Small Cap Value Report (Thur 30 August 2018) - DUKE, CHH, XAR, ARW, HSS, KETL, CRAW, OMI

30th Aug '18 by Graham Neary

40 comments 13672 reads

Good morning!

Lots of interesting stories to digest today.

Duke Royalty (LON:DUKE)
Churchill China (LON:CHH)
Xaar (LON:XAR)
Arrow Global (LON:ARW)
HSS Hire (LON:HSS)
Strix (LON:KETL)
Crawshaw (LON:CRAW)
Orosur Mining Inc (LON:OMI)

Duke Royalty (LON:DUKE)

Share price: 45p (+1%)
No. of shares: 198 million
Market cap: £89 million

New royalty agreement

Please note that I currently own DUKE shares.

Duke is an unusual investment vehicle. I wrote about it last month, when it raised £44 million in new equity.

It has raised £79 million (gross) in total from investors so far, at 40p and 44p.

As I have written previously, it won't be a very confident hold for me until I feel happy with its level of diversification.

Today we have news of a £10 million deal, including the temporary option to increase the investment by a further US $5 million. I guess it will do that depending on progress with other deals over the next few months.

The yield is fantastic: over 13% in cash, received monthly. The payments will vary in future years depending on revenue generation by the investee's parent.

The investee is a Canadian company, operating internationally. It specialises "in the development, commissioning and management of healthcare facilities and services using a public-private partnership model. "

Payments will be received for 30 years unless the investee exercises its buyback option. Note that there is no repayment of principal at the end of 30 years. It works more like an annuity.

My opinion

The Duke portfolio has five investees now - it is gradually improving its diversification. My confidence is very slowly improving, the longer we go without a mishap. There is a long way to go yet.

The main attraction for me is the high yield that Duke achieves with each deal, and the possibility that it could compound this wealth over time by reinvesting the proceeds.

The dividend yield is of less importance, but it doesn't hurt. The most recent quarterly dividend was 0.7p, implying a…

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John Gibson

30th Aug '18

I was just about to ask the same about RBG, anybody know any reason for the fall?
Many thanks,
J

Zipmanpeter

Re Morses Club (LON:MCL) - I believe the drop from 174p probably reflects a natural pullback after a 34% run up from 130p as recently as April 18. Still good value but at the of the day, trading is "in line" but loan growth was only up +4.3%, impairment "within the Company's IAS 39 guidance range" and customer numbers flat at 229K. Non-Standard Finance (LON:NSF) (I hold) also reported weak numbers on Home Credit in early August (vs booming sales in brand and guarantor lending) whilst Provident Financial (LON:PFG) 's operations are stabilising.

Personally, I think that the fall out from Provident Financial (LON:PFG) has been an accelerated net reduction in the Home Credit market. MCL also made no mention of leading consolidation as a potential source of home credit growth although this may wait for finals.

Morses Club (LON:MCL) were also noticeably downbeat/reticent about Dot Dot Loans which "continues to develop and is providing us with useful customer insights and learnings"......But not it seems a profitable and significant new business line to complement a structurally declining Home Credit market!!

Re Revolution Bars (LON:RBG) - hoping recent decline is simply small traders fears over incoming Brexit plus annualisation of Stonegate bid (ie I gave it a year and they did not come back). Volumes traded remain tiny so no sign of a big player moving.

Graham Neary

rtj, sorry to disappoint today! Don't have a view on either of them. G

TheShareWhisperer, I don't bother with speculative pharma, or indeed with pharma in general.

re: OptiBiotix Health (LON:OPTI), out of curiosity I've just looked up their half-year report from August 2016. They said:

"OptiBiotix has made strong progress during this period in its strategy of developing compounds which modify the human Microbiome and commercialising these through partnering with food, health, wellbeing, and pharmaceutical companies."

At the half-year report in August 2017, they said:

"This period reflects the transition of OptiBiotix from a research and development company to a commercial business with the appointment of a commercial team, product launches, and a number of sales agreements signed at the end of the period providing future revenue streams."

Today they said:

This period reflects the continued transition of OptiBiotix® from a research and development company into a commercial business, with seven commercial deals in six months covering the USA (two deals), Asia (one each in India and Pakistan), Europe (two deals), and a deal with a global brand who is one of the world's largest providers of dairy products.

Commercialisation has been just around the corner for a while! 17 deals announced since March 2017 and still not much by way of revenue. Good luck to them.

Graham

Strix (LON:KETL)

Hi SundayTrader, since it runs off the value of its patents it doesn't need much equity capital, hence the high ROCE.

fredericktug

I suspect it's just a case of declining LFL's, sector sentiment still poor, take-over hopes fading. Their last results blamed both cold AND hot weather, which just sounded a bit silly as I recall. Also, they lost their CFO after the 2017 profit warning and then the CEO after the bid, with a new CEO only starting in June.

I remain long. I think there's value to be had, and the yield is now pretty good. Deltic would still like to acquire or merge, and were buyers recently, so there is some, albeit limited takeover potential. Also of note is that they are still growing/opening new outlets, on better rents, so the growth story is still just about in tact.

Camtab

Graham, nice piece on Xaar. Very tricky to assess, as you say strong balance sheet (total assets over 5 times total liabilities), but dividend surely must be cut now. Margin has been falling and the return on capital and equity not too exciting. After fall you can pick shares up around book value which feels good. But high multiple and it just disappointed. I can't help feeling you will pick them up cheaper than this in 2 weeks time.
All the best

andyfwwrench

Filtronic (LON:FTC) - The orders for antennae support the roll out of 5G, which is indeed just getting underway.

Orosur Mining Inc (LON:OMI) - not sure I recognise any of that description of management Graham! I don't think it ever had true free cash flow as even at the peak of the gold price it still wasn't covering the all in replacement cost of what it was extracting in the present. The trouble with any hole in the ground company is that its cash generating assets are continuously depleting. As the only way of getting money back are dividends or a trade sale one has to estimate the discounted NPV to be a multiple of EV to think there is any kind of market beating return to be had. At least for quarrying / mining marginal costs increase with depth, and grades tend to get lower. Oil / gas can be better because enhanced recovery techniques can extend field life with very good economics.
Even a good operator such as Randgold Resources (LON:RRS) is currently massively over valued. At current mining rates it has 15 years worth of a generous combined reserves and resources. The covered dividend give an investor their money back in just over 20 years. Yes the price of gold could go up, but so will the cost of mining, especially with depth. Ideally one does want to produce as quickly as possible, but ipso facto cash returns to investors must be even more rapid because life of mine is short. To say that careful and cautious analysis is required is an understatement.

john2

Surely the Morses Club price fall is also affected by the highly publicised problems of Wonga.

sevenccc

OptiBiotix Health (LON:OPTI) looks like it will need more cash soon. £1.7m cash at half year and £1m+ loss for H1. No wonder the SP is heading south. After all these deals over the last 18 months when will products be launched and revenues start flowing through? At least another 12 months for first real revenue?

Like the idea behind it but seems like lots of huff and puff with little substance, no irony intended, at this stage. Might look t buy in on next fundraise if it is after some products hit the market.

Edward John Canham

Xaar (LON:XAR)

Agree. Even now, at book value (although not TBV), the PER is way too high. Still 20+ for a company which made profits of £15m in 2016 and is forecast to make £7m in 2019.

I think relying on book value is dangerous except for property companies and investment trusts.

Phil

Effortless Cool

This comment has been moderated

PJ0077

Great work Effortless, in bringing this forum one step closer to the ADVFN asylum

DJCP

Graham,

Now it's out of hours, and not even sure you read the late/previous day's posts, but if you're inclined to put your 'financial-sector' hat on tomorrow, if it's a quiet-ish day, I would be interested to know your views on the Wonga fiasco, and also to a lesser extent, your (and other investors) general view on the Argentina situation, seeing as they've just put up interest rates from 45% to 60%.

As a matter of interest, does anyone know how/where to look to invest in Argentine government bonds? Not saying I will, but with the situation as it stands, I'm slightly interested from an investment view, but more-so from a personal view, as my cousin recently married an Argentine, and is contemplating moving over there, and he'll definitely not be aware of what's happening. Thank you.

31st Aug '18

Hi DJCP, I read all the comments (except those that turn invisible for one reason or another).

Wonga is a big story indeed. I've been passively taking in the news. Marginally improves my outlook on H & T (LON:HAT) - it's not a direct competitor to us, but a competitor all the same.

Don't have much of a view on Argentina, could have a root around tomorrow.

ATB

Graham

JohnWigg

@ PJ0077 - "the ADVFN asylum". I suppose, to push your metaphor a bit further, the staff have deserted the building! So there's no moderation, but you do have the filter function, and a few more sanctions if you pay for them.

In defence, though, it's free, and a bit like panning for gold. There are some pretty knowledgeable and shrewd posters, and it's possible to go deeply in discussion of a single company. With experience, you can filter out the noise and use the site for mutual enrichment (literally!).

Incidentally, I didn't see the deleted post by EC but he does post on ADVFN and I'd see him as one of the good guys over there.

gus 1065

Hi Emperor.

OptiBiotix Health (LON:OPTI) has been marketing it’s weight loss products online under the Go Figure moniker for a couple of years now. The current website can be a bit clunky but serves a purpose and is imminently due for an upgrade release. Link is here:-

https://www.gofigurediet.com

Most of the reported deals activity seems to relate to putting in place various licensing/manufacturing/ distribution partnerships around the world which puts them in a position to scale up quickly at someone else’s expense should the opportunity arise. I agree sales have been pretty sluggish but in the fickle world of consumer lifestyle/health products they’re possibly one celebrity endorsement in the Daily Mail away from making the big break through. (Quid pro quo, they may also get called out for their products being completely useless/dangerous).

FWIW, I trialled one of their 3 week diet packs (and subsequently extended it) after a recent back op left me overweight and have lost 22lbs in just under 3 months. Whether that’s causal or simply coincidence, products seemed to work for me. (That’s not the celebrity endorsement by the way!)

On the recent share price movement, it doubled during the summer to about 130p and his since fallen back to about 100p. Part of this may be due to long time advocate TW/Share Prophets calling the share rise excessive and calling investors to take profits.

Gus.

Skepsis

24th May '20

The price action on OMI after this post in 2018 is interesting in terms of how things actually turned out. Not great, but not game over either. Maybe there are lessons to be learned.

ajcshaw1

1st Oct '20

Game over ? Far from it. Whoever writes this stuff should not be making statements of this nature. Utterly pointless them having a say in anything

Small Cap Value Report (Thur 30 August 2018) - DUKE, CHH, XAR, ARW, HSS, KETL, CRAW, OMI

Duke Royalty (LON:DUKE)

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Graham Neary

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