Small Cap Value Report (Thu 9 Feb 2023) - SUS, ARB

9th Feb '23 by Paul Scott

54 comments 6875 reads

Good morning from Paul & Graham.

Explanatory notes -

A quick reminder that we don’t recommend any stocks. We aim to review trading updates & results of the day and offer our opinions on them as possible candidates for further research if they interest you. Our opinions will sometimes turn out to be right, and sometimes wrong, because it's anybody's guess what direction market sentiment will take & nobody can predict the future with certainty. We are analysing the company fundamentals, not trying to predict market sentiment.

We stick to companies that have issued news on the day, with market caps up to about £700m. We avoid the smallest, and most speculative companies, and also avoid a few specialist sectors (e.g. natural resources, pharma/biotech).

A key assumption is that readers DYOR (do your own research), and make your own investment decisions. Reader comments are welcomed - please be civil, rational, and include the company name/ticker, otherwise people won't necessarily know what company you are referring to.

Agenda - to follow.

Graham’s Section:

S&U (LON:SUS)

Share price: £20.90 (pre-market)

Market cap: £254m

This specialist lender issues a full-year trading statement for the year ending 31st January.

We covered the last update, issued in early December, here.

Thankfully, trading in both of S&U’s operating businesses remains “excellent” and the full-year results will “meet expectations and exceed budget”.

The company notes that “UK business confidence is reported by the ICAEW to be a thirteen year low whilst a potential recession and rising interest rates continue to pose challenges” - and I agree that this adds to the impressiveness of S&U’s performance.

Their loan books continue to grow strongly even at the same time as lending criteria are tightened:

Despite the period seeing prudent adjustments to underwriting and the scorecard, and some rate increases to protect net interest margins as both operational and financial costs grow, group net receivables have now reached c£420m against £370m at the half year. That ultimate measure of quality - collections - remains good in both businesses.

Motor finance division (Advantage Finance)

This loan book is now £306m (up from £296m two months ago).

S&U argues that these customers are “nearer” to prime than they were bevore, after lending criteria were tightened up.…

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55555

9th Feb '23

Solicitors are less trustworthy than estate agents in my view / experience ... Ambulance chasing is spot on, that's exactly what they are doing a large majority of the time.

Richie2104

I agree you can make money off anything if you time it right. However, for everyone like you who has made life changing money there will be 10x (if not more) the amount of people who've lost their life savings. DYOR etc etc, good luck to all those who run the gauntlet but it's not for me.

Dragon

tinyBuild (LON:TBLD) 31m shares out of 200m traded today. Price recovered a bit from a low this morning

ryanc106

That's how markets work though isn't it. For every winner there has to be a loser on the other side of the trade. That's what makes a market.

People lose their life savings because they have no plan or risk management. They get attached to their bias and can't admit it when they are wrong therefore hold on to losing positions hoping it will one day come back rather than cutting the loss at an acceptable level and moving on.

To The Moon

Hi Paul, I thought I would share something I saw which I think could make your life easier. I think this column is great and you go through a ton of data each day. Just watched something on how you can use chat GBP, or more specifically co pilot in bing where it helps you analysis financial reports. You can compare them to other companies with very simple commands. I reckon if you used this it would save to a ton of time. I hope you don’t mind me suggesting this and if you want me to share more details happy to do so.

raggedtp

Well, to be fair, they did stop the buyback at the end of October as far as I can see, so three months ago. They will have accumulated some cash since. I'm still mulling this over. It takes them into some drilling, which I thought they didn't want to do, but the purchase price looks compelling. Their hedging has worked so far (you may have wanted to sell at spot last summer, but you wouldn't want to now: Diversified Energy (LON:DEC) are providing reliable cashflow, key to institutional investors). I'm tempted to add for 13% yield (less 15% US withholding tax) remember), but have my theoretical max position already... Not an easy one. Do remember that Rusty Hutson owns £23m in shares (and two other directors roughly £2.5m each). Directors have skin in the game.

Epitychia

A good description of the perils of investing for the unwary.

Many lose their money in jam tommorow firms.

MetalMaid

Sorry but I disagree with this. Much of the market is a zero sum game (like trading currencies / commodities etc). But equities imo are not the same situation. A good profitable business (especially those that are growing) can create value for the shareholders without someone else losing on the other side of the trade. Think of a painter who just buys a canvas and paint - then creates something worth more than the sum of its parts. Most businesses generate revenue and profits from the economy - if they make more money then people are willing to pay more for the stock. Those new investors have paid more but they are getting higher earnings and hopefully will also get a good return on their entry price based on the business carrying on its success. So I wouldn't confuse equities with things like Bitcoin for example.

Also in terms of whether one should hold on to a losing position - this is a strategy point that will be different for all investors. As I am often a contrarian, I expect to have to hold my ground against what I might consider to be an irrational market. If I cut my losses based on the paper loss, I would have missed out on many great investments. I prefer to look at the business fundamentals along with some forward analysis as to how they may perform as a company and how the sector may perform (say over the next 3 - 5 years). So I would never sell a stock based on the actual price or anchoring to my starting price. imo it is better to just always re-evaluate. If it was cheap before and has become cheaper (with no fundamental changes) then why would you sell. As Warren Buffet says - the stock market is the only place that can have a sale - and all the customers run out the store.

Vsihv

I'm not sure they are only selling to the rich - there aren't that many people that can afford to put a car on their wrist or shoulder.

LVMH juggernaut is a function of being able to borrow at negative interest rates to acquire & cut costs while selling items on 0% finance/BNPL etc etc, with share price appreciation a function of a limited free float.

WOSG also relied quite heavily on 0% finance for jewelry that goes (went) up in value - a win win win for everyone except savers. Interestingly they don't offer 0% finance on stainless steel sports watches where demand exceeds supply.

I am not sure how long this will continue. Merill Lynch made a great business bringing wall street to main street until they didn't & I can see a world where luxury follows a similar path

JASVFS

Paul might shoot me down for this Colin Craig 1, I'm sure your suggestion makes sense but there's a camaraderie on Stockopedia much of which rests with the personalities of Paul Graham and Roland plus many subscribers, I'd be very sad to see AI take over.

BnB

Unfortunately LVMH is always very expensive

It’s on a FY23 EV/EBITDA of 15x for one of the most consistently profitable and recession-robust businesses on the planet. How is that expensive?

Or to put it another way. Is one of the world’s richest men selling his LVMH shares in order to buy an ex-growth carpet distributor on a half the multiple?

spglet

davidjhill... Journeo (LON:JNEO) As I say interesting and cheap co, but I'm not sure I understand what you mean by "not really suffering from any protracted investment cycles particularly as they have been focussing more and more on software." Their solutions are a combination of hardware and software. It doesn't matter if this is SaaS or some other kind of subscription model because the issue is around what drives the business. Their sales process will involved responding to a public tender. There will be a competitive submissions from various suppliers, which will eventually lead to an order for someone. A big part of this business will be technical alliances with bus, coach and train manufacturers who will provide interfaces to the whole system, and there will be other sub-system manufacturers that will have to be "partnered" with. It's a game of lots of moving parts set against the backdrop of public sector finances. So I stand by my point about protracted capital investment cycles, which as investors won't necessarily be highlighted to us by the company. The reason for this is obviously because it makes revenue forecasting difficult.

davidjhill, also meant to add, love following your various posts on SCVR. Very informative. Thank you.

Yes me too. I 100% agree that the personalities of Paul, Graham, Roland and Co is what makes the SCVR. I was meaning more that I saw a video where the bing chat basically showed someone looking at a 15 page financial report and the chat allowed the user to summarise the report in seconds and then you couple compare the summary with a competitor again in seconds. I just thought it was the next generation of search engines and I’m sure it will help a lot of investors analysis data very quickly.

However, as a say, I totally agree that personalities and human experience are priceless.

PDiddy

What on earth is going on with TinyBuild

The Boon Fund

10th Feb '23

Then someone will invent a high frequency algo to trade based on AI summarised results and announcements.

So therefore, as a PI, using that same AI (which is likely inferior to specialist HFT fund AI) will mean you're trading after everyone has gone in.

Better to depend on your brain, which currently is unrivalled and unmatched by any AI, to outsmart the AI and trade on better analysis, rather than faster :)

davidjhill

Thanks spglet - appreciated

what I meant was that with a £27m confirmed order book and forecast revenues of £31m next year they appear to have very strong revenue visibility. A protracted investment cycle by end user clients doesn't really matter to a service provider once they are over a certain hump and have a pipeline sufficiently large and diversified. Ie this is factored in to sales forecasts. Whilst it might take time for a brand new sale to work its way through the pipeline there are other more mature sales further along in the hopper ready to come out.

Historically I was always a bit concerned they were sub scale and thus orders could be lumpy. The numbers they are showing now in terms of revenues, confirmed pipeline and potential orders suggests they have reached scale and growth. Potentially a nice sweet spot if I am correct.

A_Private_Investor

No, it’s a good description of trading, not investing.

Journeo (LON:JNEO) Thanks davidjhill. I understand where you are coming from. A £27m confirmed order book is very good. The sales cycle itself - gathering leads -> qualifying to prospects -> submitting proposals may be quite long (something like a year I'd imagine) but as you say the latency doesn't really matter at this stage of the company's growth (over the hump). Next year's forecast will be based on something like a 20% conversion ratio of the leads (pipeline) they have. I think you are right they seem to have reached scale and growth. That means the addressable market is something around £155m (5 x £31m). Which doesn't seem very big for what we're talking about - I'd imagine the market for transport systems of the type they produce is at least ten times that in the UK. That means there is quite a lot of growth for them, the constraint might be deployment not sales. Anyway, just conjecture...

yes - interesting, and thank you for the extra industry insight, that is very useful.

Small Cap Value Report (Thu 9 Feb 2023) - SUS, ARB

Graham’s Section:

S&U (LON:SUS)

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Paul Scott

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