankfully the vagueness of the trading update is made up for by Liberum's…

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Ken Lowes

6th Jan '22

I think you would enjoy a recent rebuild of a Jaguar Coupe, (same car) on Harry's Garage YouTube . Yes I know off topic but very enjoyable watching someone spending £67000 on a service.

timarr

cmpeckham, you make a very interesting and insightful comment re: why anyone would voluntarily hold bonds that yield far below inflation.

Bond markets are roughly three times bigger than equity markets so if you're a bank or a pension fund you have limited options. Plus government regulations force certain parties such as pension funds to hold government bonds.

It's a classic government debt reduction strategy to hold bond yields below inflation rates and legislate to force financial institutions to fund the deficit and allow inflation to erode the value of the debt.

rmillaree

Cheers timarr - intresting fact that is

JohnDoe2378

Hi planetx,

Yes, I'm hoping the trading update due imminently will be good news.

I have emailed the company on this matter, but no reply as yet...

In times like this, i try to remind myself ( although hard sometimes! ) that the world isn't going to end, and that there may be one or two real bargains to be had out there

Hi all,

Volex (LON:VLX), the fall continues. Now rated on 15 x forward earnings...

ezlifeme

Thanks for the observation Ken

Having watched Paul's annual portfolio review and his comments on spending - As soon as I find out he has been tempted to spend the same amount on a car

I am selling ALL my holdings! (His Splash the cash warning comment)

Norfolk'n'Good

Volex (LON:VLX) Time to top up???

Tim Chorlton

I am looking forward to this after selling off all of my classics last year.

grumpy5

If you want a Mk1 Jag, this one has a cracking history (not that I play the uke): https://www.the-saleroom.com/e...

Monty9

Not to mention the introduction of legislation, over the last few years, to force investment in such pension funds, which effectively drives more investment in these value decretive bonds will be bought. And yes, my current NEST pension, running since 2017, is currently worth slightly less than the total amount invested. And that is the result in GBP taking no account of inflation.

handybrownone

Until the contract is cancelled as per a government contract some time ago! Too long ago to remember..... Was it the Philipinnes?

Epsilon

On 8th December (Interims), Rockwood Realisation (LON:RKW) reported "Augean plc has been sold, as has the holding in RPS Group plc. There has also been a bid for Universe Group plc which when the proceeds are received, will increase the cash balance to approximately £30m."

Given AuM of around £60m, then the NAV discount (ex-cash) is approx 30%. So fairly sizeable.

NB Harwood/Mills were already 3% shareholders in the Trust. So recent purchases have been marginal

planetx

Mills buying again another RNS , up to 4.17% . It is quite a hard share to buy and they are clearly happy to top up day by day .

Northbridge in the portfolio too which is a solid share and one of my biggest holdings .

I guess even if the plan is to liquidate the portfolio over 2 years and a 30% discount to NAV it seems to offer a decent enough return compared to keeping your cash in the bank .

doug2500

Did you realise that the only way to hold 100% equities in NEST is to opt for sharia investment? I'm not convinced that it's the best name for a pure equity fund but there we go.

Effortless Cool

Srt Marine Systems (LON:SRT) tipped again today by ST in the IC. He includes this additional information that has all, presumably, been gleaned direct from his discussions the company:

The other three contracts (worth £31m in total) are all expected to close before the 31 March financial year-end. SRT’s chairman, Kevin Finn, also notes that three other contracts worth £54m (two in the Middle East and one in Asia) have “unexpectedly progressed and could materialise during the current financial year”.

This really does look promising, potentially transformative.

Are you sure this is right ?

"Given AuM of around £60m, then the NAV discount (ex-cash) is approx 30%."

NAV last week stated as 1644p , which gives a discount of around 12-13% , which is about right as GHS varied from 7-15% max over the past years .

Share price dropped £3 per share few weeks ago when that was dispersed .

Wilbraham

The lack of understanding of prudent financial management shown by some here puzzles me, especially when people even mention managing money on behalf of others.

The absolute key is to invest to meet your liabilities. Take a grossly over-simplified example; suppose you’re responsible for a large highly mature pension fund with £100m pa outgo declining linearly over 20 years when your last pensioner is projected to draw their last breath. So £1bn cash outgo ignoring any discounting and indexation. You put it all into equities as ‘equities have always outperformed in the long-term’. Sadly, this is autumn-2007. UK equities fall pretty rapidly to a low of barely half by early 2009 before staging a slower recovery, finally recovering their capital value in 2013. You breathe a sigh of relief, congratulating yourself on holding your equity nerve. Problem is, over the first 3 years 27% of your entire pension cashflow has been paid out. Over the first 5 years it’s 44%. To meet this outgo you’ve had to sell your equities at materially depressed prices, have become technically insolvent, have egg all over your face, and would need a mega return in subsequent years to meet your remaining contractual outgo. (It would be lovely if you could say to your pensioners ‘’Our investments have taken a knock so we can pay only 80% of your pension this year. Trust us! - we’ll make it up later when things improve. '’ But that’s not how the world works.)

So pension fund trustees and insurers take as their starting point the minimum risk investment strategy, ie a portfolio of index-linked and conventional gilts constructed so that interest and redemption proceeds year by year ‘match’ as closely as possible the annual pension outgo, regardless of future changes in interest and inflation rates etc. This is the modern evolution of Redington’s immunisation theory from the 1950s, developed over the years most notably by the pioneering work of Exley, Mehta and Smith – see https://johnralfe.wordpress.com/2020/06/19/the-pensions-prophets-10-years-on-by-barry-riley-ft-april-23rd-2007-exley-mehta-smith/ and https://www.cambridge.org/core/journals/british-actuarial-journal/article/abs/financial-theory-of-defined-benefit-pension-schemes/9655AB6962D8516723BFD29BB485163D

In practice the world is a lot more complex and not so cut and dried. You’ll need inflation swaps and other derivatives to fine tune your portfolio to match your cashflow (not least because there’s not nearly enough index-linked gilts around to meet UK pensioners’ needs). You’ll venture up the risk spectrum into corporate bonds and overseas bonds as the higher yield should more than cover the credit risk. You might add property and infrastructure-type assets with reasonably secure and predictable income streams. You might even add some equities back in. But the further you diverge from the minimum risk position the bigger the cushion of surplus you need to be sufficiently confident of weathering the type of drawdown outlined above. (That’s where the asset-liability stochastic models beloved of the pension industry come in. And if your models are anticipating only say a 4% pa higher return from equities than bonds, but with considerably higher volatility, you might conclude it’s hardly worth the candle.) If you can’t afford that cushion then you’ll need a cast-iron ‘employer covenant’ to convince the regulators of your prudence, perhaps even a quasi-government guarantee.

So the simple answer is yes, pension funds and insurers will still invest in bonds of appropriate duration even if they show a negative real (maybe even nominal!) yield. Holding your fund entirely in cash (perhaps ‘waiting for yields to recover’) is not the answer either – you have no way of knowing with confidence what investment conditions will be in 1, 2, 3 years’ time when your deposits roll over.

For general insurers (notably property and motor) the issue is perhaps even starker – you take in premiums at the start of the year to pay out claims typically just 12-24 months ahead.

Sorry for the long, dry lecture! I expect there’s plenty of free trustee training resources on the web for anyone wishing to better understand basic institutional investment.

eParo

StockRank has fallen from 90+ to just over 50 over 12 months.

jamesalastair

7th Jan '22

I have been short ARK Innovation; long Uranium and O&G and long gold equities (mostly through the royalty companies) for 12 months. Ark has been my most profitable trade; Uranium equities are volatile as hell, albeit up for the year; O&G doubled and gold has gone precisely nowhere. My European/UK small caps are slightly better than break-even. 2021 was a strange year and I suspect 2022 is about to get even stranger. It sounds like our views are similar and I see no reason to change mine.

Small Cap Value Report (Thu 6 Jan 2022) - DBOX, SOS, MADE, SAA, TEG

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Paul Scott

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