Small Cap Value Report (Thur 28 May 2020) - BOO, Market Comment, TND, FLTA, KETL, CCT, CTO

28th May '20 by Graham Neary

86 comments 11470 reads

Good morning!

Graham here.

its going to reach 24 degrees today, so I'll to have to get this report done early, before the heat kicks in. One of the few benefits of corporate offices, that I do miss in the summer, is the powerful air conditioning!

Building a list for today:

Tandem (LON:TND)
Filta Group (LON:FLTA)
Strix (LON:KETL)
Character (LON:CCT)
Tclarke (LON:CTO)

All done at 5pm.

Boohoo (LON:BOO)

In mid-caps, I see that Boohoo (LON:BOO) has attacked the bear argument head-on and bought out the rest of PrettyLittleThing for £320 million. The certainty this provides and the lower-than-feared valuation should be received positively, I think.

Market open - Boohoo is up 11% and is threatening to break out to an all-time high.

Shadowfall's research note speculated that the cost of buying out PrettyLittleThing could have been almost £1 billion, if Boohoo waited until 2022 and if it paid a very high EV/EBIT multiple (in line with stock market multiples for Boohoo, Asos and German peer Zalando)

The much, much lower price paid is terrific news for Boohoo shareholders and takes away the fear around this impending deal. I think it makes sense that the Boohoo market cap has increased by over £400 million - that accounts for most of the difference between the worst-case PLT scenario, and the reality which has transpired.

Boohoo argues that it is using its existing cash to fund the £162 million cash portion of the deal, not the £200 million it recently raised from investors.

Since all money is the same, regardless of where it came from, this is stretching things! The facts are that it recently raised £200 million, and it is spending £162 million in cash (plus more in shares) to buy out the Chairman's son.

And it could have bought the PLT stake several years ago, at a much lower level, but chose not to.

Conclusions - this short attack looks to have failed within 48 hours, in my opinion.

I do want to make it clear that I think Matt Earl is a brilliant analyst. He has scalped companies before and…

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ken mitchell

28th May '20

And itHi timarr

Agree that we need to be very careful and also with your comments about percentages.

What so many seem unable to grasp, including the media, is such clear evidence that it was already well established in the UK long before the first official cases were reported. A golfer at our club who I and many others mixed with almost certainly got it last December. He had all the now well known symptoms and genuinely feared for his like as he struggled to breathe.

Many of us were in close contact with him, and some must surely have had it without knowing. I think I could well have had it in very mild form, as had intermittent temperature, and each time that happened a rasping dry cough and lack of energy, Then it went and then came back again. Luckily mild each time. I know others who put it down to flu, but said it was different this time and they too now think they could have had it. It’s now well known that a Harrogate choir had several members with classic symptoms also last December and it transpired that one of them had direct contact with someone from Wuhan! They could well have caused it to spread.

Premier League footballers have been surprised they’ve tested positive as they’ve had no symptoms at all. It could well be that millions have had it without knowing, so IF that provides protection against getting it again, the worst might soon be over. Markets are behaving as if that is he case.

JohnEustace

It's also suspected that it's not just that the viruses are seasonal, it could also be that our susceptibility to them varies with the seasons, perhaps as a function of our Vitamin D levels so this weather is perfect to get outside and top up our levels naturally.

I listened to this podcast which is a good summary on my daily walk yesterday.

https://www.theguardian.com/science/audio/2020/may/27/covid-19-the-role-of-vitamin-d-podcast

Rhodie Jonners

"My view - the core business at Strix should be ok in the near-term, I would have thought. The demand for kettles is hardly going to fall off a cliff!"

You missed an opportunity to say demand is unlikely to come of the boil or even run out of steam :)

I'm another who thinks they had "it" at the start of February but never needed to be tested. I think the early cases here were likely the Wuhan strain brought here mostly by returning students in January, which wasn't as severe for us as the strain that came back from the Italian and Austrian ski resorts after half term.

simoan

Has anyone been following the Stelios v Easyjet saga? I've only seen bits and pieces, but today's latest shot across the bows from Stelios is fun. He's offered £5m to any recently sacked EasyJet employee who will whistle blow on connections between the board (aka scoundrels) and a "dodgy" Swiss lawyer. Can't wait for the film...

https://easy.com/sir-stelios-easyjet-staff-are-getting-to-carry-the-can-not-airbus/

BTW does the person in the photo not remind you of the late, great Dave Allen!?

"Goodnight, thank you, and may your God go with you." Si

Tony1249

You'd also hope that if there is a second wave we'll be better prepared for it.

That would be big dose of hope, based on the way the first wave was dealt with, especially given that there was ample 'notice' by observing what was happening in other nations before it finally hit the UK.

Graham Neary

Whoops :)

timarr

Hi Ken

There are various estimates around but the average seem to suggest that between 10% and 12% of the UK population have had the disease - which is a long way short of the two thirds that need it to get herd immunity. In Stockholm the latest tests surprised everyone by showing that less than 8% of people had antibodies - and Sweden has had four times the number of deaths of neighbouring Denmark, which did lockdown, so the price has been high.

Personally I think that looking to this kind of thing for guidance on where markets will go is a bit of a red herring. We will have to learn to live with the disease which means more social distancing, better sanitation control, gradually improving track and testing and gradually finding better treatments (blood thinners and interferon already appear to be helping). A vaccine may arrive eventually but if this mutates like the common cold we'll need a new one every couple of years.

That would suggest that we've already seen the worst for markets in terms of fear and uncertainty. The major unknown is peoples' behaviour - the only similar event I can compare this to was 9/11, and it took about 3 years for behaviour to fully revert to normal. That impacted transport, hotels, leisure - although you'd think the 18-25 group will mainly not care and go for it anyway, and good luck to them (as long as they stay away from me!).

However, we are guaranteed a steep downturn and weaker businesses will fail so we're into normal pre-recession planning. There will be a lot of job losses although unemployment would probably plateau quite quickly, but that will impact house purchases, new car registrations and big ticket home items (sofas, etc).

Some trends like e-commerce and homeworking have been accelerated by this, they're unlikely to ever fully unwind. I assume governments will invest more in healthcare and perhaps a bit less in defence going forward. Commercial property will have to change, although it's hard to know how.

Most of the big share price movements are in stuff that's already been heavily beaten down. There's been a trend towards companies moving off-market because of the boom in PE / VC money - but right now, the public markets are the place to be as companies raise cash with relative ease. Anything funding itself through to safety is going to bounce because unlisted competition that came into this without funding is in big, big trouble.

But looking at vaccines and infection rates isn't really a guide to the future, IMO.

timarr

barnetpeter

Yes and CARD soaring today. Was looking at other retailers today to see if any bargains. Quiz? FCCN?

I timarr

The only thing worth challenging in your post is the number of people here (and elsewhere) who have had it and often without realising it.

There are so many cases where people having it were not tested. I think in Paul Scott’s household only the one very sad fatal case was recorded. The other three all got it, but won’t show on official figures. And with so many seeming to get it without knowing it, this sort of thing must apply in other Countries too. So I suspect that millions more here have had the virus than is being recognised.

So I suspect that millions more here have had the virus than is being recognised.

Surely we have to go with the best data rather than our own guesswork? That's not just about investing but about personal safety - although most people are hardly touched by the virus for those who do get it badly, it's a terrible experience:

https://www.bbc.co.uk/news/527...

The New York studies, the ones in Sweden and the ones in the UK mainly show a range of 8% to 12%. There are a variety of methods being used but this isn't guesswork, it's combination of sampling and testing with some modelling thrown in. While that won't be perfect I'd rather work on the basis it's roughly right than trust my personal instincts.

If you really believe that the rates are significantly higher than that then you should invest accordingly - all in on travel and leisure - and stop worrying about social distancing and all of the other measures. To me that sounds quite a high risk approach

Personally I suspect those figures are roughly correct and I would rather get it later than sooner. The later you get it the better the treatments and the better your survival chance if you are unlucky enough to be badly affected.

EDIT: The ONS figures today say that 7% of people in the UK have had it, just to add to the evidence pointing in that direction:

https://www.bbc.co.uk/news/hea...

timarr

bryaz

boo stinks-do you think they would be buying now if it was not for the short attack plus lots of deals which are done include an additional payment if targets are reached- surely that would have been the way to go with the original 66% purchase

Hi again timarr

I respect your views and I’m sure the vast majority here will agree with you, the more so as every day the media bombard us with genuine horror stories from the front line.

What doesn’t get stressed enough is that the vast majority of severe cases are obese people (and Boris freely admits that applied to him at 6 stone overweight) and those unfortunate enough to have other medical conditions like diabetes, along with some ethnic minorities. The fact that for fit under 45s the death rates and severe cases are very low, at only around 500 of the 40000 fatalities gets little if any coverage,

Aldo the media do not every day dramatise the equally terrible deaths from cancer, heart attacks and strokes and many others, nor that those have increased significantly since lockdowns. Why the extreme focus on coronavirus? There has been hardly anything else on the news for weeks. Yet 99.99% in the UK, one of the worst affected Countries, have NOT died from it.

I’m not guessing about the millions who may well have had it. That too has been covered but gets ignored by much of the media. I really do believe that many have been brainwashed.

And I guess here on Stockopedia, many of the contributors are retired and in the age group more likely to be affected, and it’s so noticeable that posts bearish on the virus get well recommended, and those giving the opposite view don’t. The crowded beaches are a guide as to how often younger folk are reacting.

As for investment angle, the markets have gone with my view, but also with the incredible “money” being thrown at it. And I have gone with the market. I was down 25% but buying since mid March along with a couple of lucky buys mean I have now recouped all my losses this year. And some of those profits have been taken.

This site and the Small Company reports and comments have also considerably helped my performance. Ditto Paul’s sensationally good market/virus comment.

E.g I bought Revolution Bars back after comment from Paul Scott here just 2 days ago, and it has already doubled....in just 2 days. I can now look to sell half and run the rest for free. And several other recent buys are up more than 50%. Some shares are doubling or more in a day!

And it’s a shame that many seem to be waiting for a safer time to buy, failing to notice that markets, at least for now, are far more bullish about virus outcome than many posters here and elsewhere. By the time some change their minds and buy it might be just before the next big dip IFIF the virus returns with a vengeance. THE best time to buy is so often when news is dire, but priced in, and any better news isn’t. That was the case in mid March. It isn’t the case now markets have soared.

And time will tell on how the virus was handled worldwide. Again though investors here seem to be ignoring the fact that many Countries dealt with it far better than the UK. Stock markets are reflecting that too.

Why the extreme focus on coronavirus? There has been hardly anything else on the news for weeks. Yet 99.99% in the UK, one of the worst affected Countries, have NOT died from it.

Actually its only 99.999% of people in the UK that have died from it. Which is 'only' 60,000 people. Which, remember, was suppressed by lockdown.

As for investing - as I said, there are lots of opportunities. How you go about it depends on the type of investor you are. For me the likes of Revolution Bars (LON:RBG) is pure beauty parade investing - with no earnings visibility it's a bet that other people will bid up the stock as they turn positive on it surviving. Which is absolutely fine, just not my thing.

There are plenty of great opportunities around with no capital risk, it's a good time to be any sort of investor on the long side but I want stuff I can buy and hold, I don't want stocks I have to monitor constantly in case in turns out they're about to go bust or shut down as a Covid-19 superspreader location.

Each to their own. Personally, I'm enjoying the investing opportunity, I reckon this will lead to years of portfolio outperformance with minimal supervision.

GrahamF

I’m afraid that he should have asked the science teachers before holding forth on things that weren’t his subject area.

Yes, vaporising the water uses energy.

For the same reason, when you come out of the water after a swim you feel cold as water evaporates off your skin using heat from your body.

What he should have known is that that moisture in the air condenses from vapour back to liquid at altitude (forming clouds) reversing the process and releasing that heat again as it changes state.

So, this is immaterial in terms of climate change as overall it causes neither warming nor cooling.

What he would not have known back in 1965 was that our greenhouse gas emissions are causing a greenhouse effect that increases temperatures overall. This may cause more extreme weather but not an ice age.

Final words for today timarr, and it’s good of you to reply again.

I’ve given you a false impression. I do dabble in the odd speculative share like Revolution Bars, but my methods are usually much more like John Lee. i.e quality dividend paying shares (dividends blown away for now though!) and Investment Trusts to invest all round the World, including promising Countries like Vietnam. And my focus is always on sectors that look good value after falls. Spoilt for choice recently.

Hope your last sentence is proved right!

2ShedSam

Hi Ken, would be interested in your choice of Trust for Vietnam. Recently went for the Vinacapital Opportunity fund but no real conviction in choice, just wanted a bit of exposure to the country.

29th May '20

2Shedsham

I too would go for, and hold, Vinacapital Opportunity Investment Trust VOF.

Latest Net Asset Value is 390p yet it can be bought for a 20% discount to that price at 315p.

I marginally prefer VOF to Vietnam Holdings Investment Trust, also on a big 17% NAV discount. I like their user friendly updates too. e.g their monthly factsheets.

Note how Vietnam has dealt with Coronavirus superbly and Vietnam is seen by some ad the next China. So this Trust could prove a superb long term holding.

For excellent info on Investment Trusts I used to use www.trustnet.com
but I now use the easier to navigate aic site itself.

Here’s the link taking you straight to the VOF page. Just scroll down below the “Company Announcements” heading on the right to find their latest fact sheet.

Hope that helps

Ken

https://www.theaic.co.uk/companydata/0P0000FTTI

hayashi22

30th May '20

Thanks for that Ken. I;m tempted by investment trusts for direct exposure to a country. Out of interest what are the annual charges you pay each year in order to hold the fund. That for me has been one of the issues. With shares you pay your £10 whatever to buy and sell and that's it. I have one pension fund with various pots and they pay 1.65%...that's quite alot of dosh on an average £50k pot.

Hi hayashi22

I’ll reply in more detail later, but Investment Trusts can be bought and sold on our stock market exactly the same as shares. That and the chance to buy at a discount (including many right now) is one of the big plus points.

Each Trust also has charges that are taken out of the share price, so investors don’t really notice them Charges for many Trusts are low, and under 1% sometimes. Trustnet and theaic sites both show the charges for each Trust.

If you could give a brief indication of your knowledge/experience with them that will help with the next reply.

Small Cap Value Report (Thur 28 May 2020) - BOO, Market comment, TND, FLTA, KETL, CCT, CTO

Boohoo (LON:BOO)

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Graham Neary

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