Small Cap Value Report (Tue 14 Feb 2023) - BMS, BPM, UPGS, ALT, ADF, PLUS

14th Feb '23 by Paul Scott

39 comments 8188 reads

Good morning. It's Paul & Graham here!

Today's report is now finished.

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.

Agenda/ Summaries

Paul’s Section:

Braemar (LON:BMS)

317p (pre market open)

Market cap £104m

Trading Update

Braemar Plc (LSE: BMS), a provider of expert investment, chartering, and risk management advice to the shipping and energy markets, today announces an update on trading for the year ending 28 February 2023…

It’s only a vague comment today, with no mention on how the company is performing vs market expectations -

The board of Braemar is pleased to report that the Group has continued to trade well since the release of its interim results in November 2022. The integration of the Group's newly acquired Spanish and US businesses announced in December 2022 has progressed well and both businesses are set to make an immediate and strong contribution to the Group's trading in the next financial year.

The board looks forward with confidence to providing a more detailed update on trading for the year ending 28 February 2023 and on expectations for the year to February 2024 in a pre-close update to be announced in mid-March 2023.

Capital reduction - this is just a minor administrative matter. It looks as if the company inadvertently paid out divis incorrectly. This is to be fixed by creating distributable reserves,…

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Rusty2

14th Feb '23

In your profile under Personal settings, there is a field about notifications, however even though mine is ticked, I never get any. It maybe worth asking the Support team about this.

MIK

Thanks both for that, will also ask the support team.

Lee Brown

My biggest holding and agree!

Bouden54

Yes a fair point, they have to continually win new customers, which does seem to be getting more expensive recently. I actually sold a while ago after a strong run as feels they are coming out of one of their boom periods, and may find it hard to match recent earnings. Still very cheap though and their long term record is excellent, so probably should have kept a small position.

Tortoise investor

Paul on Braemar (LON:BMS) you say 'The crux of the investment case, is whether it’s enjoying a cyclical or pandemic-related boom in profits, that is likely to subside?'

I think there is some post-pandemic benefit but I've suspected they are experiencing a benefit from from the awful war in Ukraine as well. In their HY results they referenced 'Revenue for Deep Sea Tankers in H1 FY22/23 is £17.0m, a 93% increase on H1 FY22/23. Sanctions and related volatility have been the main drivers in the Deep Sea Tanker markets, and these factors have led to changes in oil flows and increased ton miles considerably' and 'Clean Tanker markets, particularly in the Middle East and Far East, are seeing multi-year highs thanks to increased demand, and the growth in ton miles due to sanctions on Russia.'

timarr

Plus500 (LON:PLUS) v CMC Markets (LON:CMCX) v IG group (LON:IGG) has been debated here a few times:

Historically PLUS has had a less convincing hedging strategy than the other spreadbetters, although CMC weakened their's a bit a while ago - so more of the upside drops through to the bottom line, at the expense of greater risk and volatility
PLUS have tended to serve the lowest common denominator in terms of clients - their customer churn rate certainly used to be far higher than the others
Back in the day PLUS's management had a remarkable capacity to predict how future trading was going to go and to sell or buy appropriately
PLUS is an Israeli company, which is not everyone's cup-of-tea.

I haven't looked at this recently so can't say how much, if any, of the above still applies.

More generally, all spreadbetters are exposed to changes in regulation - it comes with the territory. I hold IG group (LON:IGG) and CMC Markets (LON:CMCX), so I'm with Graham on this, but it's undeniable that holders of Plus have been better rewarded for what, I at least perceive as, accepting greater risk in what is already a risky sector.

abtan

Plus500 (LON:PLUS)

Hi Bouden

I'm negative on Plus500 too.

The underlying business actually decreased YOY (-9%), whereas the profits gained from customer trading losses increased significantly ($15.5m ---> $193m.)

I don't really understand how a business in this industry would be allowed to gain from their own customers' losses, especially when they can simultaneously stop those same customers from closing positions, as they have done in the past.

Also, they lied about this for years - Graham did a post several years ago, which included a direct response from the company stating that they do not benefit from their customer trading losses...which turned out to be a lie just a couple of months later when the company announced that they did actually make profits from customer trading losses.

Scandalous.

Unlike the other players in the industry listed in the UK I believe only IG group (LON:IGG) does not benefit when their customers lose.

rmillaree

"I don't really understand how a business in this industry would be allowed to gain from their own customers' losses, especially when they can simultaneously stop those same customers from closing positions, as they have done in the past."

Huh - thats how they earn their cut , their customers should know they are more likelyt o lose than not!!!

they are basically a bookie and make a margin on everything they do. They also take "risk in the market" by not hedging "everything" customers buy.

Its ultra simple

If they didnt make money from customers they would be out of business surely?

Also, they lied about this for years

Yep amazing how issues like that can be glossed over with the market quickly forgetting - i am not saying they outright lied (dont want to be sued) but the explanations as to why they had little risk then started to take big risks where very waffly. This one is stil on my baregpole list for that very reason - although caution has meant i have missed out on some great potential gains. Well done for those more brave than me.

I still always feel there is the danger of some unforseen (other than by me here now) regulatory clampdown that simply removed their ability to make the easy money they clearly do.

ACounsell

Definitely suffered from this in past with Plus500 (LON:PLUS) . Recognise as rmillaree said that they warn customers that 70%+ customers lose money on trades. However, preventing a positions from closing at a preset stop loss because they stopped trading in an instrument and then allowing it to restart at a level well beyond the stop loss is a bit underhand in my view. This means the customer loss is much greater than was originally intended when they set up a stop loss - even allowing for some tolerance around that due to market conditions. As a consequence of this I long ago recognised the Plus500 (LON:PLUS) is a share to hold and not a trading platform to use. Sadly I didn't hold the shares for long enough!

Silver Moon

Ah, millaree, you and I know there are far worse actors out there than Plus500 (LON:PLUS) . I've held it throughout a long wilderness having paid too much in the first place but had spread my bet by holding IG group (LON:IGG) and CMC Markets (LON:CMCX) neither of which I feel so lucky with.

You're correct, the underlying income has actually fallen and that's one of the reasons I sold a couple of months ago - as I said it feels like they're coming out of one of their boom periods.

The other point about customer losses/hedging I feel is massively exaggerated - Plus have demonstrated that over time these will broadly even out and they are not exposing themselves to undue levels of risk - they may face a couple of hundred million loss in a particularly bad quarter, but they can easily cover this and make it up in subsequent quarters. What people fail to grasp is that fully hedging ever single position (the IG approach) is incredibly expensive and will eat into a large part of profits - so smoother earnings yes, but much lower earnings on aggregate.

Graham Neary

(Disclaimer: I'm an IGG shareholder.)

Hi Bouden,

Thanks for the comment, however I do feel the need to correct you on the statement that I have been "consistently negative on Plus500".

While I do believe there are issues that investors should be aware of re: the PLUS business model, and I have been very critical of how the company has communicated its risk management processes to investors in the past, I have not been consistently negative on PLUS as an investment.

If you check the records, you will see that I have been price-sensitive and always sought clarity on what I perceived to be the outstanding issues at PLUS, when it comes to taking a positive or negative view on these shares. The last time I discussed PLUS in the SCVR was on 13/8/2019 (link), when I said:

While I had no interest in this at £20 and before we had clarity over customer P&L and the long-term impact of ESMA regulations, I am starting to find this interesting at the current much more reasonable valuation. But I would not bet the farm on it.

The share price at the time was 661p.

Best regards

Graham

The Boon Fund

Be careful - the cyclical downturn in content production might be coming soon to the UK. In the USA, the FT had an article within the last week reporting that Hollywood production activity was down substantially in Q4, as streaming services and content providers commissioned less new work.

Facilities by ADF (LON:ADF) work is obviously tied to amount of film and TV production done.

raigersfield

PLUS500- it has persistent if variable annual free cash flow and massive ROE. That is why it has been such a successful wealth creator over a long period for investors in the shares. I agree that all the other comments here re regulation or disclosure have been or might yet be negative factors. Also there is as yet no visibility as to what net cash flows the US move might produce - or the additional risk factors that might emerge there. Both could be very large.

BnB

Facilities by ADF (LON:ADF) - Be careful - the cyclical downturn in content production might be coming soon to the UK

This. I've heard that there's a big cull on new programming as streamers trim their losses. The whole sector is at war with each other and the numbers don't add up.

Thanks for clarifying Graham and looking through your posts I can see you've become a bit more constructive on the company in last couple of years.

iamflimflam1

I saw this and thought it might amuse a few people here:

"Often times when we see presentations from companies, they have little information in them. They might show information about number of users, total downloads, awards the company has won, etc. Many of these companies have raised tens of millions of dollars in financing, and should be able to speak to their traction in some way. To that end, we have created a hierarchy of information included in company decks:"

If companies have good cash profits they report those
If companies don't have good cash profits, they report on adjusted profits
If companies don't have good adjusted profits, they report on gross profits
If companies don't have good gross profits, they report on revenue
If companies don't have good revenue, they report on adjusted revenue indicators (like Gross Merchandise Value - GMV)
If companies don't have good GMV, they report on Monthly Active Users
If companies don't have good Monthly Active Users, they report on Subscribers
If companies don't have good Subscribers, they report on Downloads
If companies don't have good Downloads, they report on Pageviews
If companies don't have good Pageviews, they report on that they were voted the "Best Place to Work in XYZ City"

I asked the support team about this. They came back saying that it is a dummy functionality, it doesn't work. No idea when they will get round to implementing it... seems like one of the biggest bits of work they can do, compared to all the "updates" they often come out with.

mojomogoz

15th Feb '23

I'm a bit late catching up...but Altitude (LON:ALT) is just an expensive and low quality version of Pebble (LON:PEBB). Twice now I've tried to speak to IR to clarify some aspects of disclosure/business and they haven't been forthcoming (one recent, the other c.9mths ago). IMO they deliberate obfuscate what's happening in the business and the reason I think they do that is lack of confidence in their own execution.

There recent direct move into merchandising is low margin and high volume. Its a low quality use of their platform. They have struggled for years to adequately 'monetise' their platform services to customers. There will be a high risk of a sudden letdown with this stock...or a punchy raise on elevated price to invest in a better product or acquisition

epo001

17th Feb '23

Dummy functionality eh? We had better jargon in my day. Pre-alpha, proof of concept feasibility demonstration. And in my day we kept this sort of stuff hidden away on test systems.

Small Cap Value Report (Tue 14 Feb 2023) - BMS, BPM, UPGS, ALT, ADF, PLUS

Agenda/ Summaries

Paul’s Section:

Braemar (LON:BMS)

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Paul Scott

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