Small Cap Value Report (Tue 17 Dec 2019) - The Boom Is Back

17th Dec '19 by Graham Neary

35 comments 6374 reads

Morning! Graham here.

Huge thanks to Paul for volunteering to do yesterday's report, even though I was scheduled to do it. He didn't know this, but I had just spent three days in Newcastle. I am still recovering.

For today's report, I'm tempted to wade into controversial topics with a look at the macro outlook but we also have updates from:

SDI (LON:SDI)
Pressure Technologies (LON:PRES)
City of London (LON:CIN)
Hipgnosis Songs Fund (LON:SONG)

I have to leave the office at 1pm so the report will be finished by then, whether I like it or not.

Cheers

Graham

The Boom is Back

When the din of politics gets very loud, it can overshadow company news. This most certainly happened over the last few days.

If you've been looking at the comments on the SCVR recently, then you'll know what I mean. The dreaded 'B' word, and the 'E' word, dominated the thoughts of many readers.

Most of the time, I try to stay on higher ground and focus on companies. But the macro picture truly is of great interest to me when it comes to indexes and currencies. Let me preface what I am about to say with the warning that leveraged trading is unsuitable for the majority of people.

Indexes

Having watched the FTSE-100 for pretty much my entire career, I think I have the ability to perceive when it offers good relative value. Maybe I am overconfident, but that is my perception.

I backed up my view by taking leveraged long positions in the FTSE during the Spring/Summer this year, believing that there was plenty of value around the low 7000s. Using options, I was able to structure the trades in such a way that I wouldn't lose any money, so long as it settled somewhere above the 6300-6500 region. While I liquidated all of those positions sooner than I wanted, I'd be interested to repeat the strategy if such good value was ever offered again.

The beauty of trading and investing in a diversified index, versus specific companies, is that you can afford to take on a lot of exposure with just a small number trades. That's the beauty of diversification: you can go "big",…

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MichaelFBS

17th Dec '19

Graham thank you for the intro which I will finish later.

Anybody have a view on microcap Lightwaverf (LON:LWRF)? Maybe below the limit for SCVR?

I don't hold but also think the product is not very good (putting it mildly) so would completely agree with Stockopedia classification as a sucker stock.

rmillaree

Still recovering from 3 days in Newcastle? Was it a shock to be so far north in England??? ;-)

If i had to guess it might be the amount of alcohol everyone drinks up here that leaves one needing recovery time when one leaves .

Graham Neary

Hi J - Spread bet!

InvestorJohn

Believe me I noticed - my poor SIPP lol

Hopefully the allegations prove to be unfounded but hard to be sure at this stage what the best action to take is...

john2

Thank you Graham, I have never considered hedging the FTSE but I'm going to print your thoughts off and give them some consideration over the next few days.

For what it's worth, my personal macro-related actions were to spend 5% of my investment capital on a FTSE 100 ETF on Friday and 5% on a FTSE 250 one. The 100 ETF was yielding 4.3% when I bought it and is in my ISA where it will provide a bit of tax-free income for the future, and the 250 one is in my SIPP where hopefully the certainty provided by Johnson's victory will allow UK biased companies to begin to invest for the future (and maybe some will turn out to be takeover targets). I like the automatic rebalancing that occurs when the indices are recalculated.

garbetklb

Lightwaverf (LON:LWRF) - Purpleski - by complete chance, I had a quick look at them yesterday. I didn't look in any great depth, but I moved on because I can't see how they can build / defend a position in such a hot consumer area without much more firepower in terms of advertising etc.

However good their product (and I didn't look in detail), reminded me of the VHS / Betamax competition. People like Amazon / Google / Apple have much more presence & credibility.

Co-incidentally, I also recently had a look at smart lamps - they seem expensive, but I'm pretty tight. One of my serial failings is to forget that mass market tech gets much better & much cheaper much more quickly than one expects. LED light bulbs are a perfect example.

I might be missing an opportunity.......

mammyoko

Graham - beautiful! Lovely comments today. Let's hope you are right and the UK is in for a sustained re-rating.

WhaleHQ

Thanks Graham excellent post and congratulations on a very productive year of investing. That Next (LON:NXT) buy was something else.

For what it is worth (not much). Due to a lack of high conviction opportunities I have retreated around 50% of my porfolio to indexes (without leverage) over the last year or so and have actually turned a nice return on the FTSE 250 in particular. Now the pound has picked up a bit I've started looking outside the UK for investments buying a little of the DAX earlier in the week for example and hope to buy more overseas indexes as/ if pound continues to strengthen. The S&P has a stunning array of constituents but I think it is expensive at the moment (and has been in gbp terms for the last few years) so I've been finding it hard to bring myself to buy in.

I hope that didn't put anyone to sleep on this the 'Small Cap Value Report'.

LongValue

It might be interesting if insurance companies had to issue a statement on all marketing literature in respect to the numbers of policyholders who lose money ie Don't make a claim. And, yes, I am long in both Cmc Markets (LON:CMCX) and Ig Group (LON:IGG) .

Laughton

Re Hipgnosis Songs Fund (LON:SONG) , I'm sure that the music copyright lawyer is correct in saying that they are overpaying but that's the nature of the game. It was the case when Michael Jackson bought ATV for $47.5M, but he then sold half of that ten years later for $90M (having benefited from the "yield" in the meantime). So who overpaid, or did anyone?

There really is no way, especially if you're trying to build a music copyright business quickly not to overpay. As far as I can see, almost all of what Hipgnosis Songs Fund (LON:SONG) are buying are existing catalogues which all have an earnings history so the sellers and potential buyers know what the yield has been over a number of years.

Hipgnosis Songs Fund (LON:SONG) 's "selling" point to the original writers/performers/producers is that they will work harder than the current custodians to generate additional income thereby sustaining or increasing what might otherwise be a dwindling yield over time. If they can do that then maybe they're not overpaying.

Although some will think that these catalogues have had their day and the best income has been and gone, we need to bear in mind that nowadays most/many musical artists make their money from live appearances and plays on radio, tv and streaming rather than from record sales.

Yes, streaming only pays a minute amount each time a composition is streamed but many compositions are streamed millions of times per year. And many of these compostions are by artists that you may not even be aware of.

Radio plays, as an example, 1 play on BBC radio 1 generates an average of £25 per minute for the copyright owners, so maybe £100 each time the record is played.

Performance royalties for concert appearances increase by well over the rate of inflation. They are calculated as a percentage of the value of tickets sold and as anyone who goes to concerts will know ticket prices have gone up a lot more than 2% to 3% per year. On top of that the rate at which royatlies for concerts in the UK have been charged (excluding festivals) has very recently gone up by almost 50%. That could make a significant difference to Hipgnosis Songs Fund (LON:SONG) 's figures next year.

I have a modest holding in Hipgnosis Songs Fund (LON:SONG) as I believe that their income is uncorrelated to anything else. It's going to take some time before we can tell if their business model will work, it's almost impossible to tell after such a short time whether the catalogues are earning the rate of return promised and enough to cover the administration costs and the yield being paid.

At the rate they're going with an RNS almost every other day announclng another catalogue purchase it can only be a matter of time before they come back to the market for additional funding.

Apologies for the rather rambling post.

sevenccc

Happy to see the macro musings but not at the expense of the company analysis please. If you only have time for one or the other please stick to the subject. This is after all the SCVR first and foremost.

Portfolio top 20 share very interesting.

Wildcat

The Boris Bounce in the GBP doesn't seem to have lasted long! And comparing the UK economy to Switzerland is a mistake. The UK has a huge structural trade deficit. Very different from Switzerland.

johnsmith68

Hi Purpleski. I have installed the product in my home and it's almost really good. It's cheaper than most comparable products and if they could just make the software a little more flexible and intuitive and introduce a wider range of products in the later "smart" series then it's not a million miles from being a great product. It does some things really well and some money invested in software development would go a long way but they would need enormous firepower for marketing, product development and software development to really gain the traction they need to start pushing ahead. I fear that they are running out of cash fast however as they did a placing back in the summer to raise a trivial amount of cash and I notice that many products on their website are currently listed as "pre-order" when they are not new products. I've not really dug into the recent RNS's but they appear to be undergoing something like a management buy out possibly. I really hope that the outcome is that they get properly capitalised and start to realise their potential because I think it's better than Philips Hue which is probably the nearest equivalent product but even that is not the same thing because with Hue, the intelligence resides in the bulbs whereas Lightwave works with most fittings. Lutron it most certainly is not but it's really aiming at a different market. As far as an investment opportunity, it's definitely bargepole at the moment. I really wish them success - if they were in Silicon Valley, they'd have a market cap of billions by now! Sadly they're in Brum!

Martin Verlaine

Hipgnosis thanks for the comment and I agree given this is clearly a new type of ‘ land grab’ it is always going to be difficult to assess if they are overpaying. My view is they are likely to be given they can hardly raise funds and sit on it so the artist’s agent knows what they are looking to do. Far from clear there would ever be much of a market for distressed sellers! I declare a small investment here but having posted on this before my bigger concern is no obvious skin in the game from MM and if he ceases involvement. Arguably, ‘ thematic ‘ funds assets are difficult to value so conventional analysis based on NAV maybe of limited value, going forward. I have a feeling this Fund will divide opinions for its whole life. It has some heavy weight asset management backers although it would be interesting to learn on what asset allocation basis they are holders.

millen and Hipgnosis Songs Fund (LON:SONG) - re your query regarding how the various parties divi up the royalties: There are different royalties applicable but hopefully this helps:

It probably helps to think of there being two components:

1 - The song or composition.

This earns its own set of royalties and is conservatively/traditionally shared 50% to the lyrisist 25% to the person(s) who comes up with the melody and 25% to the person(s) who come up with rest of the music.

But in practice these percentages are subject to agreement by the people who "compose" the song. In the "old days" songs were usually written by one or two people but nowadays everyone tries to get in on the act because the rewards are so great. So the producer whilst recording the song in the studio might, for example, suggest an added or different lyric for a chorus or a slight change to the backing track and he will claim that this is significant enough to warrant a share of the overall "writers" royalty.

Bands sometimes agree that the song was a collaboration and agree that the royalty should be shared equally by all the band members even though it's possible that not all the band members are credited as writers.

These royalties are earned by the "writers" each time the song is exploited (sold, streamed, performed publicly etc.) even if by different artists or producers. So, every time Match of The Day shows a Liverpool game with the crowd singing "You'll Never Walk Alone" on-air before the start then the BBC has to pay a royalty which eventually finds its way to the estates of Rogers & Hammerstein as the original composres and their publishers.

The record

This earns a royalty for the performers and (normally) the producer. There is no "industry standard" for what this royalty should be. If you're Taylor Swift, expect a record company to pay you a much much higher royalty that if you're Ann Smith who has never made a record before. Likewise, if you were Quincy Jones then expect a much higher royalty to produce the Michael Jackson albums than if you're a less well known, less succesful producer.

The performers on the record also earn royaties when the record is played in public.

But the performers and producer of the original record don't earn these royalties on subsequent recordings made by other artists.

I'm rambling again but hope this helps.

JonBirdy

Hi Graham, I really welcome your occasional and timely macro musings. Very enlightening to hear your thoughts. Thank you.

DWit199

"He also said that while music streaming is growing the amounts paid are minimal."

That would depend on your definition of minimal. There are around 300 million paid music streaming subscribers worldwide. Spotify are reported to pay around $0.004 per play and other services pay more, so let's say $0.005 on average.

If every subscriber plays one song a day, the royalties paid would be over $500 million annually. I think one song a day is a low estimate per subscriber so the total royalties paid will be several $billion annually. Subscribers to these services have increased 10 fold in the last five years without signs of growth slowing. These figures are not minimal in my opinion.

“When I see Switzerland, I see proof that a country outside the EU with a strong economy can have an incredibly powerful currency.”

Thing is Switzerland is only quasi outside of EU. They effectively have FMOl and FMOG.

They also have over the long term a strong currency and the UK the opposite.

AnonymousUser192020

Thanks Laughton - that's fascinating; clearly you have some insight into the performing rights scene. (fwiw, I've one investment in a film production company and there the position on royalties seems complex - different providers of capital are in different pecking orders for repayment once the royalty 'waterfall' begins to flow, but for Hipgnosis Songs Fund (LON:SONG) I imagine we're looking essentially at 'mature' royalty streams long after any risk capital has been repaid.)

I also thought another growing royalty stream for Hipgnosis Songs Fund (LON:SONG) is payments for music featured in block-buster movies - a typical film might have up to 20 well-known songs listed in the closing credits.

18th Dec '19

Hipgnosis Songs Fund (LON:SONG) - ONS today said " the upward pressure (on inflation) was particularly driven by higher concert tickets after a number of major UK tours were announced during the month"

So long as the tickets sell, that's continuing good news for royalties

Disclosure: I do hold some Hipgnosis Songs Fund (LON:SONG) . I'm not trying to ramp, probably just trying to convince myself to continue holding.

Small Cap Value Report (Tue 17 Dec 2019) - The boom is back

The Boom is Back

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Graham Neary

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