Small Cap Value Report (Thu 6 Oct 2022) - MOTR, VIC, CMCX, ECK, FAN, STEM

6th Oct '22 by Paul Scott

27 comments 7458 reads

Good morning from Paul & Graham!

Agenda -

Paul's Section:

SThree (LON:STEM) - I've lined up another of my CEO audio interviews today. These are only occasional, when I approach companies that I think look good, and are trading well, and reasonably priced. We've covered STEM positively here all this year, as it has issued repeated ahead of expectations updates. So I thought it would be interesting to talk to management and learn a bit more about the company. I'm recording it at 15:00, so it should be published here at about 16:00, and will come up automatically on my podcast channel. Here is my audio interview with STEM, I hope you find it interesting.

Motorpoint (LON:MOTR) - quite a nasty profit warning, with broker forecasts slashed by 50-60% this morning. The company tries to explain it as being about "investments" for growth, but I suspect the market is about to take a dim view of this update (am writing this just before the market opens). With profits now largely disappearing, and not much asset backing, it's a lot harder to feel bullish about this share in the short term.

Victorian Plumbing (LON:VIC) - one of many bombed out eCommerce shares. Today's update sounds encouraging, being ahead of (lowered) expectations. I like the balance sheet, with a cash pile of about a third of the market cap. Also a low PER. I do have some reservations, but this share now looks attractively priced, and fairly low risk due to its sound finances, in my view.

Graham's Section:

CMC Markets (LON:CMCX) (£624m) - a nice trading update from CMC. It’s looking to grow profits by 30% over the next three years, from the FY 2022 level. The FY 2021 results are considered a one-off event, boosted by Covid, and FY 2022 is considered to be more representative of normal performance from now on. The market apparently disagrees, however, and has put CMC on some very cheap valuation ratios. If volatility collapsed back to 2018 levels, then I agree that profitability would suffer but I don’t consider that to be very likely and I appreciate the counter-cyclical characteristics of these shares. I also welcome CMC’s move into traditional stockbroking. I like these shares - two thumbs up from me.

Eckoh (LON:ECK) (£128m) [no section below] - the “global provider of…

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marigold

6th Oct '22

I would say inflation is more a case of supply side problems caused by the lockdowns. As well as the high cost of fuel, which feeds into everything. In which case increasing the interest rate will just make things worse. To me it looks like the Bank of England is trying to crash the economy. Back in 2007/8 they increased the interest rate which made things worse until they reversed course.

The reason house prices have gone up (although not so much in London) is for the same reason, supply and demand. We are not building enough properties to keep up with the increase in the population.

BnB

Re SThree (LON:STEM)

I would take their recently announced outreach to investors (and Paul Scott) as bullish - they think their shares are worth more than the value ascribed to them by the market. But if I had the opportunity to quiz them, here are some of the questions I would ask:

What has been the average margin - or markup if you prefer it expressed as a higher %ge but do be clear which you mean - on contractor placements for the past x years, including current? What is the highest level that could be achieved on average across the group? And is this a target? - This is a measure of the trend in demand but it will also reveal where the company sits on the quality scale

What was the rate of wage acceleration across contractor and perm in the last FY? And what is it this year? - Another measure of demand but also a predictor of where we sit in the hiring cycle

What is the company targeting for annual organic growth in contractor numbers over the next 3 years? - This has been very strong these past two years and I consider it to be the most reliable measure of future growth potential

What is the highest rate of commission routinely paid to top billers? - The rewards for top performers reflect the balance between price/brand-led and service/quality-led market approaches. The higher the rewards, the higher the service quality and vice versa (usually). There should be a relationship between this measure and gross margins on contractor fees.

I would ask about attrition rates among established consultants. - High attrition in the experienced cohort is a significant limiter of expansion

I would ask about changes in the balance of experienced vs junior employees (existing, not new hires). - A shift towards more experience would point towards higher productivity in the future and vice versa

I would be asking about M&A intentions - This might reveal concerns about organic growth although I would not worry about good tuck-in acquisitions.

Don’t get steamrollered into believing SThree is leading the market in anything It”s the largest listed STEM recruiter with a global reach, yes, but it is a grain of sand on a beach of recruiters, some of whom are twice as profitable on an operating margin level with the same mix of perm/ctr.

I would not get hung up on IR35 changes in the budget. These are broadly positive for the sector but SThree is a bit part player in the UK.

I’ll post this now to get the ball rolling and add any other thoughts over the next hour while I can still edit.

Bully15

Hi Paul,

MOTR (I hold), as a slightly different take as a holder of the business I was actually very pleased with the companies update this morning, as it continues to execute on its long term growth strategy.

The decision to hold their finance rates is in my view the best decision for the business, the company is taking the decision to invest in the customer at the expense of short term profits, this will only increase the companies market share gains further as well as extend its competitive advantage over its competitors as the lowest cost provider of used cars in the UK. In my view what drives its competitive advantage, as you mention above comes from 2 things, its industry leading sales volumes (as a comparison their inventory turn is on a similar level as Costco) and secondly their brand reputation and customer trust (both for service, 84 NPS score and reputation as the lowest price provider of used cars).

This will lead to a more loyal customer base with repeat purchasing continuing to increase consistently YOY & more consistent future revenues. within a business like the used car sales business, I would much prefer a company that prioritises its customers first above all else as opposed to taking profits today in an environment which allows them to (Which company do you think will likely win in the long term?)

the business has lots of other competitive advantages such as supply advantages, data advantages etc.. but ultimately for me it comes down to an extremely efficient low cost model, which obsesses about its customers and has the highest inventory turns in the business.

Add to that an almost 100% return on incremental capital and a owner managed business with 20% insider ownership, and a strong likelihood of major share buybacks in the next few years and I think you have a winning model.

I hope the share price keeps getting lower, as I plan to keep buying.

But would love to hear bear arguments as well.

Bouden54

Thanks for the udpate on CMC Markets (LON:CMCX) I agree the spreadbetters are worth holding as a hedge against ongoing market volatility. Also worth mentioning Plus500 (LON:PLUS) I know Graham was previously never keen on this one, but its growth has been phenomenal (something like a 30 fold shareholder return since IPO in 2013 if you include the generous dividends - blows both CMC and IG out of the park so they must be doing something right).

mojomogoz

I'm not Motorpoint (LON:MOTR) expert but this seems a good perspective IMO

My question is that people are sceptical of the MOTR outlook given its rather pure play used car market exposure then how can they be simultaneously bullish companies like Vertu Motors (LON:VTU) ? (this point is not directed at anyone...I don't follow comments or holdings closely for anyone)

When it comes down to it a lot of Vertu's outlook is driven by used car dynamics. New car sales and degree of general churn in car sales (new and old) are driven by used car prices and the extent to which they support the magical financing wheel whereby people feel they have cash to trade. Note that higher interest rates also impact this.

My drive by banalysis perspective is I don't want to buy any motor retailers at the moment as pain points are still to unfold. However, I'm interested in MOTR and will watch (I expect more pain) as ultimately it will win from the pain of others. Stocks like Vertu are value traps (the tangible value of property is a nothing burger as its so bitty and crappy...if it had value the company would work a lot harder to realise value from it rather than having it as a fetish that they like to own property)

JASVFS

I also agree with Bully 15's points abut Motorpoint mojomogoz, they were the sharpest used car sellers in the UK when I was involved in fleet car trading between dealer groups over 20 years ago and no doubt still are. I disagree about Vertu. You can aim your comments at me as I think the shares are excellent value, they have something Motorpoint doesn't have, i.e. New car sales and a constant supply of quality retail cars in p/ex against new, or a strong profitable and growing aftersales operation., you might also have found Vertu's success in their growing van sales highlighted in their webinar interesting. Motorpoint were and still are big enough to take advantage of manufacturers' weakness in scooping up pre reg cars but the big dealer groups get that advantage too although I agree with your observation about it winning from the pain of others. I do not expect that pain to come from Vertu although I accept the pain of recession might not be fully in any retail facing companies shares yet.

Raleigh4343

Watching Sosandar (LON:SOS) but not doing anything until the November update. I think things will generally get worse in the coming months. Sitting on my hands and not buying my targets has served me well so far.

Andy Sav

New lows for Sosandar (LON:SOS) today, with a 11% price drop to 14p. Have to go back to Feb 2021 when price was around this level. Half year earnings release is on 28th of Nov and can't see any news, so I guess its just the general bear market having an impact

Camtab

House building interests me, largely because I don't believe this build build build mantra. I think a lot of the problem is big business moves around the place and their employees have to move hence increase in housing required. I also think property is an investment and a lot of people want more to increase their own investment opportunities. Finally I have a conspiracy theory (based on recent developments in Cambridge) - we sell a lot of housing to the Chinese. In a controlled society a lot of this housing is not being bought by individuals and by moving citizens into an open society at the same time applying pressure at the political level will in time pay dividends. The Chinese have seen efforts by Putin and Trump to play these games and they are much longer term. Weirdo i hear you say (and think it myself to be honest) but the influx of Chinese faces around me (Cambridge) has been startling.

ACounsell

Plus500 (LON:PLUS) are very good at fleecing their customers which they readily admit. In terms of a % of customers who lose money. However, if a trade is going against them they just shut down trade on that instrument and then when it restarts customers can lose out badly as stop losses not implemented. Having said that being a shareholder would have been a much better option over the last few years!

55555

Snap

kanga

Paul,

Where/ what is the link for access to your podcast please

gringo

The bear case for Motorpoint (LON:MOTR) is the price. In the whole of 2022 its only closed twice above the 50 day MA.

Personally I wouldn't even look at it until this changes.

Paul Scott

Hi BnB,

Unfortunately that's come through too late for me to cover in this interview.

I'll ask them to do a webinar for PIs, where you can ask all this type of detailed questions yourselves.

My interview starts in 6 minutes, and I've planned more general questions on performance, and outlook. So it's intended as an introduction to the company, rather than a detailed thing. Maybe I could have them back for a more detailed interview at a later stage?

Regards, Paul.

Richard Goodwin

the Car a group had the same model a few years ago. Unfortunately when car prices fell the speed of stock turnover went down as well. It went bust.

In my ignorance and lack of industry specific knowledge I will still take the other side on Vertu Motors (LON:VTU) - for years they have deployed capital poorly IMO. They acquired Bristol Street motors excellently back in 2006/7 (ish?) but since then they do a bad job allocating capital. Their folly of recent years is paying high valuations to acquire premium dealers (this leaves plenty room for goodwill write downs in future). The shift to premium juices results short term but increases the risk that high interest rates and lower resale prices and/or churn (so people own for longer) brings negative surprise. The tangible backing from property is not worth the sticker price as its value cannot be realised except in distress and at a discount (if they were good at allocating capital they would have realised much more value from it to date).

So I believe vertu is a value trap where the p/e goes up as earning go down

Noted Paul

However, given your prominence relative to us lowly PIs, perhaps it would be worth asking Timo if you could submit my suggested questions in writing post-interview for their measured response. They ought to recognise these questions are the real deal and might even see benefit in thinking them through.

Hi Kanga, I think you are looking for this: http://qualitysmallcaps.co.uk/ you call also search for for the podcasts via your favourite streaming service. For example, I listen via Spotify (searching for "Small Caps UK" or "Paul Scott")

The Boon Fund

7th Oct '22

It looks like things are going really bad at Sosandar (LON:SOS) - they've been doing a blanket 20% off everything sale for more than a month now.

Megan Boxall

24th Oct '22

Small Cap Value Report (Thu 6 Oct 2022) - MOTR, VIC, CMCX, ECK, FAN, STEM

Agenda -

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Paul Scott

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