Small Cap Value Report (Tue 17 Nov 2020) - EZJ, SAGA, BOO, IGP, G4M, TUNE, EYE, SCPA, CRW

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17th Nov by Paul Scott

82 comments 13030 reads

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

Timings - update at 14:07, I've been working since 7am, so am having a break for now. Will come back later to finish off.
Update at 16:10 - I'm back at my desk, so finish time now likely to be 6-7pm, as there's lots to cover still. Update at 18:24 - that's me done, today's report is now finished.

Many thanks for all the thumbs ups for yesterday's report. People seem to like it when I do a personal portfolio review, maybe I should do those more often? Remember I only covered my top 10 holdings yesterday, to focus on the main conviction longs I hold. There are about another 18 holdings, making up the remaining 23% of my portfolio not included in the top 10 positions. Maybe we'll have a look at those on a quiet day.

Easyjet (LON:EZJ) - interesting comment from its CEO a moment ago on CNBC. He said that lockdowns are increasing pent-up demand. It seems to me that 2021 could be a bonanza year for travel companies, once they're allowed to start operating freely again. The elderly could be widely vaccinated by the spring or summer, and many of them love cruising. This is a key reason why I'm so keen on Saga (LON:SAGA) shares ( hold), as mentioned yesterday, as it has clear multibagger potential, once its 2 brand new cruise ships can begin generating cash again. The current market cap doesn't make any sense to me.

Boohoo (LON:BOO) - I hold - Last night Sky news reported that BooHoo has made the first of two heavyweight NED appointments, to improve its ESG (environmental, social, and governance) credentials. This was confirmed on the RNS today. Hopefully this might be the start of a comeback for the shares, since it's clear that BOO is serious about making changes being demanded by journalists, and I imagine some institutional shareholders in private.

Judith MacKenzie was recently interviewed in a MelloMonday session, and she emphasised just how important ESG is to fund managers now. That must be why the share price fell so far, on re-hashed news about its supply chain, and the auditor resigning because of reputational worries (nothing to do with the accounts, as it had repeatedly signed off clean audit reports).

ESG - This…

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fred9566

17th Nov

Hi Paul sorry to take you back to yesterday,s SCVR but I have only just read it . I looked at £Vlx (Volex) and £Luce ( Luceco) a while back as they are both operating in similar areas and after a bit of DOYOR I decided to buy the latter and not the former although they were both in the frame . So far I have been very happy with the decision as Luceco is well up . In making the decision I used the stocko tool for comparing stocks side by side and out of curiosity I reran the stocko comparison tool prior to putting pen to paper . Luceco still comes out the overall winner with some interesting metrics : they have similar MCAP ( £383 m for Volex versus £412 m for Luceco ) and similar PE's but after that there is no comparison

PE : Volex : 15.3 , Luceco : 16.4

Revenue Volex : 296m Luceco :161

Net profit : Volex : 11.1 Luceco :15.8

Oper margin : Volex : 4.37 , Luceco : 11.74

ROCE : Volex : 11.57 , Luceco : 26.37

ROE : Volex : 11.9 , Luceco : 29.3

What's not to like about those numbers . The only down side about Luceco is that the free float is only 41.4% but Volex is also relatively low at 68% .

Did you consider Luceco and if you did I would be interested why you chose Volex

Zipmanpeter

FREng - I saw the same and wondered if it is because it is normalised not statutory reported profit that is 6.0Mn - so it maybe implies brokers see some exceptional costs, perhaps arising from Corona virus costs or write downs/provisions.

I have believed to now that MCL e relatively books were conservative and quality focused (vs NSF which I own). But maybe they will have to take a write down on the Shopacheck acquistion given how low the whole sector multiplers have dropped! You really cant get a more hated sector now that sub prime lending. (Non-standard Finance (LON:NSF) had to write off ALL remaining value in ALL its subsids at the last set of results, partly for this reason)

Alternatively, they may have write downs on loans in the new digital division from i) Switching to a new provider from Wirecard - eg writeoff of software

Either way, if normalised profit remains positive it implies (to my limited understanding that the core business has not incurred huge losses and thus should be able to come back over time.

I am long Morses Club (LON:MCL) but nervous that the results have been delayed to the 11th hour so that the impact of corona can be calculated.

Patrick L

Having looked at more detail this evening I think it's also worth highlighting the broker estimates assume H2 YoY growth of just 7% (75.6m revenue for H2 versus 70.6m last year by my calculations). So I agree that broker target of 33p will probably be a considerable underestimate given the company is talking of strong trading going into November and it will surely benefit from physical retailers being shut for at least some of the run up to Christmas.

Gear4music Holdings (LON:G4M) market share is still only 8.6% so there is still plenty of room for further long-term growth even if next financial year's numbers don't end up being quite so glowing as this year's.

KevinS1

I rang HL the other day as I couldn't get a price on some junk I wanted to offload. Initially the spread they came back with was ridiculous so I asked them to only sell at a better price - 2mins later they came back and got me a slightly better price - only saved a few quid, but covered the phone dealing costs vs online and left me enough to pay for a good night out (whenever they happen), although TBH I lost so much on the rubbish I don't think I can afford a night out.

davidjhill

I don't own either but the other way to look at £VLX is that it has an opportunity to significantly improve operating margin and ROCE which it appears to be focussed on. If they can double operating margin towards 9%, still below Luceco, that will more or less double profit and halve PE. Thus if I were looking at this I'd be inclined to say Volex (LON:VLX) can potentially double its share price without really growing revenue whereas Luceco (LON:LUCE) is already well run and efficient so we are relying on revenue growth to continue the upward momentum. If I had to choose one I'd plump for Volex (LON:VLX) based on the risk/reward but clearly Luceco (LON:LUCE) is a good business too, just more fully up with events.

Somersetal

On Morses Club (LON:MCL), the consensus view - as Zipmanpeter says in his post - is that the delay in publishing the finals for the 53 weeks to 29 Feb 2020 is bearish. But there is a contrary view which I think is better (although as always DYOR).

The bullish view on delay is that MCL had their year end figures reasonably to hand because they published a detailed trading update on 11 March and said that the finals would be published on 30 April.

The long delay - as Zipmanpeter notes - is down to calculating possible impairments from COVID.

MCL applies IFRS 9 and therefore recognises impairments in its receivables (i.e. it "bakes in" impairments when the loan is made) and it used an impairment rate of 19% in FY 2019. Now, it would have been straightforward for MCL to increase the 19% figure to account for COVID (as, for example, S&u (LON:SUS) and Provident Financial (LON:PFG) have done) and get their accounts out.

Perhaps they can't reach an agreement with their auditors and have been haggling since April.

But the bullish thesis is that since the average loan duration is just over 6 months MCL have been using the extension for filing accounts to analyse the out-turn on the loans. This analysis of what actually happened with the loans would then (on this thesis) inform the judgement about the correct impairment figure for receivables due as at 28 February. For example, IMO it wouldn't give a true and fair picture to use an impairment figure of 35% if the actual outturn from the loan book as at 28 February was 25%.

If this hypothesis is right, it seems bullish because MCL would presumably not delay the accounts if it expected a worse outcome in terms of impairments than making an estimate as S&u (LON:SUS) and Provident Financial (LON:PFG) have done.

This is a very testable idea as the results are due by 28 November.

MichaelFBS

"Many thanks for all the thumbs ups for yesterday's report. People seem to like it when I do a personal portfolio review, maybe I should do those more often?"

Absolutely!!

Focusrite (LON:TUNE) is one of those companies that haunts me. I bought back in May 2017 at 265p but I am not sure why and sold in October of the same year at 251p through boredom. What a mistake that was.

I would like to re-buy and must stop anchoring to the price I paid and see if it is still a great company at a reasonable price?

Regards

Michael

Effortless Cool

I currently hold a sizeable steak

I do enjoy a sizeable steak.

I would agree on tobacco and it is one of my few investing red lines (I probably wouldn't touch defence either but then Avon Rubber (LON:AVON) is a top 10 holding for me so maybe...) and if it was the sort of investment I was after I might well buy Diageo (LON:DGE) or £LVMH, however I suspect that down the road we will find that alcohol is not quite as benign as we wish it was. I do drink by the way but do wish I had the will power not to!!

-1

Gear4music Holdings (LON:G4M) useful MrContrarian. Thx. Interesting to see that they talk about a business able to grow revenues 20% p/a which makes my 10% look nicely conservative. Gives me more confidence in my own calculations. I had thought I'd read somewhere that 2021 forecasts hadn't been revised for a long time, so nice to see that confirmed as it appears to point to some very material upgrades on 2021 & 2022 consensus expectations at some point. I guess this is the difficulty for investors at the moment in that analysts and even management are reluctant (probably understandably) to venture much past 6 months in terms of revenue predictions. Whilst that is obviously a headache it could pay off nicely for the likes of those who can do their our own maths and spot opportunities that may be mis-priced.

Paul Scott

Good reply, davidjhill.

Volex (LON:VLX) is delivering a very strong, and rapid turnaround. Therefore it is not a good candidate for using the comparison tool here, as that uses the historic data.

Luceco (LON:LUCE) is also performing very well this year. If you have a look at the archive here, I've covered both companies in a lot of detail this year, which will give you a bang up-to-date analysis of both.

I think both shares are excellent, but for me, there's probably more upside on VLX.

In the last year, LUCE has done better than VLX, at +136%, but Volex shareholders probably won't be complaining about being +119% in the last 12 months! Both smashing companies, both performing well.

abtan

Gear4music Holdings (LON:G4M)

I'm interested in hearing thoughts on the decline in email subscribers since last year (from 717,000 to 708,00,0 - i.e. a decline of 9,000 emails).

It seems such a small, irrelevant thing to focus on, but it's stopping me from pressing the buy button.

The company states that the decrease is due to GDPR and logging in functionality, but the sceptic inside me doesn't buy this when Active Customers has increased by a whopping +23% (181,000 customers.)

The only thing I can realistically think of is that Active Customers (defined as those that have made a purchase in the last 12 months) only went up because old customers who hadn't made a purchase for at least 12 months came back to the platform and the company already had their email addresses.

I'm not even sure if this is an issue when the company is growing so rapidly, but it would have been nice to have clarity on the proportion of completely new customers.

That aside , I really like the cash flow and that (most of) the numbers are pointing in the right direction.

Bystander for now.

greensiax

Thanks Mark :)

I have a database that I import data from various sources into, and use to generate the heatmaps.

Cheers,

mark1308

Wed 1:57am

NO ! Paul has said why - MANY TIMES !

-2

Wed 2:03am

Sounds like the whole Woke / Left agenda to me !

-4

timarr

Wed 7:05am

I think there are opportunities re ESG, not least because ESG has become a mainstream factor for fund managers whose awareness, understanding and even commitment will be understandably variable.

ESG at the moment is a moveable feast, which definitely creates some opportunities, but the IFRS Foundation have launched a consultation into standardising ESG reporting which would essentially integrate it into existing accounting standards:

https://www.ifrs.org/news-and-...

The aim would be to ensure that companies are actually minimising their ESG impact rather than simply greenwashing.

There's a clear direction of travel here, although it'll take years to get to the point of standardisation. But I'd be wary of dismissing this as simple wokery and virtue signalling, not least because those terms are increasingly used by people to dismiss ideas they don't like rather than engaging in any kind of constructive analysis.

I'd also be wary of dismissing this simply as a fund manager fad. Fund managers do odd things from time to time but they also have a keen eye on what their investors want. So if they're pulling out of investing in certain companies and sectors it's probably because they think that will make them more attractive to their investors. To the extent that's "virtue signalling" it potentially indicates a change in attitude from investors rather than fund managers.

A study earlier this year indicated that millenials are far more concerned about ESG issues than people of my late Boomer generation. That group is in process of receiving the largest inter-generational wealth transfer in history, so we should be careful about dismissing this as a fad:

https://www.triplepundit.com/s...

Bluesky Ventura

Wed 8:11am

What's wrong with Boris acting woke and left handers?

I'm a fan of both.

M10GUV

Wed 4:53pm

Hi. Maybe I'm being uncharacteristically thick but I'm trying to find the Saga article in the above report. It's highlighted in the alert email.

Roger Baron

Wed 6:04pm

I don't think you are being thick M10GUV but I can't see the comment about £SAGA either. What's more, I'm sure there was something about it here when I looked yesterday!

herbie47

Wed 6:10pm

There is a comment under the Easyjet (LON:EZJ) for Saga (LON:SAGA).

Small Cap Value Report (Tue 17 Nov 2020) - EZJ, SAGA, BOO, IGP, G4M, TUNE, EYE, SCPA, CRW

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Small Cap Value Report (Tue 17 Nov 2020) - EZJ, SAGA, BOO, IGP, G4M, TUNE, EYE, SCPA, CRW

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