Small Cap Value Report (Thurs 30 Mar 2023) - REVB, SHOE, SDG, MOON, TWD, XLM, AQX, LTHM, RBN

30th Mar '23 by Paul Scott

40 comments 7910 reads

Good morning from Paul & Graham.

In case you missed it, here's my audio interview with Belvoir (LON:BLV) recorded yesterday afternoon.

I'll be talking to Portmeirion (LON:PMP) (I hold) today. EDIT: my interview with Portmeirion's CEO has also now gone live.

I enjoy your feedback on these interviews, so do leave a comment if you wish.

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 with certainty. We are analysing the company fundamentals, not trying to predict market sentiment.

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.

Main Sections -

(summaries here, main sections further down)

Moonpig (LON:MOON)

Trading Update - up 17% to 133p (market cap £455m) - Paul - RED

This market leader in online greetings cards & gifts issues a reassuring update for FY 4/2023 - it's trading in line with expectations. It expects a return to growth in FY 4/2024, with an H2 weighting. The market likes MOON a lot more than I do! In the section below I flag up a terrible balance sheet, overloaded with debt, hence no prospect of meaningful divis any time soon. Thumbs down from me, due to poor finances.

XLMedia (LON:XLM)

Final Results - down 9% to 13.4p (market cap £35m) - Graham - AMBER

Reasonable results but 2023 forecasts are downgraded today. The market rates this as if it were a Chinese stock which may be too harsh. Management team is entirely new.

Aquis Exchange (LON:AQX)

Final Results - down 2% to 381p (market cap…

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Graham Neary

30th Mar '23

XLM - good luck, JASVFS! I'm very curious to find out what is the "catch" at this market cap! G

sharw

Trackwise Designs (LON:TWD)

I have followed this since it was ascending towards the 100p mark and was close to pressing the buy button a couple of times but mercifully didn't. As Paul writes: Such a pity, as this looks promising technology, but as usual with UK startups, it hasn't been properly funded, so looks set to fail.

This has prompted me to send this to the green button -

This morning's further bad news from Trackwise Designs (LON:TWD) once again highlights the idiocy of your policy of not removing forecasts that have been suspended/discontinued. When are you going to change this? In this case we have a share price that has halved this morning to 0.6p and you are showing finnCap's eps 5p and PT 315p both suspended on 30/9/22. This gives a forward p/e of 0.12 no doubt helping the Value Rank of 74 and an upside of 52,400%. If only!

Albertos

Quiz (LON:QUIZ)

Just noticed this is on the move upwards today with higher than average volume. I guess people are hoping for a good TU next week - and to be fair if they hit forecast they look good value.

Only have some beer money in here at present but if the story continues positively I'll be adding.

Phil

(NB huge spread {normally can get well inside} and liquidity can be a problem)

Tortoise investor

Up 15% currently - maybe an element of "risk on" today in the markets but it does seem like a big uptick. Volume currently 3x higher than daily average so that's good too. I can't see any other relevant news about.

davidjhill

Quiz (LON:QUIZ) always seems to trade upwards as it moves towards TU/Results and then drifts in-between. Mainly liquidity driven.

FREng

Is it possible that IC has tipped Quiz (LON:QUIZ) ?

Chrisp

Paul, could you look at EAAS – Eenergy who came out with excellent figures yesterday? Thanks. Chris

Lucky dip

I would also expect a good trading statement from CCC tomorrow.

This has been chosen twice by Rolalnd, in his sustainable dividend and Buffet like share over the last month.

portugull

The latest RNS yesterday from Inland Homes (LON:INL) reminded me of my good fortune in selling in Feb 2021 at 56.25p taking a 35% loss.

I was strongly influenced by Paul Scott who in the SCVR of 26th October 2020 commented very negatively on the behaviour of the then CEO of Inland Homes who he described behaved "like a petulant child" when challenged. This turned out to be a Company which was run for the benefit of the Directors and certainly not the Shareholders. I suspect in the fullness of time there will be a lot of very disturbing behaviour uncovered here.

Wimbledonsprinter

I also hold Portmeirion (LON:PMP) and will be interested in the interview. Shares do look cheap and hopefully selling crockery is a fairly defensive business and one that is difficult to muck up (although mistakes were made in the past - eg allowing paralell sales into South Korea). My household has recently bought a new set (Royal Worcester) and we are very happy with it.

I do have some doubts about the management. The CEO is a chartered accountant and the ex-CFO and seems on top of the numbers - but (I know this is subjective) does not to express a lot of passion for the product. For example, they did what may be a clever acquisition of a brand out of administration last year - it is justified on the recent ImC call for increasing factory utilisation (very valid) - but not in terms of here is a useful brand we can develop. Being cruel and a bit unfair, it seems as if the company has two CFOs.

Also, targets have been reduced. In the Feb 2021 CMD (I think slide 46), the target was to get to 13%+ margins. On the recent ImC presentation, the long-term target (although sometimes it seemed downgraded to an aspiration) was 12.5%. They were asked explicitly (Q2 in the Q&A - not by me) why the target had been moved down - the CEO said that the targets had not been changed. I could not reconcile this.

But the P/E is low, growth in the US and RoW has some momentum and given the long-life of most of the products, I am not too worried by the inventory levels. I own it on the basis that the share prce could rise 50% and it would still not seem expensive.

mjfgs

May well be to do with H&M doing so well & thus overall sentiment in this sector...I see Boohoo up too.....

cheeky_minnows

Just listened to your interview with Belvoir (LON:BLV) Paul, was very good - a big thumbs up !!

topvest

Secure Trust Bank (LON:STB). The £90m is Tier 2 capital and so its quasi-equity for regulatory purposes. Double the cost of the redeemed bond unfortunately. Timing not great, but if they needed growth capital this was probably the cheapest option given the low share price.

It's also worth noting that the 2021 results benefited signfificantly because of the one-off credits on impairment charges following the 2019 covid-19 impairments that turned out not to be necessary.

Interesting that they are exploring M&A merger opportunities.

The two subsequent events are not very positive.

Nevertheless, I continue to hold as its one of the safer UK banks originally from the Arbuthnot or Henry Angest stable.

archibold

Many thanks for the thinking on James Latham (LON:LTHM) Paul, it's something I've been happy to hold for a while now. Your comment about long term family businesses, reminded me of a post from Motley Fool a long, long time ago where someone was running a portfolio of family businesses with their child as a learning exercise. I recall (maybe incorrectly) they they had used a list of UK listed businesses with a significant family holding/invovlement as a starting point for further research. I've tried looking, but not found anything similar - anyone know of anything like this? Thanks in advance!

illiswilgig

Thank you for summarising Robinson (LON:RBN) - I have considered buying in the past but as Macfarlane (LON:MACF) is one of my largest long term holdings I've not done so. Though it would have paid me handsomely to be in RBN instead of MACF for the last year.

As a readacross to MACF I keep half an eye on RBN and took a look this morning, The results headline some very healthy looking numbers. £2.3m pbt which comes out in the P&L as 14p statutory eps - but is apparently in line with the forecasts shown on the stocko report as (underlying adjusted) 1.2m and 7.2p.

It's taken me a while to figure that out as there is no reconciliation in the results. But it does indeed look to be in-line. The statutory eps is flattered by the 1.7m exceptional profit and zero tax charge this year. Adjusting for exceptionals and amortisation and adding a notional 20% tax charge gets to the underlying adjusted 7.2p putting the shares on 13.8x current profits - which seems quite fully valued for the sector?

The company certainly has an impressive history and I hope they do well. I've driven past the old Chesterfield mill site - quite huge. They have got quite a lot of property still to sell off - so perhaps they can keep this going for a couple of years yet?

Some of the other statements in the report are a little bit more concerning? The revenue gain of 10% is almost entirely down to the Danish acquisition - the effect of increases in their prices mean that the underlying volumes were down 10%.

The gross margin is 'stable' at 17% - but that's not high for a manufacturing business and the new Danish subsidiary is said to be below this. Looking at MACF's manufacturing division which had revenues of £30m in 2022 - the gross margin was around 40% .

Cashflow of 7.6m (5.4m) is said to have improved primarily through squeezing suppliers (though I can't immediately reconcile the £1.9m increase in payables in the cashflow statement with the decrease of 700k in the balance sheet).

They need to keep paying down the debt as well as invest in the business - so the proceeds from the property sales are not really surplus to requirements ? And they are paying a chunky dividend of 5.5p annually which seems high given the performance of the underlying business?

There seems to be a lot of work still to do - to pay down the debt and to raise the performance of the underlying business to support the current share price (which has done very well in the last year) let alone continue the upward trajectory? It remains to be seen whether their large customers will take the price increases they need to put through without further falls in volume? I hope that they can do it - but I'd need to look in a lot more detail to understand what's so special about their products - the current margins suggest their don't have a large moat?

But perhaps I've misunderstood, certainly the market seems to think so?

cheers

Mark

Wimbledonsprinter re: Portmeirion (LON:PMP) (I hold) I too am looking forward to the interview with the Portmeirion CEO. I note your concerns about management. I always have concerns about management - having learnt the hard way.

I note your concerns about the CFO becoming the CEO. Doesn't always work well. When previously researching Portmeirion (LON:PMP) I had a look at his CV - and liked his previous experience with multi-brand manufacturer (Vax etc iirc). I get the feeling that he does understand the brands and is very keen, perhaps more than he seems, to get the most from them. I'm also impressed that for an ex-CFO he seems to be willing to invest seriously in the business.

He has previously said that he saw no immediate reason to acquire further brands - as there is so much further to go with the existing brands. Then they bought a small fragrance manufacturer from the receiver.

So I took his explanation of why they made an acquisition - in the context of his previous statement that they didn't need to make one. But in this case they do to get the most from their existing brand? I thought that they were quite positive about AromaWorks - to the extent that they may almost think its better than the brand they already had - but then I prefer management to be understated and over-deliver and I'd prefer an ex-CFO to an ex-sales director. But thats just me.

I've had a look at last year's presentation and slide 13 presents the 'ambitions'

AMBITIONS
OUR BUSINESS MODEL
By delivering on our strategy we will:
• Sustainable sales growth
• Increased operating margins
− Short term target - back to 10%
− Medium term target 12-13%
− Long term 13%+
• Reduce further our impact on environment

and then this year with

2022
Medium & long term targets for significant operating margin growth
• Operating margin medium-term target 10% and long-term 12.5%

I did wonder why he repeated 12.5% in the Q&A, it's an oddly specific number as a target?

It is fair to say he's changed the numbers. A little bit. I mean are we splitting hairs over 0.5% or is it more about trusting management?

For me its more about trusting management (as far as I am able) and I think it's quite likely that he didn't mean to give the impression that the numbers had changed. In that he's actually changed the time-scales rather than the numbers, and 13%+, ie a little bit above 12.5% is still quite possibly the aspiration, even if it takes a bit longer to achieve. So when he said that the numbers haven't changed he did mean it, in his mind they haven't. I did wonder about this during the presentation - because 12.5% seems so odd - I am willing to give him the benefit of the doubt and assume that its a case of mis-presentation? But I shall be listening to Paul's interview all the more after considering this,

cheers

Mark

The Boon Fund

I never quite understood why Getech (LON:GTC) is strategically placed to succeed with hydrogen hubs?

I know they can provide the seismology data to find good locations for hydrogen storage underground.

But do they have expertise in everything else required to get a hydrogen hub live?

Basically - why are they going to be able to make good money from this exciting idea, and not someone else?

gmtrader

Just checked IC. No mention of Quiz (LON:QUIZ)

On Bill Ackman and Pershing Square he is a great investor and well worth following on Twitter. I hold some PSH as well. I agree with his excellent comments on the US banking crisis. Central bankers could well have a busy year...again.

US banks have to disclose the fair value of their held to maturity assets on the face of the balance sheet and so its easy to get to the numbers. I looked at SVB and Bank of America and the problem is plain to see. BoA has over US100m of unrealised losses for example, which would wipe out nearly half of its capital if marked to market. If, or more likely when, property companies default in the US and commercial property losses end up on a banks balance sheet its going to get ugly. This is all highly likely to cause a global recession as the everything bubble finally bursts, in my view, so I'm still cautiously positioned. Sandy Nairn is worth following on this and his excellent book The end of Everything Bubble if you want a depressing read.

Of course the Fed might still achieve a soft landing, but it looks more like wishful thinking with recent events and such a massive inversion on the yield curve.

mojomogoz

So...this inevitable doom scenario I take issue with...

Most of the value of commercial real estate is not encumbered with debt. Much is debt free and much of it has low LTV ratios. Its the minority that has high debt underpinning it with a US bias to office and malls. The former is the most at risk particularly in old urban centres (new urban centres tend to have gone back to work in office much more). The median loan is to a smaller city office space, whereas the average office value is more in old centre like NY but with low to zero LTV.

Banks are pensions who have a high exposure to this stuff are odd animals in an economic sense and can sort transmogrify financial risks over time. Neither need to be hindered by write downs and losses short term depending on their funding situation. Its a million miles from us and our homes. Where a bank has a loan secured against a building they can take possession and resell. This is actually a source of potential profit though it does create short term volatility as resolution is worked through.

I'm not saying its all okay...and it could go very bad...but horse and cart...if liquidity and/or other asset values hold up okay in nominal terms then asset values in CRE don't need to plunge....and for the disaster scenario to occur there needs to be a plunge...reflexivity...

PS Sandy Nairn is a mediocre investor with a penchant for be a misery. His main argument is mean reversion of value which is a highly dodgy perspective IMO.

Small Cap Value Report (Thurs 30 Mar 2023) - REVB, SHOE, SDG, MOON, TWD, XLM, AQX, LTHM, RBN

Main Sections -

Moonpig (LON:MOON)

XLMedia (LON:XLM)

Aquis Exchange (LON:AQX)

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About the Author

Paul Scott

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