Small Cap Value Report (Tue 12 April 2022) - CLX, COG, AGFX, HRN, W7L, SUP

12th Apr '22 by Paul Scott

69 comments 9897 reads

Good morning! Paul & Jack here with the SCVR for Tuesday. Today's report is now finished.

Agenda -

Jack's section:

Calnex Solutions (LON:CLX) - I hold - acquisition of iTrinegy, which provides testing for gaming, military, tech, and financial organisations including JPMorgan and Ubisoft. Calnex has a plan for scaling the business up and expects this new addition to contribute significantly to profits in the years ahead. Beyond that, the group says FY22 results should be ahead of expectations. Arguably reflected in the price though, so the key thing to consider is whether you’re comfortable with the valuation.

Argentex (LON:AGFX) - shares down this morning despite full year revenue growth of 23%. Presumably the group has not matched expectations, but the valuation is now quite modest and it’s possible the fall is overdone. If management can begin to impress the market, then there’s a rerating opportunity as the valuation discount to peers is now quite wide.

Hornby (LON:HRN) - looks like solid Q4 results for the owner of Hornby Trains, with full year sales and margins in line with budget. There are supply chain challenges though and, while there are some positive developments (namely a return to profitability), I’m mindful that turnarounds can often take longer than expected but there is potential upside, so it stays on the watchlist.

Paul's section:

Cambridge Cognition Holdings (LON:COG) (I hold) - as expected, strong revenue growth of +50% (organic) has moved the company into profit. A much larger order book gives really good visibility for 2022. Forecasts are set low, so it should beat expectations as 2022 develops. Plenty of cash on the balance sheet, so no need for any more dilution. COG is benefiting from long-term sector tailwinds. Hence this looks an attractive growth share, and shouldn't be impacted by macro issues.

Warpaint London (LON:W7L) - a sparkling trading update, with very strong Q1 performance across all channels. Broker upgrades today look too cautious, so I think this company now looks set up to continue out-performing. This year's indiscriminate selling looks to have created a nice buying opportunity, and you get paid to wait, with an attractive divi.

Supreme (LON:SUP) - a strong performance for FY 3/2022 is reported. Shares are down 18% today on a mild profit warning for FY 3/2023, due to higher costs (hardly surprising). Broker…

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jonno

12th Apr '22

Hi Shanklin

Good call on the dividend, Stockopedia and Sharepad show the dividend for the year to 31 March 2022 as 6.6p and 6.64p respectively, so 6.1p is in the ballpark, for a yield of about 4%. A consolation in the short term for today's share price battering. I also agree with your comments regarding price increases, still that and the market are outside my control. Just have to be patient, perhaps very, given the current sentiment, which is likely to prevail for sometime

TheFloatingInvestor

Somero Enterprises Inc (LON:SOM) Looks cheap to me, so have bought some. Having previously worked in concrete laying and having been lucky enough to use Somero levelling machines in the past, I can't express enough the difference these machines make.

With health and safety playing more and more of a role in construction (construction still manages to kill a person, on average, each week, and kills more people than all of the UK armed forces put together in peace time!) this sort of kit will become the norm. I suspect that America is a key growth area for them, but just drive around and look at all these warehouses getting thrown up and gives you an idea of the scale of flooring going down.

As we move into robotic picking of goods, floor tolerances need to be that much tighter which again will point towards automated floor laying, and this type of kit.

I want to be careful with 'confirmation bias', but I have avoided to date as I have found them a bit pricey, but in my opinion looks good value now and wanted to give a personal view of the product to add to your own research.

Cheers

Paul.S

JohnEustace

I read an interesting Bloomberg article as to why JP Morgan Chase are bothering with this in the UK. You're part of their their cloud banking trials. https://www.bloombergquint.com...

KevinS1

I also thought about buying more this morning Supreme (LON:SUP) and after considering if I should up the holding in what is already my 2nd biggest holding in the PF felt that this opportunity was too big to pass by, so bought a few more at £1.55

I am in this for the long-run and have a lot of confidence in the owner (Sandy Chadha) and whilst things maybe a bit bumpy in the short-term with increased raw material costs, greater wage inflation & transport costs I cannot see Sandy just sitting around and doing nothing.

In the meantime, there is a decent dividend and whilst forecasts have been reduced I reckon there is a chance these maybe beaten.

Time will tell, but happy to hold for the long-term.

MetalMaid

Given the comments I'm reading, my opinion on Supreme seems somewhat contrarian to the discussions here. I am interested to hear your views regarding my concerns. My conclusion is that their business is a lot weaker / vulnerable than many might think. It all seems to simple a business without any great IP or specialist complexities.

The sports nutrition products - the ceo has described this as a simple product to produce (whack a few ingredients into a pill press and whack them in a bottle!) - its a highly competitive market where I would expect margins to be squeezed in the future. There is no brand strength or competitive edge that I can see here.

Batteries - As far as I can see they are just a distributor. They own no IP or have any complex offering in this area. It is in perhaps a saturated industry that I would not expect to be growing very much (these types of batteries are not what the latest innovative products tend to use). I would fear that they are vulnerable to margin squeezes as all the power appears to be with the brands imo.

They have a discount warehouse type offering. From what I can see online - the products seem expensive to me. They don't seem to be selling them at a price that clearly shows there bulk buying power. I just don't see why I would shop with Supreme over Costco for example - the offering seems very small and random imo.

88 Vape product - personally I think this has very limited brand value. The customers buy it because its well priced and currently it dominates its space. However you would have to believe that Supreme have some kind of manufacturing super abilities that are rare or unique to believe that no one else will ever be able to produce similar product at similar price points. This is a super competitive industry and Supreme are up against multi billion $ players in the area. It would be safe to have a cautions growth assumptions in this area - personally I think they will struggle to maintain their market share. They also have some client risk in this area as I believe they have a contract with the prison system.

I am not an expert on Supreme (and obviously do not hold) - no offence to those that are bullish - just thought I would share a counter opinion as some may appreciate the view from the other side.

I genuinely think Supreme is a very well run company. They have grown the business in a very entrepreneurial way and perhaps I would be foolish to bet against their continued success. Imo as a private company you can easily go under the radar. People (usually correctly) assume your business must be complex and difficult. People don't just open up a salon or a restaurant with no experience believing it to be simple - they assume it will take hard work and a lot of know how. So when a company goes from private to public it becomes imo a lot more visible. It will get scrutinised closely. Imo this is one of the reasons investors place so much value on IP / brand / competitive edges etc - you could call this the complex engine under the bonnet - very hard to replicate. Supreme now as a public company will be closely looked at within its areas. And I think a lot of competitors will notice that there is nothing complex about the business - look under the bonnet and its a hamster on wheel. I don't mean that to sound offensive - its just a fact that their business by their own admittance is very simple. I am also wary of recent IPOs being near the top of the growth model - another reason why I would be cautious about future growth prospects.

None of my opinions are based on todays TU and I have not considered inflation / supply chains and all the current near term market conditions. This is just my view on Supreme as a business. As I've said I do not hold and not an expert so I apologies if I have made errors in my assessment.

simoan

This comment has been moderated

Fair point David, well made. Always two sides to a debate.

JohnDoe2378

Hi Paul,

Thanks for that info, very useful.

I am also mulling buying some at this level...

Michael Tee

Cambridge Cognition (LON:COG).

Here is a link to a 5 minute interview today with Matthew Stork CEO.

It gives a quick idea of the present and future at COG.

Matthew demonstrates both the scientific knowledge and also commercial ability which is behind the company's recent success. Previous to his arrival the commercial acumen appeared to be lacking, as is the case in many such companies.

I hold

Traders Cafe with Zak Mir: Matthew Stork, CEO Cambridge Cognition - Vox Markets

Db47

thanks for posting John - very interesting - I don’t mind being part of a trial guaranteed by JP Morgan, wouldn’t have opened an account with a new-starter for sure. Interestingly the 1.5% interest paid on savings is calculated AER and paid monthly so effectively (I believe) account holders are compounding each month… trial or not it beats the 0.65% per annum I’m currently receiving at Skipton Building Society so I’m shifting funds across to Chase.

Bouden54

Agree plenty of upside on Gresham House (LON:GHE) I think you're best just valuing this off an earnings multiple, or rather where you expect earnings to go if they continue to see big inflows. Price/nav not really relevant for an asset manager as they are investing other people's money, not their own.

Dragon

Supreme (LON:SUP)

" bad news arrives the doors are not wide enough for all those that have been suckered in,me included."

Can I ask, who suckered you in?

Thanks, I became aware of Gore Street Energy Storage Fund (LON:GSF) after it was featured on the recent Stock Slam. Not the best pitch to be honest, but did encourage me to have a quick look and after a bit of research ended up buying some as there seems a big disconnect with Gresham House Energy Storage Fund (LON:GRID)

DaviStoVest

"Sympathy" ... I honestly didn't feel that. "Honesty" ... if so, not very sympathetically expressed.

I agree with you on your underlying thesis. Stocko, its attribution of 'guru' status to a few hero contributors, and its evident tendency to encourage group-think, presents too much of a siren call to inexperienced investors. Too many people have happily and uncritically followed the Stocko Pied Pipers ... but can you blame Stocko for that?

davidallen77

Gore Street Energy Storage Fund (LON:GSF) was in mail on sunday last week also

Monty Carlo

I'm not aware of any reliable shortcut if you want 100% accuracy for corporate finance purposes where you can't afford to be wrong (or at least there wasn't a few years back, although some providers probably get close so I stand to be corrected) - even the Bloomberg register of major shareholders was often out of date or missed something.

Companys' website investor relations sections often also often lag behind. Only surefire method is to take the major shareholder list from the last set of published annual accounts and then modify for any RNS announcements since that date. Major shareholders >3% are obliged (by FCA handbook) to announce each time they cross a further integer 1% in either direction.

Again you need to differentiate between holders of voting shares and synthetic exposure via various derivatives such as total return swaps, not just CFDs. As Archegos demonstrated recently, it is possible to build up huge economic exposure without it being evident on the shareholder register.

Sammybates

Thanks a lot, that's helpful. Yes - I was struggling to find a clear/good source of information, was wondering if I had missed a trick. I ended up doing exactly what you recommended before even seeing you had commented!

13th Apr '22

AAhhh thanks for that A! That sounds bloody awful tbh!

smilingmickey

Hello Paul,

I often think that the valuation of Somero is clouded by the thought of them using concrete whose production is a strong CO2 emitter. But think of the reduced emissions and health benefits which can be gained from using a flat floor.

It is a similar argument that miners face when they produce copper and battery metals, associated with lots of emissions, but which are then required for use in EV cars!

FWIW I topped up after the share price dropped to below £5.00 in anticipation of a big divi payout in June. Maybe then take take a small profit on a sale thereafter or hold on for more payouts!

14th Apr '22

For those interested Supreme (LON:SUP) are holding an investor presentation in respect of its recent trading update, next Friday 22 April at noon, hosted by Equity Development. It is free to register on the Equity Development website at:

News & Events - Equity Development

I suspect that the company was somewhat surprised by the market reaction to the update and wants to redress the balance. Anyway will shall see.

All the best

Small Cap Value Report (Tue 12 April 2022) - CLX, COG, AGFX, HRN, W7L, SUP

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Paul Scott

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