Small Cap Value Report (Thurs 24 Feb 2022) - MACF, RCDO, INCH, VIC

24th Feb '22 by Jack Brumby

66 comments 12631 reads

Good morning, it's Paul & Jack here with you for Thursday's SCVR.

There's a free Mello Investment Trusts and Funds event from 1pm today and Edmund Shing will be on the panel later - his contributions to the site are greatly appreciated, so I'll be tuning in to see what he has to say. Given all the developments, it could be a good opportunity to meet up and discuss with fellow investors. More detail in David's post. Here's the link to register.

Agenda -

Jack's section:

Macfarlane (LON:MACF) - I hold - strong growth ahead of market expectations, external pressures well-managed, and the valuation remains modest on an adjusted EPS basis. Macfarlane has grown profitably for a long time now, and the business is quite resilient. These good results will likely be lost amid the noise this morning, but all the more reason to put it on the watchlist in my opinion.

Ricardo (LON:RCDO) - looks potentially interesting, with a new CEO and a more sustainable strategy becoming clearer. There has not been a huge deal of equity dilution since the share price fall, so a successful turnaround could lead to good upside. A capital markets event is planned for the Spring, so that will be a good opportunity to get a better grasp of the group’s plans and prospects.

Inchcape (LON:INCH) - too large for the SCVR usually, but worth a look given the potential readacross for smaller peers given recent exceptional market conditions in the used car market.

Victorian Plumbing (LON:VIC) - looks like a mild profit warning, with higher costs leading to lower than expected margins. This is a recent IPO and has lost nearly 80% of its market cap in less than a year. Given that the past couple of years have been boosted by lockdowns, I’m unsure what the longer term growth prospects are like here so I don’t see the need to jump in.

Explanatory notes -

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

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muzmano

24th Feb '22

The finncap note says to expect $50m of share based compensation payments for fy22 and $23m for fy23. There appears to be little upside for investors until fy23 and beyond and in a fast changing market where will tremor be then.

brads13

From John Authers a week or so ago

Maybe it is different this time. It is a concern that USA is energy independent so perhaps Bidet will continue to show no leadership/interest, and leave Europe to make the first response, but it is very exposed on gas supplies, and relatively weak militarily so what can Europe do. Which European leader will be strong enough to lead?

Rusty2

Polymetal International (LON:POLY) What about the development projects inside Russia?

Everything inside Russia is getting hit today.

Update at 2.35pm, I see it is now 547p and is suspended on my platform.

NeilS

One reason is that historically the manager plays heads I win tails you lose. This is from this mornings annual results:

“a vote to wind-up, if passed, would trigger an exit fee equal to twenty times the most recent quarterly Management Fee (see Note 9 for further details). At year end, such amount payable to the Investment Manager would have been approximately $49 million.”

I believe this is actually somewhat of an improvement over how things were previously believe it or not. (I hold while they leap aboard the decarbonisation band wagon.)

Stocks123456

Can anyone suggest why Ig Group (LON:IGG) has had such poor momentum lately? I would have thought the recent market volatility would have been perfect for it. Thanks.

Tommy H

Hi Stocks

I think that this is being hit by a number of factors, partly it being seen as a "lockdown" benefiting stock, so massive boom in trading in Lockdown's 1 through 17. People expecting constant upgrades, increases and stocks always going up. When we look at the hit on Hargreaves Lansdown (LON:HL.) yesterday, Ig Group (LON:IGG) is holding up well.

I personally hold a level of growth with dividend for income.

Then there is the question of how the US acquisition is performing and being integrated, it is a big step, which with the US markets going into decline is there going to be a hit there?

So I expect a benefit to come from the ongoing volatility, but I question how many accounts have been blown in the last few weeks for those who are doing the CFD route, and how many people came in through lockdown have just moved on to something else instead. No such thing as free profit?

Tommy

I hold Ig Group (LON:IGG)

MichaelFBS

Tremor International (LON:TRMR) I hold.

I have only got partially through the accounts but both items are the adding back of options to come to adjusted EBITDA and the egregious size of the option grant. See image attached.

The cost of options is a bit too complex for me and I am not sure how they cost should be shown in accounts. If a director is granted a 1,000 shares at a strike price of £1 and he is able to excise them three years later at £3 he does. What is the cost? I can see eps has been diluted because the shares in issue has gone up by 1,000.

Anyway Tremor continues to be an uncomfortable holding for me but the do seem to be a genuine cash machine. Even if you strip out the money raised in the NASDAQ offering the cash has still increased by a prodigious amount.

Regards

Michael

rmillaree

Ig Group (LON:IGG)

(1) I would guess the market has been somewhat skeptical about the sense of the Tasty acquisition and whether that will add to the business or whether the reduction in cash/extra shares will be recouped.

(2) If stocky is belied eps growth ye 31/5/2022 is showing 20% decline compared to 31/5/2021 - so perhaps the market is being unduly harsh now - or perhaps peeps who bought at previous higher levels didnt perhaps anticipate earnings would take a tumble.

(3) if times are tough for stocks and crypto is there the chance that peeps will not be using their services as much if they are losing money and throwing in the towel - or having less play money to play with if they are doing less well.

(4) Ig Group (LON:IGG) are mega cautious - perhaps at times their caution leads peeps to the wrong conclusion that future earnings will not be as good as they actually turn out to be. This can be a danger for companies that deliver very low baseline expectations at the year start and upgrade a very high % of the time. I previously sold out of IGG when they flaged up well in advance times would be tougher the following two years - for most companies thats an automatic red flag (look at loopup!) - it turned out that trading wasnt as bad as they feared - if i had known back then how cautious they are i probably would not have sold out.

(5) guessing they did well with covid tailwinds many such stocks seems to have been battered price wise.

cmpeckham

"Is it unethical to profit from this invasion situation?"

I think it's ethical, but I can't tell you something that you have to decide for yourself. What I can tell you is that it is something you need to reconcile yourself to if you want to make money in stocks. Every great buying opportunity is a crisis for someone. Look at the great buying opportunities of the 21st century: 2003: Iraq war ... 2009: the GFC putting millions out of work and out of their homes ... 2020: covid-19 threatens millions with death. The same pattern is true of previous centuries. If you only want to buy when nothing is going wrong, then it would be almost impossible to find a time to buy, and if you did it would be the top of the market.

Simmo1a

Paul/Jack - can you explain in layman’s terms what the announcement from £STU actually means? They’ve appointed administrators but not in administration, involved in M&A and the shares are to cancelled from listing tomorrow? Thanks, it’s been a long day!

Antehelion

a clear and in my view encouraging RNS from Polymetal International (LON:POLY) earlier today.

they clearly are on top of things, and I think the SP drop is overdone given there is no expected impact as yet.

https://www.stockopedia.com/sh...

POLYMETAL REPORTS THAT ALL ITS OPERATIONS IN
RUSSIA
AND KAZAKHSTAN CONTINUE AS USUAL

* POLYMETAL - SANCTIONS ANNOUNCED TO DATE HAVE NOT AFFECTED
POLYMETAL.

* POLYMETAL - REITERATES ITS PRODUCTION AND COST GUIDANCE
FOR 2022

* POLYMETAL - CONTINGENCY PLANNING HAS BEEN INITIATED
PROACTIVELY
TO ENSURE BUSINESS CONTINUITY, INCLUDING SELECTION OF KEY
EQUIPMENT SUPPLIERS

* POLYMETAL - POLYMETAL BELIEVES THAT TARGETED SANCTIONS ON
COMPANY REMAIN UNLIKELY

Polymetal International (LON:POLY), I see the shares have gone from 505p to 714p, so a good one if you bought around low 500s. I'm not investing in that area at the moment and probably won't in the future either.

Bouden54

Victorian Plumbing (LON:VIC) I've been taking a closer look here and think it could be interesting. They have a long term (I believe 20 year) growth record and are now established as the leading player in their space. However it's still quite a fragmented market so still lots of room to consolidate and grow further. After such a strong year, this year was always going to be tough to beat and perhaps easy to come to the conclusion that it's gone ex-growth - but I think the long term growth trend is still there as evidenced by the strong 2y figures. They've been unfortunate in also facing intense cost pressures (outside their control) and and their decision to partly pass these on will hit profits this year. But if they successfully take market share (and perhaps knock out some of the competition) I think they should be very well placed when things get back to normal.

JohnDoe2378

Fwiw, i agree.

abtan

Victorian Plumbing (LON:VIC) (I hold)

Thanks for the write-up Jack, and for your thoughts Bouden54.

I must admit to be sceptical of this company at first but on further research I am slowly warming to it. Accordingly I bought a starter position 2 weeks ago.

My rationale for buying:

High organic search rankings, and #1 for a lot of keywords.
See this link for keyword ranking analysis from SEMRush: https://bit.ly/3haPUKI
Net cash position, so as things stand there appears to be little solvency risk.
Growing % of own brand sales, which are achieve higher gross margins.
The latest results included a big chunk of IPO-related expenses.
These won't repeat and I think they are masking how profitable the company can be.
Increasing Average Order Values over the last few years.
Founder led with high director ownership. The % ownership is a little too high for my liking, but at least they're buying shares back at these depressed prices.
I'm assuming -5% sales growth this year and then a return to +5% growth over each of the next 2 years, targets which I don't think are demanding.
I'm expecting marketing spend to stay constant at 25% of revenues, which I also don't think is unreasonable.
I have made increases for other OPEX too.

Modelling these numbers out gives me EBITDA in 2.5 years of c£45m.
If I'm being too optimistic somewhere then at the least I would hope EBITDA would be £30m.
The current EV is £211m.
Given the high organic search rankings (which are hard to achieve in such a competitive market) I personally apply a high multiple.

It just seems too cheap, though of course I remain wary that it might fall further this year.

---

Speaking to a knowledgeable friend this morning, I believe competition in an already fragmented market is about to get more intense as another big player prepares to enter.

This is a big risk and it if looks like the company's search rankings are in trouble then I might re-assess my position.

In the meantime I will keep an eye on it and hopefully look to top up once more numbers are published.

Cheers

sharw

re Studio Retail (LON:STU) : If you re-read it carefully you will find that it is Studio Retail Group plc (the shares of which were the ones traded) that is in administration. One of its subsidiary companies - Studio Retail Ltd. is not. It is quite common for the parent company to be in admin, but not all the subsids. and equally for one or more subsid. to be in admin. but not the parent.

Gobbagvooar

Studio Retail (LON:STU)

I see the announcement states that Studio Retail Group plc is in administration but for the avoidance of doubt, that its main operating company, Studio Retail Limited, is not.

It would be interesting to know with whom "The Administrators are currently in advanced discussions in relation to an accelerated M&A process" in respect of the business and assets and whether the parties concerned comprise the majority shareholders. Presumably administrators have no concerns over grounds for possible minority protection claims under Part 11 of the Companies Act 2006 / Foss v Harbottle. (Don't ask me, I just did a web search).

Harry Hindsight

Nobody believed Putin would go the whole hog, but he did. Blindsided the markets and me with £FXPO. This can go anywhere but let's not put rose tinted glasses on. If a MIG or missile strays over into NATO territory then the 'jaw jaws' will have to stand up to their rhetoric.

Missile defence and cyber security are on my list and who gains from cutting off Russian oil/gas - grain I have no clue - fertilisers - food - maybe a separate discussion post.

As for investing when there is 'blood on the streets' - we pay tax so our betters can use it for the greater good.

Just when you thought taking a mask off in public was a thing.

Thanks Tommy and rmillarie for your insightful responses re Ig Group (LON:IGG) . It just looks too good on fundamentals and so I hold some. Also I don't think Hargreaves do cfd or spreadbets so their recent fall is not really comparable and if my experience of using these products is anything to go by, IG should be raking in ££ from inexperienced punters. Thanks

Epsilon

25th Feb '22

I first became aware of Victorian Plumbing (LON:VIC) with the Paul Jourdan (Amati) interview on PIWorld who indeed observed that Victorian Plumbing (LON:VIC) had 'been through the hockey stick' of losses into profitability, which is far usual with IPO's.

They have 21% share compared to B&Q/Screwfix combined share of 20%.

The four largest players control 58% of the market leading to 42% of share to be taken from the smaller players.

One unknown is who will buy Homebase, which is currently up for sale, again.

Interview at 45:33 https://www.piworld.co.uk/educ...

Small Cap Value Report (Thurs 24 Feb 2022) - MACF, RCDO, INCH, VIC

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Jack Brumby

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