Small Cap Value Report (Thur 19 Sep 2019) - IGG, SFE, BILB, A&B

19th Sep '19 by Graham Neary

31 comments 7894 reads

Good morning

Let's see what the RNS has in store for us today.

Timings - writing until around 2.30pm today.

This list is final:

IG Group (LON:IGG)
Safestyle UK (LON:SFE)
Bilby (LON:BILB)
Albemarle & Bond

IG Group (LON:IGG)

1st Quarter Results

Not a small-cap (market cap is >£2 billion), but as the share price is up 8% and it's one of my larger holdings, let's briefly discuss.

I have taken the view with this one that that regulations can't get that much more strict. Indices are at 20:1 and FX is at 30:1, for example.

Other reasons for my bullishness:

Compliance costs from all the new rules and fewer trading choices for customers could make life even easier for the incumbents, by creating an environment where there is less competition and fewer new entrants
Professional clients are unaffected by the rules, and the spread bet companies can focus more resources on them, instead.

Let's see what this Q1 update says.

The business has performed well in the first quarter benefitting from growth in the number of active clients, and from increased client trading activity as a result of the favourable market conditions in August.

I can attest to that myself as I was taking out positions in FTSE options during August, because of the excessive volatility/fear in the markets.

By the way, with the FTSE back around 7350, doesn't it feel like nerves have calmed already, since that August fear? GPB has strengthened, too. Perhaps these are early signs of the positive adjustments which will happen after Brexit is resolved - that's just my wishful thinking!

IG's Q1 revenue was flat in June/July/August, compared to Q1 the prior year.

The regulations took effect in August 2018, so two months of Q1 last year were still under the old regime. This is very positive to me, as it suggests there was an underlying improvement (doubtless helped by all the volatility this year).

By category, the "OTC leveraged" segment (spread betting/CFDs) was flat.

Nadex, the North American business, declined by 2%.

Meanwhile, stock trading and investments were up 9% - that's great news. This is a much lower-margin business compared to spread betting and CFDs, but I…

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jwebster

19th Sep '19

Next (LON:NXT)

"I have to admit it doesn't particularly sit comfortably a clothing company making a big wad of finance money on top of the profit from selling clothes"

Just looking at the half year results, the finance sales numbers are:
134 interest income
(19.1) bad debt charge
(21.3) overheads
(17.8) costs of funds
75.8m net profit

Wow, 75.8m net profit on 134m revenue. That's because they are charging 23.9% interest rate but 88% of their customers are low risk. Defaults reported at only 4.3%.

Yes, it means this customer profile should be able to obtain much cheaper credit elsewhere, but I guess the convenience of a one-stop shop makes it work.

Graham Neary

Thanks for the feedback on Judges Scientific (LON:JDG), jonno!

FREng

Graham: You wrote "Perhaps these are early signs of the positive adjustments which will
happen after Brexit is resolved - that's just my wishful thinking!"

How quickly can Brexit be "resolved"? If the UK leaves, with or without a transition agreement (aka "deal") then there will be years of negotiations to achieve acceptable trading terms with the EU, the USA and all the countries that we have agreements with as an EU member. If the UK decides to stay in the EU, the internal arguments will go on through a succession of elections.

It's hard to see stability returning soon.

TamzinPiworld

Videos just published of results presentations by management this week/last week:

1. Keywords Studios (LON:KWS) analyst presentation from yesterday Andrew Day CEO sounds very positive, albeit companies like this don't trade cheaply. (But it's cheaper than it was yesterday!)

2. Beeks Financial Cloud (LON:BKS) results presentation just after results. A great overview by Gordon McArthur, CEO and Fraser McDonald, CFO. Gives a clear steer on what's happened this year, and their aspirations going forward.

To follow in due course, the analyst presentation for Judges Scientific (LON:JDG) and a results presentation from Eagle Eye Solutions (LON:EYE).

SundayTrader

Also it is not only the UK for which the workings of the EU are politically destabilising. We can expect squalls from other parts of Europe as well - all part of the new normal.

Thanks for the insight. 8% looks very low to me, much lower than I would have thought.

Hi doug,

Thanks for your early request on IG Group (LON:IGG). Hopefully I made a decent stab at covering it. Cheers.

rmillaree

If the UK leaves, with or without a transition agreement (aka "deal") then there will be years of negotiations to achieve acceptable trading terms with the EU, the USA and all the countries that we have agreements with as an EU member.

That's a bold statement to make - why should it take years of negotiations to reach acceptable trading terms? - i would guess that vat majority of countries we deal with import more into our country than we export to them or at least have some trade decent volume of trade going the other way - it's in neither parties interests to start from a position of penal duties/paperwork banning imports and the like - is it not more likely that for the majority of things a compromise will be found that does the job?. I am not saying its not going to be mammoth initial headache and i agree there will be some stumbling blocks but that's life but i am not presuming we won't be able to carry on life pretty much as it was. I may be totally wrong in this regard though - i suspect we may not have long to wait to find out how bad it does actually get.

Apocryphal Now

Got to think it doesn't look good, if they really need to raise $500m and can't by the means they planned, then I'm not sure what they'll do. The rights issue in May raised a tiny amount in comparison, and that was at 15p per share

Aislabie

The idea that trading agreements can be reached without too much difficulty is alarmingly at odds with reality. It would be hard to find any that have been quick and plenty that have taken a very long time. The current Mercosur deal with the EU has been in the works for 20 years and still looks likely to fail.
The very unpleasant fact is that we are not in for an “initial headache” but for a prolonged disorder and declining economic performance.
The devil is always in the details as various interest groups get their oar in to (in their view) “level the playing field” or to right what are seen as previous wrongs.
Trade agreements always seem simple from one side but it takes two sides to settle and that takes ages, even assuming we have a generous supply of experienced and knowledgeable trade negotiators.
(Which we don’t)

peterg

That's a bold statement to make - why should it take years of negotiations to reach acceptable trading terms?

Because that's how long international trade deals take, up to 10 years. If the UK leaves with no deal then we start from scratch, and the EU have made clear that the issues not being resolved now - payments borders etc will still need resolving, and the US congress has said much the same about the border. There may be a few quickies with Fiji and even Australia, but the big ones that we depend on, EU and US will take years.

smatthews1

Very valid point I completely agree, I also think there is a general belief there will a sigh of relief when we have left, yet negotiations will be going on for years, this isn't going to go away over night unfortunately.

Wol

Hi Graham

Many thanks for today’s write up. I especially like your analysis of “non-underlying” costs which seems to mean anything that they need to ignore in order to present a positive picture.

There is a lot of debate at the moment about whether companies should only be concerned about the well being of their shareholders or should also look after other stakeholders (employees, etc.). That debate seems to be a bit misplaced when directors seem to be doing all they can to mislead shareholders while at the same time finding ways to set themselves easy targets for their LTIPs. Maybe they should look after all stakeholders including shareholders and not just focus on the board of directors.

Companies like LON:GAW who pay bonuses to all employees spring to mind as excellent exceptions to the norms.

And a small addition to your notes on £IGG. I don’t go in for spread bets or the like but I have recently opened a share dealing ISA with £IGG. I am really impressed by their different approach and the ease and speed with which I can get a good price on my share dealing transactions. Companies that serve their customers well are often also good investments.

If the UK leaves with no deal then we start from scratch, and the EU have made clear that the issues not being resolved now - payments borders etc will still need resolving,

i didn't say nothing needs resolving or that everything could be resolved easily - i was trying to argue - that i think "acceptable trading terms" can be the default in the absence of specific agreements. From a practical perspective if nothing is agreed but no tariffs or reasonable matched tariffs are actually put in place that's an acceptable interim trading agreement.

I just cannot see any situation whereby the german car manufacturers will put up with the ec imposing tit for tat tariffs for the sake of nothing - they will want to export to us tariff free and ergo they will only be able to do that if they allow us to export tariff free or with similar minimal tariffs - we will most certainly not want tariffs and therefore its in both parties interests to come to an informal day one compromise whilst they petty squabbles go on the the next 10 years.

I am guessing we may not have long to find out how it all pans out and perhaps all the doom mongers will be provided right.

timarr

But that's not technically possible. If we leave without a deal then we have to trade on WTO terms with EU26 countries which means that the EU has to impose the same tariffs on the UK as it does on other countries without whom it has a deal - the US for instance. There's no such thing as an "informal" agreement outside of a full trade deal.

Basically, it's deal or no deal.

andyfwwrench

Personally I think if we leave without a deal we will never have a trade deal with either the US or the EU. Any freeing of trade will simply inline with global progress. The rent both will want is too much for the politics of this country. On the other hand Australia and Canada are similar sized economies with little overlap, and frankly not that much trade so trade deals should be relatively straight forward. And yes, I mean never.

The “German car manufacturers won’t let it happen” argument comes up so much in Brexit comments that at least, amongst us here, let’s put it firmly to bed.
The UK is a bit over 10% of BMW’s sales. Let us suppose that tariffs halve that, to 5%. There is no way on earth that BMW is going to do anything dramatic to save 5% of their sales if it has the slightest chance of messing up the 95% by overt support of the troublesome Brits. Ain’t gonna happen.
I am concerned that the view that a no deal Brexit is priced into the market may be based on the kind of magical thinking on the “German cars” line. If so then the true reality is going to be a nasty shock.

Apologies for using the wrong word - when i said informal meant i formal ! (doh) in that any agreed bandaid type interim solution would be spelled out in writing.

I think that there's been a massive misunderstanding by many of the potential role of German car manufacturers. I had endless arguments along those lines before the referendum. It arises from those who want to leave the EU completely failing to understand why the other 27 countries, and many in the 28th, value it, and the erronous assumption that somehow Germany, or its car manufacturers, would force a deal. It's not as simple as balance of trade, or free trade. The EU, and the whole idea of European countries working together, is massively important to many on the mainland, and particularly in Germany. Most would see the loss of car sales to the UK in the absence of a trade deal as a relatively minor matter. And apart from anything else, unlike the UK, they have plenty of other exisiting markets, with whom they will maintain free trade.

One thing is clear, even if it were possible unilaterally impose zero import tariffs, which there is little sign of the govt actually doing at present, the effect on many sectors of the economy, such as agriculture, would be devastating, as there would be no pressure on other trading nations to reciprocate.

GrahamF

20th Sep '19

Never ceases to amaze me that after all this discussion about Brexit people on both sides say “x will happen” or “y cannot happen” as if an infallible view of exactly what will happen in the future is available to us.

We would very rarely say what we think the future profits of a company are going to be with such unswerving certainty.

No one can really predict what will happen with any significant degree of certainty. To talk as if we can is a hindrance to the discussion not a help in my uncertain view.

Even what appears to be clear at first glance becomes far less so when scrutinised. WTO terms apply if there’s no deal on the face of it is clear. However, if you have a transition arrangement while you are negotiating the final deal and call that transition arrangement a deal then do you escape the inevitable WTO terms? I don’t know but the point is that nothing is as certain as it seems.

The one thing that I am fairly sure of however is that for many politicians getting re-elected is their main concern. So, while we can bandy about numbers like % tariffs or % exports etc, as if we were analysing company fundamentals, the emotional effect on voters of lost jobs or higher costs that affects their voting decisions is equally if not more important in how this will play out.

Trying to predict the mood of the electorate or the vote buying actions of politicians is far too difficult for there to be any clarity of what will happen.

Small Cap Value Report (Thur 19 Sep 2019) - IGG, SFE, BILB, A&B

IG Group (LON:IGG)

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Graham Neary

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