Small Cap Value Report (Tue 20 Aug 2019) - AVN, MYSL, TRCS, TRB, KCT, PSN

20th Aug by Paul Scott

32 comments 7009 reads

Good morning, it's Paul here.

Estimated completion time - today's report has to be finished by lunchtime, as I'm off into London for a meeting in the afternoon.

EDIT at 12:20: today's report is now finished.

Market hours

The Telegraph reports that consultations have recently started, to consider shortening equity market hours in London. This is designed to promote diversity, and more flexible working practices, so that e.g. working parents can have more childcare friendly working hours.

Revised market hours of 9 am to 3:30 pm (instead of 8 am to 4:30 pm currently) is one proposal.

I wonder if investors are going to be consulted on what we want? Personally I would love to have a later 9 am start to market hours, providing the RNS were still to start at 7 am, thus doubling the amount of time we have to digest company announcements before deciding whether or not we want to place any buy or sell orders.

An earlier finish at 3:30 pm (or even 3 pm) would also open up the opportunity for some companies to release results & trading updates after hours, as they do in America. Thus giving everyone plenty of time overnight, to pore over the detail of results, if they wish.

The counter-argument, for keeping existing hours, is so that London is open at the same time as Far Eastern markets in the morning, and USA in the afternoon.

If anyone spots a consultation aimed at private investors, let me know, and I'll publish the link here, so everyone can have their say. The existing trading day seems far too long, with long periods of inactivity from late morning, through to mid-afternoon in many small caps. Shortening the day seems very sensible to me, from a small caps perspective.

Avanti Communications (LON:AVN)

Delisting

This satellite operator was an obvious basket case, for years, due to massively excessive debt, and trading losses. Shareholders were diluted by over 90% when the bonds were converted into equity. Given that the bondholders own the bulk of the company's equity now, there's little free float, hence no point in maintaining its listing.

Therefore it has decided to delist, becoming a private company. Therefore investors who cannot hold shares in a private company, will need…

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davidjhill

20th Aug

Actually the UK market always used to open at 9am until the mid 90's. It changed to 8am to align to European opening hours rather than overlap with Asia, but a side benefit of sorts.

I see no reason to change market hours. The Fixed Income, FX and Deriv markets aren't going to change. People will still be at their desks at 7am.

Trident

Re: Tracsis (LON:TRCS) Have held this for a few years, after myself watching on the sidelines for quite a while. Its pretty illiquid so quit prone to sudden movements up and down, and dare I say, a bit of tree shaking price movements by market makers to share out some stock.

Its a an acquisitive outfit, which sensibly outlines its approach to acquisitions on its websites, and under its previous CEO was pretty cautious about what it took on. That made for a slow but generally careful acquisition of smaller units. A bit like the Judges Scientific (LON:JDG) of the transport world.

The CEO departed his role this year, and a new chap has taken over, but the ex CEO continues in a consultancy role on acquisitions. So quite an unusual arrangement. Reminds me of the Putin and Medvedev saga:-)

Originally some of the expectation in the high p/e attached to this company was the prospect of selling their rail management software to the US rail companies, but other than a sale a few years back, I think it is fair to say, this expectation has faded somewhat, and is on a very slow burner, due to regulatory/engineering adoption processes. It may surprise to the upside one day, but quite a lot of the progress of this company actually is I believe through slowly and carefully developing through acquisition and investment, a rounded transport offering for the modern world. From physical traffic management at events, through traffic analysis systems, rail monitoring software, and
managed refund systems for delays on railways.

It pays a fairly nominal dividend which is a nod to the fact that it is quite highly cash generative, and shows a bit of maturing of its early view of itself as a tech stock, which it still is, but is on a more cautious growth path so can't really disavow itself of paying some loyalty dividend to its members.

One for the Steady Eddies amongst us I would suggest. Its current P/e of 19x could make it prone to a price collapse if it under performs, but has generally earned a right to be trusted based on its cautious management.

laurie

Trading hours
This article blames MiFID II for liquidity issues outside of closing auctions, and makes the case for a shorter day. My personal inclination would be to change MiFID II rather than market hours.
https://www.msn.com/en-us/finance/news/last-orders-rise-of-closing-auctions-stirs-worries-in-european-stock-markets/ar-AAFZUWB

Here is a more academic article on the topic of periodic auctions: https://www.fca.org.uk/publications/research/periodic-auctions

Carcosa

Seems a bit archaic to me that there are restricted market hours. 24 hour markets work ok for Forex markets. Some companies have listings around the world, effectively making the shares available 24 hour/day yet most shareholders are excluded from trading shares when only having access to UK markets, for example.

For items such as Prelims/Interims/ Trading Updates e.g. price sensitive news, then shares can be routinely suspended for a couple of hours as the RNS's are issued. This would be advantageous for investors because rather than having to plow through several RNS's a day 2 hours ahead of the market opening., RNS's can be issued throughout the day - say 9-5pm - making it easier for investors to digest the news.

-1

Zipmanpeter

£NSF reported H1 results today. Reported statutory loss much increased to £22.8Mn.

Shareprice has roughly halved in the last 3 months following : a failed bid for £PFG, key stakeholder Woodford’s travails plus sector-wide declines following regulatory rumblings and a rising risk of a chaotic ‘No Deal’. Net, the mood music is very, very bad.

However, excluding (!!!) the slightly higher than expected £12.5Mn genuinely exceptional costs of the failed bid for PFG and a non-cash £12.5Mn goodwill write off Loans at Home arising from paying too much at acquisition, underlying operational results were, I felt, quite good.

Normalised revenue was up +12% and normalized operational profit +28% despite distractions. at £19.5m (2018: £15.2m); reported operating profit was £15.7m (2018: £7.0m). This was despite quite some internal investments.

Briefly by division:

• F2F Branch-based lending chain (Everyday Loans) – Rev +22%, loans up, % impairments down, modernised national network of 75 branches now well established

• Guarantor Lending (TrustTwo, George Banco) – Rev +40%, rising no.2 share to Amigo, impairments stable. Single platform now established in 1 new optimized location.

• Home Collection Credit (Loans@Home) – slightly shrinking customer base and shortening the duration of the loan book; now a profitable cash cow

Truly non-standard finance specialists like NSF should be counter-cyclical as govt benefits are ring-fenced in a downturn and more ‘prime’ customers need to go sub-prime - assuming specialist lenders can control impairments. Encouragingly, at the moment, despite rapid growth, NSF's impairments are going down whereas online specialists still lose money due to impairments and the big banks have fled.

Interim Dividend due in Sept 19 was put up by +17% and forecast dividend is >9%. Divi should grow fast behind strong organic growth and operational leverage as infrastructural investment needs slow down if impairments remain controlled.

Key issue and risk is the balance sheet. After the PFG-related exceptional costs and organic borrowing growth, this is now wafer thin. The RNS mentioned ‘advanced discussions regarding an additional, lower cost debt facility’ but details and timings were vague. I am sure they would have loved to announce something more solid if they could.

Until this is in place, the company looks a great takeover candidate - perhaps to break up the group. PFG would surely love to buy EDL and GLD divisions – sweet revenge for the failed takeover attempt! LAH could be good for anyone with thick skin and cash at the right price. Would £SUS buy it back, £MCL expand or £HAT further diversify? Or an acquirer could carryout the plan to set it up as independent business, either private or on AIM. At worst, it now rumbles on profitably in house.

To avoid being eaten, a dilutive placing to a strategic financial investor may be Management’s preferred choice to avoid being tossed out. IMHO some sort of major corporate action looks likely at current beaten up valuation. If not, then I think the shareprice will recover to at least pre-bid levels pretty fast and it should do well in medium term.

(Disc. I hold and would buy more if it were not already an outsize position. V high risk though)

doublelutz

Kin and Carta (LON:KCT) - I made a lot of money on a couple of occasions on the old St Ives so kept an eye on it when the Americans got involved and I hold again. My regret is that the chart was clearly signalling a sell for the past 10 days and for some reason I ignored my normal rules and continued to hold whereas I could have sold and now been buying in again lower. My reading of the reports to date indicates exciting possibilities on the transformation to a worldwide business with increasing activity in the US. It is one that could easily be worth double in a few years (or maybe not!) and I feel the current results are really an irrelevance compared to where they may be in the future.

herbie47

The problem with 8am trading is it is thin, spreads are wide and there are some wild price fluctuations. How much trade is actually done before 8.30am? Probably most institutions trade after 9am anyway. Some investors don't trade until after 9am. 9am will give everyone more time to study the RNS and trading will be more normal. I did say 3.30 is too early, so that can be kept the same.

sharesurfer

This was my last reply to a post yesterday about Aviva (among others) and 'value'.

"Hi Ken, please don't think that I am in any way criticising you and your methods. Its just a different opinion.

My point was that in normal times (as opposed to panic selling), the market forms the view that these are fair prices. If the price is low its normally because prospects are bad. It could be because its a cyclical and demand is forecast down. It could be downgraded forecasts. I don't know much about these shares but just a cursory glance tells me with Aviva, BT and Galliford forecasts are down. Legal and General forecasts are up so don't know why thats down but theres probably some reason.

If you are buying true quality (sustainable and high OM's, ROCE/ROE), with bright prospects then these are mostly not on sale. I have a list of these that I want to buy. If there is panic selling, I might get my chance. For example, Experian, Hargreaves Lansdown, Burberry, LSE, Rightmove, Fevertree, Craneware, GB Group are all great 'quality' companies but in this market they still all have low value scores.

Like I said, no criticism intended at all. I enjoyed your post. Wish you all the best."

And that was a reply to rmillaree and his post about Aviva and 'value'.

andyfwwrench

Full support for after hours announcements. Frankly the trading day could be an hour long, the addition time does nothing for anyone except HFTs. Less trading time might make for more thinking time, or is that too optimistic?

Edward John Canham

Pondered long and hard on what made a high quality company.

Decided it was any company where you had to pay over 30x earning for anemic growth.

Phil

John McArthur

Paul

Nice write up on Tracsis. Always welcome to answer questions anyone might have or bounce them to my successor Chris Barnes.

By the way, I totally agree it would be useful if all companies included what 'market expectations' are. What we found in the past is that a lot of NOMADs don't like including this phrase as it either refers to the house broker's own forecast (which is something they feel is purely the domain of their own research team to market) or you are in the land of 'management expectations' which can actually mean whatever management want it to.

Thankfully the good people at FinnCap (whom I rate very highly) are not pedants about this and have opened up their research for PIs to use which is good.

Best regards all
John

PS - The Putin/Medvedev analogy is amusing and made me laugh but obviously completely inappropriate. As a general rule of thumb I detest AIM companies where the CEO ends up moving to a role of significant influence i.e. Executive Chair or some other NED capacity and this was not something that we were ever going to do at Tracsis.

I continue to be involved with Tracsis in a reduced capacity (1-2 days per week) helping them out with future M&A given I continue to hold a number of relationships with companies which we have courted in the past. I have no executive authority at Tracsis whatsoever and neither attend board meetings or get involved with day-to-day operations. Cheers!

EdmondJ

9am to 3.30pm is a dreadful proposal especially for private investors in small caps. As and when any genuine serious price-sensitive news arose in 7am morning RNS, it would mean a tumult of pent-up dealing attempts at the start - which in relatively tight markets would accentuate price shifts and difficulty of the 'retail service provider' brokers to cope at all, i.e. higher chance of frustration because your trade order won't get dealt.

Rather typifies affluent professional classes nowadays, once a comfortable existence is established, to seek an easier life and not have to get up early! Also similar to the EU Remainer, metropolitan elite who want GMT abolished with a permanent shift to summertime in line with the EU (as the EU has now legislated for), on grounds e.g. that longer winter afternoons will enable parents to spend more time watching their children play football. Meanwhile those who have to get up early e.g. to work outdoors in the country, would be struggling in the dark.

It's also prejudicial against private investors who do have a genuine job starting 8.30am/9am, where under present arrangements you have time to concentrate on trading beforehand.

Thus a step back to privileged Edwardian times than anything the Thatcher share-owning democracy for working people, sought. Chiefly in the interests of a financial sector that wants more leisure time, and retired/professional private investors who can spend 9am to 3.30pm on their screens.

ken mitchell

No worries sharesurfer. Anyone is free to criticise anything posted that they disagree with.

I prefer to look at each Company rather than generalise. Some Companies are basket cases (e.g AVANTI ("obvious basket case for years," wrote Paul today) and to be avoided however low their share prices go.

Key thing is to search for what look quality investments. where the share looks oversold and with good chance of strong share price recovery in time.

E.G A Company that has gone through a rough patch but showing clear signs of better times ahead but share not yet pricing that improvement in. Or check out where an entire sector is out of favour and priced for disaster but again with that bad news priced in but any improvement not priced in.

Here's just one actual example:-

The Mining sector was in an extraordinary bear market that bottomed out at the end of 2015.. By then shares in the sector, including big FTSE100 shares, had often fallen 80% and more and the sector falls were far worse than in the big 2008 banking crisis crash.

You would say the market has decided these are fair prices. I would be wondering whether after such massive falls a lot, if not all the bad news was priced in and decent shares in the sector worth buying.

Fact is even big FTSE100 mining shares quickly multi bagged from those lows.

e.g Anglo American went up 10 times from a bombed out £2.20 and any who bought then now get a massive annual dividend.

e.g KAZ MINERALS - FTSE250 went from 80p to nearly £10.

e.g small company Anglo Asian Mining going up over 40 times from 3p to 140pish.

FTSE100 Glencore from 70p to well over £3. . And even sector bellwether RIO TINTO from £18 to nearly £50.

The shares I highlighted yesterday will NOT go up anywhere near as much. They are not as bombed out, and one reason why not are sometimes the now very big dividends that are likely to provide at least some support for their share prices. BUT the same point applies. Shares and markets can (and often do) always overshoot on both upside and downside.

I think that's the case now for some UK focus shares where sometimes a key reason they have fallen so far is pricing in no deal Brexit fears. It's very hard timing the bottom and some could well go even lower for a while, in which case the good quality ones (e.g profits forecast to rise and already big dividends likely to increase too) will be even better bargain buys.

Lord Gnome

Fair points by sharesurfer. For me, 80% of my holdings are in good dividend payers and I am primarily a yield investor. The fwd pe and fwd yield for Aviva were just too good to miss. It is a big, quality company although not big enough to avoid falling foul to a low ball bid with the £ on its backside. I've been here before with Aviva and I dare say it will recover sooner or later. I can sleep soundly with Aviva and smile as I collect the dividends. I also hold Legal and General which I picked up from the bargain basement after the Brexit vote. My rolling yield is now 9.2% based on my purchase price. Sometimes you just have to do the obvious and when the market puts shares on sale, fill your boots. Works for me.

Martin Verlaine

I have this one in my SIPP, on yield grounds only. I think the new management deserves a chance ( ‘ intends to simplify Aviva’ )and I think div safe for the next 12 months. I think the market taking very little in trust given accident prone nature of the previous CEO who was not the only one to be tripped up by the curse of FNZ. Talk of selling the Far East arm seems to make sense so a hold fir me.

Agree with you this is a blast from the past. Not looked at St ives for years so not followed it transformative strategy. Will spend some time looking. I agree chart was ugly before this announcement so perhaps the reversal no surprise. The market was well used to SI throwing in a curve ball so this has not changed. My initial thought is the increase in borrowings is an unwelcome development.......

SundayTrader

21st Aug

I have held a small amount of Aviva (LON:AV.) for a very long time (inherited it), and it is worth less now than it was then. As far as I can see, QE makes it very difficult to make money out of life insurance, so the old, "safe as houses" business model is broken. OTH, they seem to be make some progress on the commercial side, they should be a Brexit beneficiary in a small way, and I believe there is still plenty of scope for cost-cutting, so the dividend looks pretty safe, and there should be scope for small future increases. Only holding it as a "marker" for an area of the stock market I don't touch.

Well I see New York market is only 9:30 a.m. to 4 p.m. So if we had 9 - 4.30, it would still be longer than their market. Yes we used to work Saturday mornings but I would not want to go back to those days, what a waste of time.

RDHOWARTH

A couple of points - firstly, sherborne target return is 100%. So they see upside in Barclays (LON:BARC) to 400. Secondly they pay out the dividend. The rinky dink here is that only a fraction of their total exposure is in cash equities and the remainder in CFD. They do have a cap and collar too which limits their downside from 160. So its hard to say definitively how much of the divi you forego, but then you are picking up the discount. For long short players you can have v little economic risk and just play the discount. Sherbourne walking away would yield a positive return from here. Catalysts for banks seem absent but at some point the rate cuts will lead to a steeper yield curve and make banks more attractive!

Small Cap Value Report (Tue 20 Aug 2019) - AVN, MYSL, TRCS, TRB, KCT, PSN

Market hours

Avanti Communications (LON:AVN)

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Paul Scott

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