Small Cap Value Report (Thur 13 September 2018) - FTSE, SCH, DPEU

Thursday, Sep 13 2018 by

Good morning!

While I was away, the FTSE (UKX) dropped by 2% in a week. That will teach me!

The biggest faller was WPP (LON:WPP), which had a profit warning. Other big fallers were Ocado (LON:OCDO) and Just Eat (LON:JE.), and most of the big mining companies.

Mainstream media has been pointing out that the index is now around its five-month lows.

Taking a slightly longer timeframe, we can see that it basically hasn't gone anywhere over the past year (before dividends):


in currency terms, GBP has at last found some strength over the past few weeks. That is perhaps the most obvious headwind to explain the recent weakness. But it only partly explains the move.

Buying opportunity? This situation has certainly caught my attention. As regular readers will know, I am short FTSE puts. I am committed to buy a decent chunk of shares at 6,000 if the FTSE falls below that level by next March.

Aside from that reason, there are also a few tempting shares in the big-cap space to look at. British American Tobacco (LON:BATS) for example (where I already hold a long position) has been extremely weak and I am thinking about increasing my position size in it. I also have more highly rated companies like Unilever (LON:ULVR) and Experian (LON:EXPN) on the watchlist. Unfortunately, their share prices have remained very strong.

In some ways, it could be argued that the FTSE going flat for a while is a benign situation.

For those people who are worried about a general overvaluation, it gives the market a chance to grow into its valuation. And it does that without causing any of the panic you get with a very sharp sell-off. Instead of panic, it merely causes boredom and melancholy among the impatient.

And for people like myself who are buying equities from time to time, it means we still have lots of opportunities.

I've noticed a really mixed bag in terms of sentiment expressed on twitter and in casual conversations this year. Investors I've spoken to are happy with a…

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All my own views. I am not regulated by the FSA. No advice.

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SafeCharge International Group Limited is a United Kingdom-based company, which is engaged in the provision of payments services, technologies and risk management solutions for online and mobile businesses. The Company is a supplier of online payment technologies and services, risk management and information technology (IT) solutions. The Company's processing business provides its customers with a range of payment and fraud prevention services; payment card industry (PCI) descoping solutions, and a network of approximately 100 payment methods and acquiring banks through a single customer integration. It provides online merchants with a payment solution that includes secured connectivity to financial institutions, cashier with personalized checkout options, risk management platform and a Payments Management and Analytics component. Its subsidiaries include ELoad Solutions Limited, XT Commerce International Limited, SafeCharge Technologies Limited, SafeCharge (UK) Limited and others. more »

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DP Eurasia NV is a Netherlands-based company, which operates as a franchisee in Turkey, Russia, Azerbaijan and Georgia of Domino’s Pizza. The Company offers pizza delivery and takeaway/eat-in facilities at its more than 570 stores that include corporate stores and franchised stores, which together are referred to as its system stores. The Company offers pizza products at a range of price points and adapted to local tastes. It also offers complementary products such as chicken, other side dishes and desserts, some of which are developed by the Group’s centre in Istanbul and subsequently adopted by other franchisees of DP Inc internationally. The Company also operates an online ordering channel. more »

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31 Comments on this Article show/hide all

Graham Neary 13th Sep '18 12 of 31

In reply to post #398464

Hi Gromley,

As my portfolio has gotten a bit bigger over the past year or two I decided to allow myself to diversify a bit, to reduce the concentration risk somewhat. I'm still quite concentrated: Burberry (LON:BRBY), Volvere (LON:VLE) and H & T (LON:HAT) account for one third of everything, for example.

Also, I wanted to try investing in a few companies which I wouldn't normally invest in, but which I thought were interesting. Diversification has enabled me to invest in DUKE, DIS and DPEU. If I only owned 7 stocks in total, I might not be able to bear the risk of owning them.

My other equity holdings are :

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Graham Neary 13th Sep '18 13 of 31

In reply to post #398474

Hey, thanks for the useful graphic and the insights. G

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FREng 13th Sep '18 14 of 31

Microcap Malvern International (LON:MLVN) reported its Interims today. I would be grateful if Paul would be willing to comment, as it's a BMUS stock.

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sharmvr 13th Sep '18 15 of 31

Hi Graham,

Time allowing, would appreciate if you could take a look at Medica (LON:MGP) half year results out yesterday.
If I remember, on your last look, you were quite positive about the company.

My personal view - high quality business with a solid balance sheet (assuming goodwill carrying value is not impaired) and given it represents some 37% of the capital base, and the company generates roughly 25% ROC (assuming last 6 months doubles), I would suggest it is fair.

The not so good - revenue growth seems to be slowing - roughly 18m generated in H2 17 and 18.6m in H1 18, which would imply revenue run rate is not growing.
They note in the financials reduced gross margin (due to lower prices from increased competition and stingy trust) - and results support that with "transaction" volume growing faster than revenue and.
I guess a 50% gross and 20 - 25% operating margin is going to attract competition and if I read correctly, they do not expect it to impact operating margin.

My worry is more that they do not seem to be growing customer numbers.
This might be due to NHS trusts being busy with whatever the next NHS crisis happens to be (Brexit / No deal preparations perhaps) or whether that is due to competition or an ineffective sales force - they seem pretty quiet on the "new business" front - it would be helpful if they disclosed the number of trusts they work with.
I expect the customer base is quite sticky, given that selling to public sector is not easy and I imagine (shameful bias against the public sector) that they are not the most dynamic of customers, but whether that qualifies as a moat I am not sure?
From looking at the services, they do not seem that entrenched, unless they substantially expand the offering and become the one stop shop for all remote medical scanning

Would appreciate any thoughts especially those who might have experience of selling to the NHS / other public sector trusts.
Many thanks

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Graham Neary 13th Sep '18 16 of 31

In reply to post #398479

Hi Threeputt, I appreciate the requests. I don't cover every sector, however - Amerisur Resources (LON:AMER) is a resource stock and Ricardo (LON:RCDO) is a consultancy. So they're not on my radar. Apologies. G

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DJCP 13th Sep '18 17 of 31


I hold two from your portfolio:
Volvere (LON:VLE) - currently my largest holding, and have held for 8+ years now, without top-slicing or topping-up.
Duke Royalty (LON:DUKE) - a recent purchase (Jun 18) and have a note to top-up when/if I think it's worthwhile.

The one surprising (to me) holding of yours is Distil (LON:DIS) . Seems to be very diversified in comparison to your 'folio. It has been on and off my watch list. I suppose many people enjoy a beverage (stock?) ! lol. I wonder if Wetherspoon cutting/replacing their European-based drinks would benefit non-Euros (Distil perhaps ?).

I've not long pruned my folio (to 17 stocks), and have 3 main categories:
1) Top - 5 shares accounting for 53%
2) Middle - 8 shares for 37%
3) Punts - 4 shares for 7% - This area is where the pruning took part, else would have been 15 shares for 16% !
Leaving 3% for cash.

Market caps range from £2.8m (one of the punts) to £2.7b (a bank that's likely to be sold when/if funds needed). The average Market Cap over the 17 stocks is exactly £500m !

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Graham Neary 13th Sep '18 18 of 31

In reply to post #398449

Hi andrea, I'm not too familiar with Sirius Real Estate (LON:SRE) to be honest. I see that its EPRA NAV was recorded at 64c (about 57p) for March 2018. That means the shares are only trading at a small premium, or maybe even a discount compared to whatever its live EPRA NAV might be.

That's a good start. I like buying property companies at NAV or lower. But I don't have specific information about SRE. Cheers, G

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crazycoops 13th Sep '18 19 of 31

Thanks for your review of SafeCharge International (LON:SCH) Graham, it is one I hold a modest amount of (c3% folio position). I have a couple of things to add which might provide some additional colour.

1. The reduction in margin is a result of the company de-risking away from over reliance on the gambling sector, from which it was borne.

2. There is a dominant shareholder situation. Overall, this adds an element of risk, including low liquidity (although volatility is not high).

My personal view is that the endgame here will be a takeover as part of industry consolidation (they have had sufficient cash to be an acquirer for a while but I think that boat has sailed), the price of which will be determined by the dominant shareholder. I wouldn’t want overweight exposure but with a decent yield, it has held its own in my folio for a couple of years now.


Blog: Share Knowledge
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ricky65 13th Sep '18 20 of 31

Graham, I bet you wished you used a stop loss on DP Eurasia NV (LON:DPEU) :P

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ISAallowance 13th Sep '18 21 of 31

In reply to post #398554

Well it's easy to determine which positions need a stop loss in hindsight! You'd need to work out how Graham's entire portfolio would have done with a given stop loss to determine whether he'd have been better off with or without, not one individual holding.

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Gromley 13th Sep '18 22 of 31

In reply to post #398494

Of course, you had actually mentioned some (probably all) of those additional positions, but I hadn't joined the dots.

I can certainly relate to the soothing effect of having a bit more diversity. In fact contrary to what you've seen so far this year, I have found that my "brilliant" ideas have not disproportionately out-performed my "good" ideas, but they do create disproportionate "stress". Hence my move towards having more even position sizes (at least at the point of initial purchase). Most soothing of all though this year has been building up a diversified hedge portfolio of shorts, that also being the best performing part of my portfolio thus far.

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ppdrs 13th Sep '18 23 of 31

In reply to post #398519

Hi Sharmvr

(Disclosure I hold Medica (LON:MGP) )

I’m sure there’s lots of comments others can make around the half year results, so I’ll keep to giving some thoughts around selling to the NHS and public sector – which is what my own business does, albeit in a different segment of services.

The NHS and local government are going through a major crunch, which is well documented – an aging population (with proportionately greater health and social care needs), but dwindling and more costly labour pool. The simple economics of this are that it can not afford the projected cost, without a major transformation in funding, which politicians have repeatedly failed to address (it doesn’t win votes).

With this backdrop, our experience is that procurement within trusts is a slow moving ship, and so whilst you don’t see an increase in trusts using Medica (LON:MGP) services, it does explain why the number remains stable. The growing revenue (albeit growth slowing?) from this stable customer base suggests the service offers value for money, which is pretty much the main focus for any trust.


• The selling point of Medica (LON:MGP) services is cost saving – which trusts will focus on
• Limited pool of skilled radiologists and higher productivity per headcount
• Flexibility – 24/7 service, without relying on costly incentives for employed radiologists
• Remote working – a big incentive for a radiologist to work for Medica (LON:MGP) rather than his/her local trust
• I’ve not researched the market, but am not aware of much competition for this service?
• Radiology is not a service likely to decline, and very far from automation of any sort!


• The focus on costs – in our experience public sector bodies are slow to adjust fees to meet rising costs, so potential margin pressure
• Although they have multiple customers, really in the end it is just one – the NHS, so very sensitive to government whims, funding decisions etc
• NHS procurement – very lumpy and often delayed in getting to any sort of outcome

I hope these general comments help – obviously they are my thoughts, and a ‘read across’ from my business, but not specific to Medica (LON:MGP)


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shipoffrogs 13th Sep '18 24 of 31

In reply to post #398569

PPDRS - interesting insight - thanks, just one small point - you say that radiology is very far from automation of any sort. I thought that AI was already performing better than humans in this field.

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sharmvr 13th Sep '18 25 of 31

In reply to post #398569


I hold Medica (LON:MGP) too.
Thanks for this - great insight and exactly the kind of thing I was hoping for - mostly confirms my view.
Accepted re customer concentration and politics, but I would say that has to be a risk of investing in such a business.

Would tend to agree with Shipfrogs that basic radiology (eg recognising a common fracture such as hairline) lends itself to automation, although I would suggest part of the Medica (LON:MGP) investment case is that opportunity and an area they are looking to develop.

That said, something being ready for automation and actually being automated are two very separate ideas in the real world, especially when you are dealing a parent worried about their child.

Personally, I liked this company at the outset and sadly overpaid - at current valuations, I would suggest this is an attractive long term compounder (politics notwithstanding) - added to the holding a few months ago. If I see same operational performance and balance sheet, with a growing customer base, I would add, especially if the valuation stays as now - something to watch for in the next couple of updates I think.

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laurie 13th Sep '18 26 of 31

In reply to post #398549

SafeCharge International (LON:SCH) The dominant shareholder is said to be Teddy Sagi through Northenstar Investments, with 67+%. I can't find proof of this as Northenstar doesn't list directors on Bloomberg, but Sagi founded or was one of the founders of SafeCharge International (LON:SCH), and was in control of the company in the past.
Sagi has a criminal record, and has served time for securities fraud/bribery/deceit.
There was a period in Playtech (LON:PTEC) 's history, before Sagi's stake was reduced to 6ish%, that Playtech was buying Sagi's startups.There were serious questions at the time concerning the prices Playtech (LON:PTEC) was paying for these companies.
Rumour has it that during the attempt by Playtech (LON:PTEC) to buy Plus500 (LON:PLUS), UK regulators were concerned about Sagi being in control of the combined group.
There was some questionable behaviour involved with the Playtech (LON:PTEC) / William Hill (LON:WMH) joint venture.
Do google 'Teddy Sagi fraud' , etc., so that you can make an informed decision. My comments are based on articles read on the web; I can't vouch for the accuracy of anything above, but the sources are normally reliable (FT, etc.).
[disclosure- a tiny recent long position in PTEC]

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timarr 13th Sep '18 27 of 31

In reply to post #398589

From the Safecharge website:

The entire shareholding of Northenstar Investments Ltd is held by Teddy Sagi.


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runthejoules 13th Sep '18 28 of 31

In reply to post #398379

Thanks for the solid views on SafeCharge International (LON:SCH) Graham, much appreciated!

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Graham Neary 13th Sep '18 29 of 31

In reply to post #398619

You are very welcome rtj! G

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ppdrs 14th Sep '18 30 of 31

In reply to post #398579


I don't have any specific expertise in radiology. My understanding is at a basic level (e.g. X-ray), there might be some automation (although anecdotally I have heard that skilled clinicians have missed fractures on occasion!), however my views about automation are more around complex imaging especially oncology, where it might be some time (but never say never) before humans can be replaced.


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ezlifeme 14th Sep '18 31 of 31

In reply to post #398694

Morning ppdrs - re Medica (LON:MGP)

I'm no oncology or IT expert either, I am a bit of a google researcher however
One search and...... Article in last months science daily about AI and oncology

some time?

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About Graham Neary

Graham Neary

Full-time investor and independent analyst. Prior to this, I spent seven years in the financial markets as an analyst and institutional fund manager. I'm CFA-qualified, also holding the Investment Management Certificate and the STA Diploma in Technical Analysis.Away from finance, my main interests are recreational poker and everything to do with China, especially Mandarin Chinese. more »


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