Small Cap Value Report (Tue 10 May 2022) - SUP, NWF, TET

10th May by Paul Scott

63 comments 7322 reads

Good morning, it's Paul & Jack here with Tuesday's SCVR.

Chaotic market conditions continue. I'd love to have a pearl of wisdom to make everyone happy, but can't really think of anything. We're not traders here, but are focused on the company fundamentals being reported. It strikes me (Paul) that the current panic sell-off seems overdone, and I'm just ignoring it because my shares are long-term investments. My SIPP is now down 28% year-to-date, and down 37% from the all-time high, but I'm very happy with all the positions, so it should come back up again in time, as has always happened in the past.

We've got a nice community here, so please do continue sharing your thoughts. I read them all, but wasn't really in the right frame of mind last night to reply, when I got back from my local.

Agenda -

Paul's Section:

Supreme (LON:SUP) - a reassuring update, saying that it supplied only a negligible amount of products to McColl's, and it was supplied via Morrisons. Therefore SUP has no bad debt exposure to McColl's. There's also a brief trading update saying SUP is "trading well".

Nwf (LON:NWF) - yet another upgrade to forecasts for FY 5/2022. That's at least 3 upgrades, just in the last 3 months! Although before we get too excited, NWF does say that conditions for its oil supply busiess are "exceptional", hence unsustainable. This looks a solid company, and its shares mainly appeal for a reliable divi yield & inflation protection.

Jack's section:

Treatt (LON:TET) - revenue up 9% despite a one-off first half last year, and forecast to be up by more than 15% for the full year, although profits are down after accounting for a net gain on property disposal. The group’s new UK facility is an important factor in the valuation as it could drive significant growth, but high valuation multiples are at risk of a derating in the current environment so I’m wary in the short term.

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…

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Camtab

10th May

I have to agree I have sat on Volvere and made very little to date but I do have faith in the Lander Bros too. I recently increased my Begbie Traynor holding on the basis more opportunities are going to arise in a higher interest environment so I will probably add to Volvere at some point.

Bullsnbears

Are you suggesting crystallising losses and starting again? Hard pill to swallow when you're nearly 25% down.

RichardK

£MACF the packaging group (I hold) issued an in line trading update at noon today at its AGM which illustrates the decline in on-line shopping:

" We expect weaker sales in the e-commerce retail sector to continue
for the remainder of the year, offset by recovery in the industrial and
hospitality sectors and the benefit of new business wins. Macfarlane will
continue to manage inflationary pressures in input prices and operating costs,
mainly labour, energy and transport."

Richard

Chrisspencerphillips

Surely IDEA is a rare buy, isn't it? There is an offer on the table from Hg at £3.50 and French PE firm Astorg have said that they are going to make an offer which will obviously have to be higher than £3.50.

Petresy

Paul, just wanted to say that your frankness is both refreshing and reassuring. There may be no quick fixes with the markets as they are, but at least we know we're not alone here!

mevans6890

Absolutely agree - Buffett summed it up with his saying be fearful when others are greedy and be greedy when they are fearful obviously with the latter now applying

RutlandRam

Severe market reaction to the Treatt TET update today (I hold).

Possibly there may have been some confusion with the negative comparatives, caused by a switch in seasonality back to the norm after Covid. But its not exactly rocket science and I'm sure most shareholders are way more bright than me and will have picked up on the reasons.

Or that the very high rating has led to some disappointment that strong sales growth was not resulting in any profit growth ?

Slightly concerned that headcount has gone up 15% - one might have hoped that the new consolidated site was supposed to increase productivity and automation ?

And on that subject I have a slight gripe that the business keeps repeating how well the site move is going, and yet the only people to have moved are the office based staff, which is very straightforward to manage. The issue is that they say that the manufacturing processes will not have moved for another year yet, and this is where there is significant risk imo. No reason to suspect that the current team ( who have proven themselves to be very capable) wont manage it but its a big project and there are many examples of businesses being badly screwed up getting this sort of thing wrong

And whilst this change takes place, the business will shortly be losing its FD, who has been a long term very steady set of hands . Strange that he is going part way through such a transformational change in the company.

Plus personally I feel there is still an overhang from the outgoing FDs decision to sell over 85% of his shares during the second half of 2021, mostly in December. Totally understand not wanting too many eggs in the his basket - to be expected, but 85%, pretty well in one go ?

It would be interesting to hear others’ thoughts

Richard Goodwin

dotcom boom meant that FSE 100 had lots of little companies in it perhaps. When the chicken cam home to roost?

clarea

Great ramble Mojo you seem clued up on markets and cycles any thoughts on whether 10 year US treasury bond yields are peaking (or not) and if they are could there be some chinks of light on the horizon ? I'm assuming bonds should show signs of recovery ahead of stocks when the corner starts to turn ?

Regards Andy

RDHOWARTH

Apologies, no not at all. I suppose I tried to say this is how institutions will and do behave. And if you aren't sure what to do, this is one way of deciding. There is actually nothing wrong at all with losses , but you do have to know what your investments are worth. Riding it out is the right strategy but only if you would still buy the same stock today.

Bronstein

I don't like the look of 1974. Even worse, that was the last energy crises.

Supreme (LON:SUP) - I hold. Thought it was a steal at 150p - weighing-up adding.

topvest

I am reading Sandy Nairn's book again. It was published about a month before the market peak at the end of last year. Well worth reading, but it won't make you feel any better I'm afraid! "The End of Everything Bubble".

Cuddlesticks

Hi RutlandRam, Great to read your post. Rightly or wrongly I was much more spoked by the results than you. below are my thoughts.

Treatt (LON:TET) has been a super performer over the past couple of years but I found today's results underwhelming and frustrating. Its high PE is in line with peers but as Jack mentioned it put the TET SP at risk given market conditions. Unfortunately, I think this may have encouraged management to be less forthcoming with what I perceived as bad news.

In short, I sold first thing as I didn’t think the results or outlook merit the high PE. Below are my concerns.

Revenue growth forecast for the year increased from 10% to 15% but PBT forecast was not upgraded indicating margin pressure - page 17 of slides. They say this is a return to ‘more traditional’ lower margins. I personally didn’t expect this.
In the RNS the commentary focussed on high growth in new markets (ie coffee and aromas) but from a low base so limited impact on these overall results.
Commentary on its biggest market, the US, was left to last. A 13% fall in revenue means its shrunk from 45% (2021) to 36% of sales.
Whilst the Group order book is up 25% and there is no change to the year end profit forecast, this means ‘a return to H2 weighted split in line with historic trends’. If they hit their full year target this means that H1 profit is only 27% (£6.3m of £23m). Historically, per their slides, H1 has always made up at least 31% of FY profits and normally much higher.
Operating profit and operating cash flow both fell significantly (£9.9m to £5.9m and £11.7m to £7.7m respectively).
Working capital increased as they stocked up for H2, but the increase was very large compared to pre covid years. Maybe this simply reflects supply chain but in a recessionary environment, given TET’s slowing sales growth in both H2FY21 and H1FY22, this caused me some concern.
Despite this, current assets are greater than current liabilities. However, debt due in less than 1 year has increased to £21.9m from £12.6m and there was no commentary on available committed facilities or covenants which I found strange.

I also agree with some of your concerns around both the timing and cost of the facility build and migration

iggs58

Ditto - re my performance too. I've just finished a great motorbiking holiday in Spain with a mate and am with my wife on the Med coast now. Trying to remind myself of your final point!

Chris.Brown

While I'm positioned for a bear market, I have been surprised by the extent of market declines in recent days. I conceptualise a bear market lasting another 5-12 months from here, with an ultimate low of c.3,000 on the S&P500. Equities seem primed for a short-term rally any day now, however. Sentiment appears so extreme and I don't see many immediate catalysts for further declines. If economic growth is about to flatline as many suggest, it will take many months for profit warnings to be cleared and for an ultimate bottom to be reached.

Boon

Naturally, past outperformance of the S&P500 vs FTSE is a surefire guarantee of future success...

TamzinPiworld

11th May

Here is the Treatt (LON:TET) analyst presentation from yesterday, video & podcast. This is a Lord Lee favourite. As Jack alludes to, long term-holders have been rewarded and by the sounds of things and over time, will continue to be so. Yes, a H2 weighting, when the higher-margin healthier living categories are expected to perform better, hence the higher profitability. Edison have raised their revenue forecasts to reflect the strong momentum but their profit estimates remain broadly unchanged, due to mix considerations and cost inflation.

Excellent points Cuddlesticks , much to think about. Thanks

mojomogoz

Hi FREng

IMO the inflation is all about supply disruption -> stop start of global economy and the bottlenecks it creates. In UK and Europe we didn't print money and create extra demand...we just used debt monetisation to support services and incomes during a period when activity and tax receipts down. Demand in UK and Europe hasn't recovered past pre pandemic

The US did 'print' use fiscal space to stimulate demand which particularly went into goods which then hit supply restraints.

The UK should employ further debt monetisation (ie truly you can call it printing money at this point as then it translates into govt fiscal spend with no countervailing tax or debt support) to support strategic investments - energy (nuke IMO), defence, food supply, infrastructure that then supported private enterprise (road, rail, ports, etc).

This is not a gold-but / Austrian economics disaster movie where the currency collapses due to monetary inflation. The monetary inflation impulse is low and soon turning negative. We will have severe disinflation v soon...

Small Cap Value Report (Tue 10 May 2022) - SUP, NWF, TET

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Paul Scott

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