Small Cap Value Report (Tue 21 April 2020) - Bankruptcies, SFR, JOUL, GOCO, FLO, LID

21st Apr '20 by Graham Neary

57 comments 9137 reads

Morning! Graham here.

Bankruptcies

I'm sure you will all appreciate the cheery headline.

As a follow-up to yesterday's Covid-19 update, I thought I would spend a few minutes reflecting on the poor financial health of the travel & leisure industry, which is currently a fast-moving situation.

Airlines

Last night, it emerged that Virgin Australia entered into a voluntary administration (Sky, BBC), after the Australian government turned down its request for a loan.

It had already been struggling under a large pile of long-term debt (A$5 billion), and figured that this was the best way of restructuring.

Shortly before that news broke, Sir Richard Branson (who owns 10% of the company) published an open letter to employees. He wrote:

We are hopeful that Virgin Australia can emerge stronger than ever, as a more sustainable, financially viable airline.

With regards to Virgin Atlantic, he said:

...we will do everything we can to keep the airline going - but we will need government support to achieve that in the face of the severe uncertainty surrounding travel today and not knowing how long the planes will be grounded for. This would be in the form of a commercial loan – it wouldn’t be free money and the airline would pay it back (as easyJet will do for the £600m loan the government recently gave them).

The entire industry is facing calamity.

I've been doing some work on Easyjet (LON:EZJ) recently - that's a stock that I would consider selling short, to hedge against the risk of continued lockdown and/or to speculate on its cash burn accelerating via operating losses and too many Airbus orders.

The dispute at easyJet with its major shareholder adds to the controversy and the drama.

The general public shouldn't be overly concerned by any of this - as others have noted, it doesn't matter to them who owns the planes or the brand they are flying with.

For equity holders, it's a different story. There is a real risk of airlines changing hands, from their current owners to their lenders or to new investors.

Something I didn't mention about Berkshire Hathaway (BRK.B)* in yesterday's report: one of the few noteworthy trades it made recently was the sale of $400 million in airline stocks.

It still owns big stakes in the airlines, so I don't…

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john652

21st Apr '20

Hi

Re Oil prices, I'm more with you that when you start to see really strange things with any asset, in a highly volatile market entering into recession, it indicates structural problems & the implications come later. This very much happened in 2008/9 and I think we are at the start of these behaviours & the outcomes are completely unpredictable, we'll only see them as things blowup. Then, quite likely we get the next phase of the down leg, unless that happens sooner given the potential for economic destrution.

bluecurve

The -$37 price related to WTI Crude which apparently is a physical delivery futures contract. I also understand that WTI cannot be exported from the US so that perhaps contributed to the sharp fall as the game of musical chairs came to an end.

Apparently you also have to take physical delivery in Cushing, Oklahoma. One person on Twitter commented “Not even people who live in Oklahoma willingly go to Cushing.”

barnetpeter

I received a home insurance renewal quote from Admiral on Friday. About the same price as last year. I pressed the "cancellation button" as I felt I could shop around and I have the time to do so. Yesterday they wrote with a new offer; £80 discount on the Friday offer. That's fair.

Berksbee

I use this app to report and can endorse how easy it is to use. I am part of the Legion of people who think they've probably had Covid but with mild symptoms (in my case a top flight cough and mild loss of taste/smell). Their stats point to a 2-3% infection rate that varies by Region (though I am not sure how this is calculated). This, plus the official stats and a first hand update from a Registrar friend saying that in his Trust Medical Staff are now being "instructed to take their holidays" says to me that we may start easing up restrictions quicker than hoped.

Clearly there is a danger of a second wave and there is a danger of complacency - but this also needs to be balanced against the economic and associated impacts - which the ONS have started flagging.

My best guess at the moment is we are going to see a W type recovery - a rally when restrictions start to ease - followed by another dip when the impact in certain sectors is better understood - then a more gentle recovery.

Good luck to all - I have appreciated many of your wise inputs to date.

Talygarn Tom

I saw an interesting theory on Twitter about the sale of airline holdings by Berkshire Hathaway and that was that Warren Buffet had previously openly admitted in a TV interview (which I later watched) that he had misjudged the level of his holdings which had taken him above the reporting threshold. Those disposals will now move him below the threshold. I'm not fully conversant with the reporting thresholds in the US from memory but, if correct, that would allow him to adjust his positions out of the public gaze and negate the "Warren Buffett effect" on his additions/disposals.

jonesj

There are also barriers to competition in this sector.

For effective competition, we need a regime where customers can move from one broker to another, with no exit fees and a reasonable maximum time limit when they cannot access the portfolio (e.g. 2 hours).

The FCA seem to spend no end of time on bank accounts, where it is very easy to move provider and they do very little to fix the problems with brokers, where moving is difficult. This smells of regulatory capture.

Also, it would be much better if we had a Singapore style system, where people hold their shares directly on an electronic repository & can buy with one broker and sell with another. That improves competition and removes the risks with brokers holding our shares in a nominee account.

rmillaree

Michelmersh Brick Holdings (LON:MBH)

I am guessing (but may be completely wrong) it may be less of an evil to produce bricks that have no customer now and incur the maginal extra cost than let the facility sit idle. Presumably by building up a buffer of bricks that may come is useful if there is ever demand beyond capacity or it may give them more scope ref future shutdowns for refurbs etc. I am gessing pretty much any brick sold will be sold at profit - perhaps even making a more bog standard brick than they would nromally do if they can sell these quickly for a lower margin.

Graham Neary

Sure, taking a look at Lidco (LON:LID) shortly. G

Interesting point Tom.

Laughton

"in his Trust Medical Staff are now being "instructed to take their holidays" "

Given the current situation presumably that's the same as "stay at home".

LumpedOn

Very emotive and can see your view, but the one thing that encourages me to believe differently is that the data on your chart shows the awful situation 11 days ago - a massive amount of time when in a crisis situation.

I posted yesterday my discovery of the NHS daily statistics, and of using that to form my own view. And my view is that the red line will not continue that trajectory when it is published next week. I don't know it, and it feels almost perverse to do so, but I would back my view based on looking in depth at NHS England daily data, rather then taking the press reporting view.

peterthegreat

Yes you are probably right Laughton. I would also interpret the NHS Trust asking their staff to take a holiday as indicating that, like the WHO, the Trust believes that the worst is still to come in this pandemic so they want to maximise the number of staff they available in the medium term future. In terms of absolute numbers, I would anticipate that the numbers of cases and deaths in the UK are near the peak in terms of rates per day. However, I am almost certain that we are at a relatively early stage of this pandemic which will rumble on with reduced but unacceptably high numbers of deaths for many months to come. This conclusion is based on the biology of the virus, notably the remarkably high infectivity, and the sad fact that we are nowhere near achieving herd immunity.

abtan

Thanks BarnetPeter

A few follow-ups if I may:

1 - Do you know how much it would cost to switch off production? I understand it might be difficult to stop and start-up production, but would companies really never choose this option?

2 - I wasn't implying stopping payments to workers. Simply pay the workers and then pocket the hedging difference as profit (see 3. below).

3 - From a previous announcement it looks like Rockrose Energy (LON:RRE) are hedged until 2022 (for gas at least), at what appear quite high prices. Given the environment I (perhaps naively) assumed the company might be able to shut down production, hedge out their positions for guaranteed profits, then restart once prices return to normal.

I have never really looked into oil and gas, so apologies if the above come across as very basic.

Cheers

"€0.53 per therm (49p/therm) for calendar 2020. Looking further ahead, an additional 54 million therms has been hedged in each of 2021 and 2022 at €0.41 and €0.45 per therm (38p and 42p) respectively."

peter, my comment was really a tongue in cheek swipe at the Trust's choice of language - they made it sound as though they were now asking their staff to take a well earned couple of weeks off by the beach somewhere nice and sunny.

I'm sure many NHS staff could do with break but somehow describing it as a "holiday" seemed a bit crass (to me at least).

TamzinPiworld

Sumo (LON:SUMO) FY19 analysts' presentation from this morning. It has a very positive tone.

Separately, do join the Thursday piworld webinar, this Thursday 23rd April at 1pm, where Leon Boros, ISA millionare, will be discussing current markets, and what he's buying or shorting. Register here.

Ned Kelly

Good results out from £RGBP today and it seems that business is pretty much unaffected by Covid19 other than a delay in a couple of Convex deals completing, Any comments Graham appreciated. I hold.

Zoiberg

Lidco (LON:LID) . I can't get excited about Lidco. The sales of monitors for FY20 raised £1.8m Assuming the surge in sales lasts two quarters a back of the envelope calculation gives them a np of £900k for FY21 which is relatively good after several years of losses but it does look like a one off to me. Plus of course, the sp is already well ahead.

Beginner

Goco (LON:GOCO) seems to me to be well worth hanging onto. It was spun out of Esure (LON:ESUR) , and like that company is effectively run by Sir Peter Wood. He founded both Esure (LON:ESUR) and Direct Line Insurance (LON:DLG) , and has made no secret of the fact he wants to sell the company up. He is now over 70 and there was a rejected bid a while back at 120. Should that, or anything near it, be offered again I am sure we will see a takeover. In the meantime there is an acceptable dividend.

Tonysaparito

Hello TamzinPiworld,

Proved impossible to register...may I suggest you post link here once webinar has completed, so subscribers on STOCKOPEDIA can see your excellent link.

Phil Mc

22nd Apr '20

I have just managed to register so it appears to have been fixed.

Small Cap Value Report (Tue 21 April 2020) - Bankruptcies, SFR, JOUL, GOCO, FLO, LID

Bankruptcies

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Graham Neary

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