Small Cap Value Report (Tue 23 April 2019) - ZIRP Absurdity, ANG, FRAN, KWS, TLY, FJET, SONG | Graham Neary

23rd Apr '19 by Graham Neary

35 comments 10396 reads

Good morning!

I'd like to thank you all for staying with us through the recent changes.

Let's see what's going on in the RNS:

Angling Direct (LON:ANG) - trading update. New store opened in Nottingham on Friday, Like-for-like sales growth very strong.
Franchise Brands (LON:FRAN) - AGM statement. "Overall, the group is trading well."
Keywords Studios (LON:KWS) - acquisition in Japan for JPY 120 million (£800k).
Totally (LON:TLY) - healthcare contract worth £13.5 million in Newcastle (not sure what the margins are).
Fastjet (LON:FJET) - small underlying loss in Q1. Might make a small underlying profit in FY 2019. Severe currency issues in Zimbabwe.
Hipgnosis Songs Fund (LON:SONG) - buys a major music catalogue including "Havana" (1.5 billion hits on YouTube). Price not given.

ZIRP Absurdity

I was thinking about putting an update out on the general state of the markets, and have been prodded into doing so by a comment in the thread below.

These two words sum up my thoughts: ZIRP Absurdity.

For those who aren't economics nerds, ZIRP stands for the "Zero Interest Rate Policy" favoured by so many central banks since the global financial crisis.

If the interest rate is close enough to zero that it makes it makes little difference, we can still refer to it as ZIRP. The Bank of England, for example, has inched up the Bank Rate only to 0.75%, and I would say that is close enough to zero that it makes little difference.

From the 1950s until the financial crisis, Bank Rate was in a range of 4% to 16%.

The USA recently escaped from ZIRP: the US interest rate is now within a 2.25% - 2.5% range.

With US government debt ballooning to $22 trillion, however (more than 100% of GDP), the prospect of much higher rates appears unlikely. Indeed, the Federal Reserve stopped increasing rates at the end of last year, and might even start cutting rates again over the next 12 months.

The Eurozone remains mired in ZIRP and only a few months ago finally halted its QE programme.

What it means

All of this easy monetary…

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MrContrarian

23rd Apr '19

My morning smallcap tweet: Angling higher

Totally (LON:TLY), Angling Direct (LON:ANG), Fastjet (LON:FJET)

Totally (TLY) wins 5 year £2m PA contract from the NHS.
Angling Direct (ANG) reports a startling 30% LFL increase in stores in February and March. ANG doesn't credit the weather. No new FY guidance.
fastjet (FJET) Messy FY & Q1 trading stmt due to restructuring: FY rev-cont up 166%, 45% in Zim and 575% in Mozambique ( only operated for two months in 2017). Op loss pre exceptional $17.3m ($11.2m loss). Q1 loss $0.2m ex $6.2m FX loss in Zim. Guides FY marginal underlying operating profit excluding Zim FX loss. No thanks.

ambrosia

Graham, I like your state of the market and economic analysis, and i'd love to hear your opinion on why government bond and share prices are both rising, usually its one or the other, not both together.

PS, look what I found, its thde big man himself

https://www.piworld.co.uk/2019...

carmensfella

Just to mention that Angling Direct will be exhibiting and presenting at the Mello2019 event on Friday 17th May

Http://melloevents.com/event/event-exhibitors/

They will be doing two presentations so one in the morning and one afternoon.

More info and tickets here...Http://melloevents.com/event/

If you want a 40% discount you can use this code in the box Stocko40

elviron

Hi Graham, I like the new format that Paul started last week, with an early doors quick summary of the action. I think that Pual was offering an off-the-cuff opinion on the company news as well, which was great. Might you do the same? Otherwise, it just ends up being a factual summary of what many of us have already read in the RNS.

Just looking for comments along the lines of: "looks promising at first scan" etc.

Camtab

Happy Easter Graham. I look forward to maybe meeting you at Mello this year. I see VLE is hitting its 1150 for a second time. I don't own but one thing I note is for an acquisitive business it carries low goodwill/intangibles. I am very negative about these particular entries into a Balance Sheet as personally I believe management have just paid too much on the whole for other peoples assets. As I look through bal sheets I think there is an inverse correlation between the size of these factors and management quality. Anyway just a thought for this morning should anyone be thinking the same or indeed opposite.

mammyoko

Like you, I am put off companies that have a negative NTAV. Paul has said the same thing but not always made this a strict rule. Although eventual write-offs of these amounts is always portrayed as a non-cash exceptional adjustment, I have noticed that the markets usually treat such write-offs as a negative and the share price suffers when they are announced. Goodwill write-offs are an admission, as you say, that the management over-paid for an acquisition. Goodwill in a balance sheet is a potential admission that a company over-paid for an acquisition and, in my experience as an FD, is usually an area where an auditor is least comfortable and most open to persuasion. I think the auditors probably console themselves with the expectation that any analyst worth his/her salt will automatically assume that anything taken to goodwill should be written off despite the company carrying it on its balance sheet.

Obviously, some goodwill does have an economic value but I believe that it is usually of limited duration and very rarely of a value equal to the carrying value on the balance sheet. I would think a return to the obligation to write off goodwill over a fixed period would sharpen a few minds and possibly lead to the avoidance of some value destruction. However, possibly I am being too optimistic about that. But it always astonishes me how little attention investors both private and institutional pay to the quality of the assets in the balance sheet. I suspect that for some of these they are fully aware of the risks of buying a company with a weak balance sheet but that they hold their noses when hitting the buy button if the market is feeling firm as it is now. My observation would be that many companies with weak balance sheets were punished in the late 2018 sell-off and I was frequently surprised to hear people ask why when it seemed to me clear that it was due to their weak balance sheet or high level of debt to ebitda.

jonesj

The Tesla web site also clearly states that ALL Tesla models are capable of upgrades to FULL self driving mode & strongly implies that is without supervision.
My understanding is full self driving requires redundancy in the safety critical systems, such that if there is an electronic failure in one ECU, a back up ECU takes over. The link below explains this.

https://www.extremetech.com/extreme/262510-new-report-self-driving-cars-ranks-tesla-dead-last

I'm not sure if ALL Tesla cars have this redundancy, but either they have it and Tesla would be incurring considerable additional cost per car or Tesla might be disingenuous with their claims. If the latter, then there must be another litigation risk.

Paul Scott

Morning Graham!

Excellent intro comments about risk from ZIRP, I agree with everything you say.

Regards, Paul.

Wimbledonsprinter

Graham I totally agree with you about the ZIRP absurdity. Outside Japan, Zero rates and QE were initially (and maybe justifiably) introduced to try to avoid a financial/ economic collapse at the end of 2008/2009. Then these extraordinary measures were justified to prevent just an “ordinary” recession and then even more recently to avoid a period of low growth. The two main causes of the 2008 crisis, in my opinion, were overly lax monetary policy since the dot.com bust (Greenspan put and Bernanke put), coupled with lax bank capital controls. The latter may have been fixed but the former has been added to in spades. There are so many self-evident financial bubbles now, I fear what will happen when the music finally stops.

Carcosa

Jonesj,

Re-read the website

Interesting how you omitted the word "New" and then went on to deride them in your final paragraph.

Your comments make little difference.

1 Tesla have had similar claims on their website for quite some time.
2 Even if the claims were applicable only to NEW cars, the principle would still be the same. Either they are incurring additional cost by having the redundancy on every new car, or the cars are not capable of software upgrades to full self driving.
Some of the information floating around suggests they may not have the redundancy.
Compare with a certain other car manufacturer, where one safety critical system clearly shows 3 parallel ECUs and 2 parallel actuators.

smythw

I've a feeling we'll be driving cars ourselves for a long while yet. Our roads are simply too complex for software to understand in enough detail. My road has two sets of white lines painted down the middle, because the contractors failed to scrub the old ones away properly. Which will it follow?

Can a self-driving car understand the instruction given by a police car not to overtake, or to pull over? There are probably thousands of such scenarios.

More worrying is how internet-connected self-driving cars can potentially be manipulated to cause damage by malicious actors. I can forsee a future when at a certain time of day, thousands of self driving cars crash at full pelt, because someone managed to upload some malicious firmware. Car firms have been notoriously lax about their online security thus far for internet enabled cars.

Unfortunately, people tend to focus on the positives of technology. Especially firms like Tesla who have to move fast and innovate to survive, or journo's who make a living about writing about such things. I'm sure driver automation will increase, but it will be more along the lines of driver aids to mitigate our mistakes, than full driver replacements.

Donuts R Ace

Angling Direct (LON:ANG)
Mcap £1millionish per store , lot of dosh for Rods , Reels n Ragworm.
Thanks for the article Graham

Graham Neary

Regarding the TSLA debate, here's a story from 2016:

https://electrek.co/2016/10/19/tesla-fully-autonomous-self-driving-car/

"We are excited to announce that, as of today, all Tesla vehicles produced in our factory – including Model 3 – will have the hardware needed for full self-driving capability at a safety level substantially greater than that of a human driver."

It is a recycled promise.

If you wish to live in the past then fine. But here's an article from a reputable source which is recent and also discusses the redundancy issue and why the claim is for "New" cars: https://www.theverge.com/2019/4/22/18511594/tesla-new-self-driving-chip-is-here-and-this-is-your-best-look-yet

Small Cap Value Report (Tue 23 April 2019) - ZIRP Absurdity, ANG, FRAN, KWS, TLY, FJET, SONG

ZIRP Absurdity

What it means

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Graham Neary

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