Small Cap Value Report (Tue 12 May 2020) - Govt Covid-19 Paper, TET, TUNE, FRP, ZYT

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12th May '20 by Paul Scott

123 comments 10131 reads

Good morning, it's Paul here with the SCVR for Tuesday.

Estimated timings - lots already done, so plenty up by 1pm. I might do more in the afternoon, or might crash out in my hammock, it depends. Today's report is now finished. Thanks for the kind comments, much appreciated.

I've just ploughed through this 60-page Government publication, issued yesterday, 11 May 2020. I'll summarise it below, so that you don't have to!

I've followed the layout & headings in the original document (hyperlink below, in blue), so you can easily consult that particular section of the report if you want more detail.

If you're short of time, jump to "Section Four" below, which has the information that's most relevant to investors.

OUR PLAN TO REBUILD:

The UK Government's COVID-19 recovery strategy

Section 1 - the current situation

Phase 1 - this is what has happened until now. Graphics showing how the lockdown strategy was to reduce the peak to within what the NHS could cope with. Explains the principle of getting R (reproduction number) below 1, to prevent exponential growth. SAGE believes R is currently between 0.5 and 0.9, hence number of infected people is falling over time. Statistics & charts provided of number of people infected, and daily tests. Outlines economic risks of high unemployment & large fall in GDP.

Moving to the next phase - worried about risk of triggering a second peak of infections, so will only lift restrictions cautiously. These are the five tests for easing measures, as announced on 16 April:

Graphic showing big falls in critical care beds being used for Covid (peaked at c.54% in England, c.12 April, now c.26%)

The challenges ahead - Covid-19 is likely to be a long term, recurring problem. No drastic changes (to restrictions) can be done in short term. No quick or easy solution. Vaccine and/or effective treatment is long-term solution. Herd immunity approach would overwhelm the NHS. Still learning about the virus. Difficult to detect because covid can spread without people having symptoms. Winter flu in 2020/21 will complicate matters, as symptoms similar to covid. Needs widespread compliance of the public to Govt measures, which so far has been the case. Graph showing large reduction in public travel, by all means, but car use now rising, public transport…

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aflash

12th May '20

These are Retail Bonds? Any Institutional participation?

What do you know more than the Professionals?

Companies that can afford to pay dividends have cancelled them. The yields were 3 to 4%. Anything over that threatens Permanent Loss of Capital.

Of course the experts will do well. Paul Elliot Singer recovered 4 times his outlay on Argentinian Sovereign Bonds, several billion $. To do so, however, he had to get court judgments in New York and Ghana. Legal fees had to be paid. He remained without income on the bonds from 2002ish to 2018ish.

Ironically (BUR) Burford Capital, which made people here rich and burned others, represented some of the parties in that dispute.

I accepted the Argentine govt settlement of 50% ish on Capital, whenever it was. Quick, easy, moved on. Moved on to Co-op group, did very well. PMO bonds, not bad. BWSA O.K. then IEER, lost the lot. Now holding AV.A which went on sale when they threatened to retire the preferreds. Good income, Capital gain wobbled in March but has come back. At that time I missed BBOX at 84p.

Some here have the Lloyds preferred from the GFC. Those were exceptional circumstances and Everybody was on the case. There used to be specialized sites but they are gathering tumble weed now.

Please make sure you know what you are doing.

Ramridge

A jaw-dropping performance along these lines has to be Diane Abbott's.

Phil Mc

Don't worry about it there is no need to apologise, I've worked in both the private sector (for 18 years) and now teaching (for 8 years). I'm now used to the media bashing of teachers and no doubt it has helped to form a lot of people's views outside the profession :-)

GrahamF

Clissoldkid

I think the trouble is that while the risk to the under 40s is very low they may spread it to many others who are not so safe. As a large proportion of the under 40s pass it on to each other as they are released from lockdown early, we could end up with many superspreaders who continue to circulate because they don’t really feel significantly unwell.

We could isolate all the over 40s completely to protect them against this, but that sounds even less practical than what we have now.

Tennis13

I am in the official "vulnerable" age of over 80. This group has the highest death rate. It should be remembered however many of my age group face the dangers of heart problems, cancer , influenza etc. This can be assisted by overweight and lack of exercise.

We can all do our bit to survive but in the end one or other we die and it is never through old age. The one thing I am sure of, is that I do not wish to spend my rest of my life imprisoned by government instructions.

homosap

Unfortunately I can’t now find the post that led me to this interesting article regarding one important way in which C-19 is spread - namely breathing, by nose, mouth, speaking, shouting and singing. Each carries increased risk of transmitting the virus. Major incidents of virus transmission appear to be associated with gatherings where much loud talk or singing takes place, whereas in places where people sit together in complete or relative silence it seemS no such widespread transmission has been reported. The article does not pretend to be a scientific study but it does suggest that proper research on the extent to which the virus may be or may not be transmitted where people sit in silence closer than 6 feet might well reveal that travelling by bus and tube and other forms of public transport including aircraft might be a lot safer than is supposed. A strict no talking rule on public transport might be the key to enabling people to get back to work safely,

https://www.erinbromage.com/post/the-risks-know-them-avoid-them?campaign_id=51&emc=edit_MBE_p_20200512&instance_id=18405&nl=morning-briefing&regi_id=109418480&section=whatElse&segment_id=27349&te=1&user_id=0b714f41b91b0cc40880ad4822d73404

sparkler

I completely agree Timarr. I was expecting a big fall today - the valuation is nuts. Another fund manager favourite engineer is £SPX. After a brief pull back in March the share price is near record highs again. Great business, absolutely, but 35x earnings for an industrial pump manufacturer in a global recession - no thanks!

cafcash49

Hi Paul, A massive thank you for your hard work in summarising the 50 pages for us. Extremely thoughtful of you and way above and beyond the call of duty, you are a star. Keep safe. Charles

pj8

Thanks for posting this - very helpful. I see it has almost 12 million hits.

Charlie11

Dart is down for most of the reasons we can all think of... it is a high beta stock operating in an industry sector that is effectively closed down with limited prospects of generating breakeven revenues any time soon.

The PE is effectively worthless as we have no clue what the forecast E will be, if there is any E at all across the next year or two. They are likely to report strong results to March '20 but for investment purposes we are now looking at a different company. They are loss-making every day and likely absorbing considerable amounts of cash. Whilst there seems to be reasonable liquidity the fact that the management deemed it appropriate to fully draw the RCF is not particularly positive news and, believe me, this will seriously rile the banks as they do not like companies doing this. The banks will have long memories should Dart breach any loan document covenants and require waivers which is a financial risk in itself. The gross leverage / gearing is also quite high for the operating model with the balance sheet likely to take a meaningful beating and be reconfigured across the coming months.

Personally, I have not invested in the travel sector for some time (as there are better businesses in which to allocate capital) - the risk-adjusted returns are just not high enough.

Wilbraham

Seriously Jez, if these are unregulated mini-bonds just run away. Fast! Think it through - what sort of credible business can borrow only at 12-15% pa, to cover the punter promise and the introducer commission? It just doesn't stack up, as lenders to LCF, Dolphin/GPG, High Street Group and many others have discovered.

Apologies if you're looking at something more grounded.

Nebraska1977

Good points and I completely agree. Easyjet disclosed that they would burn cash of approximately £3bn if they were effectively ‘shut’ for 9 months which is life threatening for them. That length of airline shutdown is perfectly possible in my view (even if skies are re-opened a huge number will choose not to fly). Survival for these companies is likely to lead to massive dilution for equity holders (lenders will grab equity value due to inevitable covenant breaches) and so even the survivors may not turn into good investments (Lloyds Bank was a survivor of last crisis and yet shareholder returns have been missing despite many of its competitors disappearing).

Agree with your thoughts although it is highly unlikely banks would contemplate debt-for-equity in this industry (and many others for that matter) as there are just too many macro and micro risks, including environmental issues, and they are not particularly good at running airline companies.

Should there be a covenant breach (leverage is often the first to miss due to the collapse of EBITDA), the banks would apply penal fees and have scope to re-set the margins as they would need to allocate more core capital to cover the debt, hence diluting economic profit. They may also take the opportunity to adjust the covenants and/or appoint advisors to undertake a deeper review of the business and prospects.

All of this would be very time consuming and expensive for the company... and it would lead to an announce able event which can spook the markets, customers and creditors... snowball effect!

greyster

I was just reading the IPO document and saw the 25% covered in section 12. Looking at the Stocko report, I assume the 27mn net profit is before profit share, hence we would need to deduct another £7mn. The remaining 20mn is still a good return on turnover and capital. There must be some growth with the number of wounded businesses out there.

I wonder if culture of distribution of profits to external shareholders is a little foreign to them and remuneration will creep up.

I have a starter position
Greyster

Paul Scott

Thanks Charles! It was 60 pages actually, but I use a larger than average font, due to being blind as a bat!! ;-)

jonesj

As far as I can see, that paper is actually modelling R0, for various scenarios. Including, for example, mosquito bites & malaria. So calculating what you would get for a hypothetical epidemic.

Currently, the first task is a much simpler one of calculating it from data for the number of cases.

Unfortunately, I don't have the data for how they select who to test.

However, if hospital admission criteria are constant, then the number of hospital admissions should be proportional to the number of cases, obviously with a slight time lag.

The number of hospital admissions is declining, so it seems very likely that R0 has been below 1.

Reasonable estimates of what the R0 has been should be fairly easy from this. Probably not accurate enough if you're fretting if R0= 1.03 (bad) or 0.97 (tolerable), but OK if we're looking at 0.7 or so.
Obviously SAGE should have better information.

[I did briefly have a look at an "independent Sage" group, which was referred to in one of the supposedly quality newspaper. THEIR R0 graph had extreme sensitivity, as they drew it based on a nonsensical assumption that the R0 value was compounding DAILY. I decided the document wasn't worth reading after that, as I'm interested in analysis with realistic assumptions].

wildshot

Good point Graham Ford.

I think what the original poster is failing to mention is that a lot of under 40 year olds are not in sole residence. Think of the years of house prices being in the news and unaffordable. Many young adults are still living with their parents because they can't afford to set up home on their own. As an example my next door neighbour to my left has two adult daughters living at home, and those girls certainly like to party and will be desperate to do so again. My neighbours on the other side have an adult daughter and son who rotate (pre-lockdown) between their divorced parents homes as places to sleep.

So free up the under 40s as much as you want but they will still run the risk of being super spreaders in their homes. For example I am late 40s in age and have a 2 year old daughter, I'll be in my sixties when she is in her teens.

One of the reasons the BAME are considered to be suffering more than other groups is because they have multi-generational households. All those partying 20 year olds will be coming home to Ma, Grandma and Great Grandma. Not a good way of protecting the elderly don't you think?

Benson

Totally agree with everything you say Tennis 13

I am 75 and trying to make the best of everything investing and life in general as we all should do

stuartb58

13th May '20

Thanks for having a look at TET on such a busy day. Might be worth a closer scrutiny one day. I have held for some 20 years and seen it change from basically a commodity trader in orange oil to a business with well diversified product range, albeit results are still influenced by some commodity prices. Previously resembled something of a family fiefdom, which all began to change in 2012 when Daemmon Reeve became CEO. In my view a very competent board of directors. Culture is now very inclusive, with focus on innovation in collaboration with mostly very high quality customers. Relationships with those customers are now much stronger. They faced big challenge of collapse in orange oil price in 2019, weathered successfully and now face coronavirus, but seem to be navigating it well. It is taking time, and this perhaps is not a share for traders, but if there are no further setbacks on the covid front the new facility will come on stream in 2021 and the medium term outlook to me is very bright. Always dyor!

andrewdb

You may be surprised.
There is a platform call WiseAplha that retails fractional corporate debt.
(disclaimer - I have a small shareholding and have a small amount of money in their platform)
I can see
McLaren Technology Group yielding 29.5% to maturity in '22
Travlelodge 14.7% maturity '25
Domestic & General 6.5% maturity '26
HSBC 3.5% maturity '29
Mostly senior secured.

They tout the Barclays equity gilt studies that say these instruments have outperformed shares for the last 20y or so.
And the numbers do stack up
But be aware of the starting point. 1000 invested in a tracker 1 feb 20 will perform very differently to 1000 in the same tracker on 15 mar 20

Small Cap Value Report (Tue 12 May 2020) - Govt Covid-19 paper, TET, TUNE, FRP, ZYT

OUR PLAN TO REBUILD:

The UK Government's COVID-19 recovery strategy

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About the Author

Paul Scott

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