Small Cap Value Report (Tue 23 June 2020) - SHOE, G4M, SCPA, RMV/OTMP

22nd Jun '20 by Paul Scott

97 comments 11905 reads

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

Estimated timings - let's try for 1pm. I've started before 7am, and feel unusually perky this morning, so that should be do-able!
Edit at 12:03 - as usual, everything is taking longer than expected. How can 5 hours go by in the blink of an eye? It's looking more like 4pm finish time, as I need to do more work on G4M & Scapa.

Update at 15:57 - today's report is now finished.

Covid treatment/vaccine

Given that I have no medical knowledge, I've tended not to think about the likelihood of a vaccine appearing any time soon. Experts in the field told me a few months ago that a vaccine would probably be late 2021 (at best), and maybe not at all. This is similar to what the UK Govt said in its document about the lockdown a few months ago.

However, much more promising signs seem to be appearing. An article in the Telegraph today really gave me a jolt (in a positive way). This suggests that, admittedly only in a best case scenario, the Oxford/AstraZeneca vaccine could be ready by this October. In a similar vein, Jim Cramer keeps saying on CNBC that the tone he's hearing direct from top US pharma company CEOs has become much more positive of late.

If effective treatments to suppress covid are only months away, then this changes everything. It means that humanity could get back to something like normal maybe by early 2021? That means travel, holidays, hospitality, retail, and every other sector can ramp back up to normal. Therefore I'm wondering if I should be pushing the boat out a bit more with some shares that could rise strongly if that scenario plays out. The key factor is whether companies have enough liquidity to survive into 2021? If they do, then the future for such shares could be much more positive than currently expected. Plus they could see pent-up demand, and less competition.

I appreciate it must be a bit frustrating for readers, because I change my mind on this topic more often than I change my socks!

We've got to balance up optimism over treatments/vaccines, with the negative of current resurgence in cases in some states in the USA, in Germany, and other places. It's certainly not under control yet, but if that's only months away, then…

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Laughton

23rd Jun '20

I was under the impression that the government could change the law if they saw fit?

Indeed - but they haven't chosen to make this a law and it's been quite a while.

The Hierarchy

Also liked what I saw today Paul and enjoyed a good chat with management for a write up.

timarr

Indeed - but they haven't chosen to make this a law and it's been quite a while.I

I haven't noticed many people out boozing recently :-)

The point is they can insist on what they want. If businesses choose to ignore the "advice" then it'll depend on whether they're serious or not. If I were a big chain I'd probably take it seriously, law or no law. Independents may choose to take the risk.

JohnEustace

I just read the rather lengthy summary of the new rules on the BBC website and I wouldn’t fancy my chances of scoring much above 60% if I had to sit a test on them. I doubt any of our political leaders would do better.

I think we are all using our own common sense at this point and the politicians are rushing to catch up and maintain the fiction that they are in control.

PLS1nve5t

Noticed Renalytix also said they were dual listing on NASDAQ about a month ago. Factor in a couple of Covid RNS's and they are up 45% in that time.

Phillip Arghebant

Paul, if it is of any help, in respect of Scapa Group Berenberg is forecasting earnings of 11.6p and Numis is forecasting earnings of 12p both for the year ending March 2022. They are both brokers to the company.

Regards

Phillip

Man of Steel

I find it difficult to believe that Onthemarket (LON:OTMP) will manage to supplant £RMV. As someone who is currently selling their house and looking to buy a new house I find RMV's website use-ability and functionality to be far superior to OTMP. RMV also has more properties listed on it. I cannot find any reason to visit OTMP - everything and more is offered by RMV. From a consumer perspective RMV wins hands down. I can see why estate agents resent them, but that's something different.

Unlike Paul, I love RMVs business model. There have essentially followed Peter Theil's mantra of creating a legal monopoly. OTMP is the plucky challenger trying to get in on the action late in the day. Unless they can create some innovative functionality or get a large number of estate agents to leave RMV enmasse then it's difficult to see them succeeding. The 100:1 market cap differential seems to me to imply overly optimistic odds of them succeeding - I would give them longer odds. In this digital age we have a large number of companies that have succeeded in maintaining similar monopolies (Amazon, Google, eBay etc.), so unless RMV bugger this up I can't see them losing their dominant market position any time soon.

My issue with RMV is a different one; growth and valuation. I can't see where the growth will come from as they already dominate the UK market and charge a "full" price for the services they offer. If they try to increase prices they run the risk of opening the door to OTMP. I don't follow the company in detail, so perhaps they have some grand ideas for developing other revenue streams. The valuation prices in significant growth expectations (no other way to justify a 30x PE ratio, even for a virtual monopoly) which I can't comprehend.

I don't hold either share, but find myself tempted to dip into RMV when the share falls during market down-turns or on bad short-term trading news, which is all externally driven and has nothing to do with the viability of the underlying business model.

Paul Scott

Very helpful, thanks Phillip! :-)

To my mind, that probably justifies a share price for Scapa (LON:SCPA) of about 150-200p, with a bit of patience.

ken mitchell

Thanks Paul for yet another superb effort today. I don’t know how you find the stamina to do it day after day!

I was especially interested in your take on OTMP. I reckoned it was worth a small punt after your previous update and going well so far. Seems that a fund raising is inevitable. Just hope that like Revolution Bars it includes an open offer for ordinary shareholders too. Hate it when they are (as so often happens) excluded in dilutive placings.

MattH

That’s my business (employing others), my career and the career of literally thousands in the country. But sure, maybe we should all go bust because you don’t like them and think it’s a trend.
By the way, the oldest preserved body ever found, over 5,000 years old, had tattoos. It’s an art form with a long long history.

Momoko Miyamoto

Scapa (LON:SCPA) - bought into this shortly after the placing but got cold feet and sold. CEO is well regarded but very highly paid for the size of company and in the past has rarely spent his own money on buying the shares. He participated in the recent placing but relative to his net worth probably a modest amount. I thought the healthcare dressings business was interesting but couldn’t see the competitive advantage with which to win market share. Considering that healthcare stocks have rallied strongly, the market is not keen on Scapa (LON:SCPA)

serg

It's not all bad news. There are reports as well of people saving more and repaying debt (credit cards, etc) more than before the pandemic. So there will be some spare cash for consumers to use when (if?) the pandemic emergency comes to an end and business resumes as usual.

I agree it's unlikely that OTMP will supplant RMV. Highly unlikely. But not 100:1 unlikely, which is what the respective market caps are saying.

Michael Tee

Interesting and thought provoking Paul.

2ShedSam

Timarr, given it was a choice and you feel the UK sat down and decided on 60k+ excess deaths. How many would you have sacrificed? I wish I could empathise with your eternal pessimism but even after the decision to sacrifice 60k+ lives, mortality rate within the UK for 2020 will remain comparable with Denmark and significantly lower than in Germany. Happy to continue taking my chances in he UK. It's not to say mistakes were not made, I just struggle to believe anyone made the choice to sacrifice lives.

Caper4

24th Jun '20

well I was astonished to see the queue outside a local pub in Richmond yesterday evening. People prepared to wait at least 30 minutes to take out a pint or two .

peterg

No one sat down and "decided on 60k excess deaths". The issue is that the govt has handled the outbreak badly, and continues to do so. If they had paid real attention to what was happeing elsewhere, from Jan onwards, we would have locked down earlier, had fewer deaths and almost certainly have been able to relax restrictions earlier, with less damage to the economy. We had the advantage of being behind several other places when this started, and it was pretty much thrown away.

The key to relaxing now is clear messaging, effective testing and tracing, and powers to local authorities to impose local restrictions where new outbreaks occur. None of those are being handled well.

I just struggle to believe anyone made the choice to sacrifice lives.

No? We have nearly ten times the number of excess deaths as in Germany. Don't you think that requires explanation? Boris likes to compare himself with Churchill. Well, Churchill didn't choose to sacrifice Australia's finest on the beaches of Gallipoli, but he did it anyway, because he was pigheaded and ignored the advice he was given. Sacrifices aren't about choices, they're about decisions.

Anyway, I'm not a pessimist - the most likely trajectory of Covid-19 is predictable. We'll see cases rise during the winter, fall back next year and death rates will fall because vulnerable groups will take preventitive measures, treatments will improve and, eventually, we'll get a vaccine. If we get a lot of flu in the winter we may be back into lockdown to protect the NHS but that would be unlucky.

Investing is about seeing the world for what it is, not what we'd like it to be.

timarr

25th Jun '20

No? We have nearly ten times the number of excess deaths as in Germany.

But a 20% lower mortality rate than in Germany.

Surely if Investing is your game, Which company are you investing in?

A company that outperforms by 20% with the occasional blip or the company that underperforms year on year by 20% but with no blip.

In respect of mortality rates, UK is the place to be even taking Covid-19 into account.

Maybe excess deaths could have been lower with different decisions, I'm just glad I didn't have to make those decisions because I am sure I would have got them wrong too.

The key to relaxing now is clear messaging, effective testing and tracing, and powers to local authorities to impose local restrictions where new outbreaks occur.

Bold words indeed Peterg!

Give me an example of clear messaging that the media won't misrepresent and that everyone will understand and observe? That the Scottish Government will use if suggested by a UK Government.

What Powers would you give to local authorities that the media and everyone impacted won't claim are an abuse when used. Powers that will stop hundreds of thousands of people heading to a beach in Bournemouth on a gloriously sunny day when the rest of the country can. What does a local lockdown entail?

What constitutes effective testing and tracing? What does it look like? If the UK released a Tracking App with a 15%, take up, would you agree that that was a success?

I look forward to your answers.

Small Cap Value Report (Tue 23 June 2020) - SHOE, G4M, SCPA, RMV/OTMP

Covid treatment/vaccine

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Paul Scott

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