Small Cap Value Report (Thurs 2 Sept 2021) - MPAC, GYM, INSE, HEAD

2nd Sep '21 by Jack Brumby

70 comments 7817 reads

Good morning, it's Jack & Roland here with the SCVR for Thursday. Paul's currently at the airport, heading for some sun.

Agenda -

Jack's section:

Mpac (LON:MPAC) - robust half year statement, with acquisitions going well and trading recovering. Full year expectations are upgraded by the company and Equity Development has nudged up its forecasts. There's a fairly significant pension scheme here, and the valuation looks reasonably full, but momentum is good and the outlook suggests this is warranted.

Inspired (LON:INSE) - Improving figures from a company focusing on ESG solutions in the Energy sector. The opportunity could be big here, but the current market cap already suggests a degree of growth is priced in.

Roland’s section

Gym (LON:GYM) - this gym operator says demand has been strong since reopening, but it’s rebuilding from a lower membership base than one year ago. Is the valuation ahead of events?

Headlam (LON:HEAD) - a solid half-year has seen sales (and underlying profits) return to 2019 levels. Not the bargain it was, but still a good business at a fair price, I suspect.

Explanatory notes -

A quick reminder that we don’t recommend any stocks. We aim to cover 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 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.

Jack’s section

Mpac (LON:MPAC)

Share price: 626.7p (+4.45%)

Shares in issue: 20,171,540

Market cap: £126.4m

MPAC is a specialist provider of automated packaging systems, an area very much in demand for operators looking to drive efficiencies. These products allow manufacturers across the food & beverage, healthcare, and pharmaceuticals sectors to meet regulatory…

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JESSE LIVERMORE

2nd Sep '21

There is a nasty smell accompanying todays profit warning from Cmc Markets (LON:CMCX) . To blame a sudden c20% cut in annual net income expectations on what is a seasonally quiet July/August trading period lacks credibility.

To locate the source of the profit shortfall I believe we need to go back to the Interim Report issued in November 2019.

Cmc Markets (LON:CMCX) had historically hedged all net client exposures (risk). But in 1H19 they decided to leave some exposures unhedged so as to improve profitability:

"... led us to re-assess the way in which we manage our net client exposure as returns were deteriorating. The internal adjustments we have been able to make to our risk management approach, where we now internalise a greater proportion of our net client exposure over a longer period of time, have resulted in both improving client transaction cost capture and also reducing hedge transaction costs."

So the profit progress has ever since been reliant on a piece of software correctly guessing which risks to internalise, and which to hedge. Plus500 (LON:PLUS) similarly internalise some client risks & consequently have a volatile profit stream.

£IGG remain the only leveraged broker to hedge all net client exposures. As such I am confident that their June-August trading update will be absent a major profit warning when released in two weeks time.

Momoko Miyamoto

I piled into Integrated Diagnostics Holdings (LON:IDHC) after their stonking Q1 results which the market largely ignored. Q2 has even managed to improve 3% on Q1. SP is only trading at around pre-pandemic levels which is bonkers considering the enduring uplift to the company.

Patrickmylnetrade

HI Herbie

I use their online only platform, @x-o.co.uk . my dealing fees are £5.95 each transaction but it's a no frills service and their platform could do with an update. But it works. You can phone in with queries when u can't trade. But this is obviously not ideal when the market is super busy( usually when u need it to be spot on!)

hope that adds some value

gus 1065

Hi jamesalastair.

Re. Your enquiry about online brokers, I’ve been a happy user of Charles Stanley Direct for several years. I transferred in in specie my and my wife’s ISA accounts a few years back (from Fidelity) and also more recently a Joint Investment account. All of these transfers went through efficiently.

Day to day online trading service is good for a range of U.K. stocks, ETFs and funds although their dealing charge at £11.50 per shares trade is not the cheapest. I’m OK with this as I tend to buy to hold in decent sized amounts rather than trade shorter term. I don’t deal much in individual overseas stocks but I checked with them just now and they confirmed they can trade Toronto Stock and Toronto Venture Exchanges (and indeed any overseas HMRC recognised exchange) but that this has to be done via their (more expensive) telephone service rather than online. Here is a link to their charges for overseas shares.

https://www.charles-stanley-di...

One cautionary note, their parent company, Charles Stanley (LON:CAY) is in the process of being acquired by a US wealth management business so there may be some changes to the online execution only platform in due course. Hope not, I’m quite content with the current high levels of service.

Gus.

Simon Rowan

Jack thanks for your views and analysis of INSE this morning. They say they have helped 3,500 corporates in UK to source cheaper greener energy and talked about expansion both through acquisition with and an eye on international markets at some point. Appears to have been some very heavy buying over the summer without moving the sp that far from the 15p placing last summer. I agree dilution is a concern, but I thought the figures today would have been better received by the market and probably would have been in a more active market. Ken Wooton is very positive on the stock and holds in top five in the Gresham House UK micro cap trust.

ACounsell

Looks like Ig Group (LON:IGG) has followed Cmc Markets (LON:CMCX) down on worries about slowdown in trading. You have to ask what sort of trading visibility management at Cmc Markets (LON:CMCX) have when a trading update just over a month ago forecast operating income in excess of £330m . To reduce this to £250-280m in the space of a month on the basis of a quiet August suggests a degree of complacency and poor financial forecasting. Even allowing for the ‘boom’ in trading stocks, derivatives, etc. due to Covid enforced boredom surely they should’ve have known that August would be a quieter month with people on holiday,. Perhaps the end of Furlough at the end of this month will have a bigger impact than many are expecting?

Bouden54

Ig Group (LON:IGG) do hedge their positions but it is very inefficient and costly and essentially wipes out a large share of their profits. I much prefer the more flexible, partial-hedging approach of Plus500 (LON:PLUS) - while this does involve some month to month volatility, it should lead to much higher profits overall.

davidjhill

COVID explanation for EMEA revenue makes absolute sense. Europe locked down heavily compared to the US and were more cautious in investment decisions as a result. For that to have credibility you should be seeing an EMEA recovery and that is exactly what management say they are seeing.

In my view this is now a superbly run company. The current management know it inside out both at a strategic macro level as well as the detail. They sold the tobacco business early for a good price and invested where there was multi-year growing demand of Food, Pharma etc. The acquisition of switchback was inspired and the fact that you have a strong native US management team there with a track record means the likelihood of them growing the US market share significantly is much greater than if they were trying to do it from the UK.

They have been quietly investing in industrial battery packaging technology over the last 3 or 4 years and this appears to be a great potential vertical for them to move into.

I have held from around 150p and not sold any yet. I'm now expecting close to 40p underlying eps this year and at 15-16* see it reasonably valued but not expensive. Over the next 2 or 3 years I can see them growing operating profits significantly though hence I remain a holder.

BnB

We held for a couple of years but sold recently for a solid profit when the auditor resigned in a huff. Not convinced there’s any skeletons in the cupboard as management appears very competent, but it’s an obvious red flag. We see long term, predictable growth for this name but the Egypt discount means that we do not expect shareholders to benefit from multiple expansion while there are plenty of other picks and shovels plays on life sciences growth in more familiar jurisdictions. In the UK we have Sdi (LON:SDI) which has been a great performer over many years, while Europe and the US are full of much safer options that have nearly doubled since the pre-pandemic peak. Thermo Fisher, pretty much the safest investment in life sciences, is up 70% since Jan ‘20, while Integrated Diagnostics Holdings (LON:IDHC) is up only 10%.

Ned Kelly

Rbg Holdings (LON:RBGP) put out a bit of an unusual release under the guise of an update on the integration of Memery Crystal into the Legal Services Division. The main point seems to be that the M.D. of the division is going and Nicola Foulsdon is taking over his job for the next 6 months. Notable that no reason was given and he was not thanked.

sevenccc

Will Headlam (LON:HEAD) suffer from Likewise (LON:LIKE) growing and their inside knowledge of the Headlam business/contacts? Not sure. I suspect there is room for both as they service a highly fragmented, independent-led set of retailers. The big sheds are a different ballgame, but with commensurately lower margins on offer.

On a buying visit to a local carpet specialist a couple of years ago they advised that they have several different Headlam reps calling on them (from various acquired businesses) but limit the share of their business they put through what is effectively one supplier. So Likewise and other specialists could still get decent distribution if this is repeated across the market.

The Annual Reports from Headlam have banged on about introducing efficiencies and enhancing margins for the last few years. Would that be because the old management were averse to change? Certainly, I get the perspective that they were no loss and possibly were a drag on the business.

On the other hand they know the trade... didn't end well for Safestyle!

Chris Brown

I remember being stunned when Aga Rangemaster was taken over in 2015. Purchased for £129m. It had a £1bn pension scheme with a £84m deficit. So anything can happen! Link here

Metatron

Interactive Investors are by far the best for the Canadian stockmarket due to them once being TD Ameritrade a Canadian stockbroker.They were then taken over

Jarvis have a smaller online broker X-O whose fees are much cheaper

Rusty2

OK thanks, I will look into that.

Those of us nursing losses on Cmc Markets (LON:CMCX) are in good company. CEO Peter Cruddas dropped about £175 million today. Don’t feel quite so hard done by on reflection.

jamesalastair

Funnily enough I was going to ring Jarvis today as I hold their shares.

Thank you Gus .... I will investigate further.

nicktudor

3rd Sep '21

I just can't see how this could make enough difference to their FY22 outcome as outlined in the trading update. In space of 2 months FY22 forecast net operating income has reduced by approx 20% (say GBP 65m) yet in FY21 only 8.5% of net operating income (GBP 34.5m) was generated by "revenue or losses from management of client positions that the Group inherits. This consists of gains or losses which accrue to the Group through client positions and, secondly, the gains or losses which accrue to the Group through the hedge positions entered into by the Group". I think they have been surprised by the speed at which trading has tailed off this summer (low market volatility, end of lockdowns, less online engagement, etc) and have had to more aggressively reduce forecasts into H2 to have confidence they can deliver a revised FY number.

The acute sensitivity of the profitability of Cmc Markets (LON:CMCX) to the success of their TARDIS risk management can be seen on the back of an envelope:

July's conservative guidance of £330m would have likely comprised:

* CFD/spread bet net trading revenue £270m

* Stockbroking net trading revenue £55m

* Interest income/other £5m

* NET OPERATING INCOME £330m

For y/e Mar 2021, client income retention was 104%. If this drops to 80% this year then CFD/spread bet revenue will fall to:

£270m * 80% / 104% = £208m.

Net Operating Income consequently drops to £268m, in the middle of yesterday's forecast range.

Small Cap Value Report (Thurs 2 Sept 2021) - MPAC, GYM, INSE, HEAD

Jack’s section

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Jack Brumby

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