Small Cap Value Report (Tue 24 May 2022) - RTN, RWI, MEAL, AVON, LORD, EPWN

24th May '22 by Paul Scott

37 comments 8152 reads

Good morning, Paul & Jack here today.

Agenda -

Paul's Section:

Restaurant (LON:RTN) - a surprisingly upbeat trading update, with no slowdown in demand evident. In line with expectations. Concessions (airport) business is recovering well. Other divisions also trading well, and coping with higher costs. Encouraging, but will demand remain as robust in future?

Parsley Box (LON:MEAL) - talk about rewards for failure! New share options give failed Directors 9% of the upside from any recovery, after they've destroyed 90% of the share price from a float only a year ago. Ridiculous, but sadly, this is one of many examples of executive greed, at the expense of private investors.

Lords Trading (LON:LORD) - my first review of this building products distributor, doing multiple acquisitions, which listed on AIM last year. I think it looks quite good!

Epwin (LON:EPWN) - today's trading update seems reassuring. Looks cheap, but that depends on your macro view.

Jack's section:

Renewi (LON:RWI) - FY23 expectations upgraded thanks to a helpful recyclate pricing environment. Renewi is managing cost inflation well and its business is exposed to some positive trends, so there are signs of promise. But regulation has been an issue before, contingent liabilities remain, and the financial health is not the strongest. Assuming trends continue though, the company could be one to look at.

Avon Protection (LON:AVON) - the CEO departs, which is important for restoring credibility here. Events in Ukraine may also have materially improved the medium term demand outlook. But the group is cautious on the second half and has embarked on an £18.5m buyback, while maintaining its dividend despite net debt shooting up. That means leverage of 2.6x is getting close to the 3.0x debt covenant. In light of recent performance, I view this as too risky.

Explanatory notes -

A quick reminder that we don’t recommend any stocks. We aim to review trading updates & results of the day and offer our opinions on them as possible candidates for further research if they interest you. Our opinions will sometimes turn out to be right, and sometimes wrong, because it's anybody's guess what direction market sentiment will take & nobody can predict the future with certainty. We are analysing the company fundamentals, not trying to predict market sentiment.

We stick to companies that have issued…

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Aargh Aitch

24th May '22

Parsley Box Parsley Box (LON:MEAL) I too take a dim view of director share options but I am wondering, when a business is foundering and issues options maybe we should see it as a not-very-descrete capital raising exercise; tapping up their leadership team for cash. Was their recent funds raising operation undersubscribed by any chance?

krtpforever

Vertu Motors (LON:VTU) Latest Research by Investors Champion suggests it is Qualiying for BPR so IHT exempt

Monty Carlo

I too am scratching my head at the mixed messages coming out of £AVON. I keep looking at this one but have yet to overcome my many doubts.

Order book down (admittedly from an elevated prior year number so not as bad as it looks), but then later the talk about "elevated demand".

One thing to add to Paul's good write up above is that they have now paused the share buy-back:

Having executed the first half of the share buy-back, announced in January, the Board have decided to put the second half on hold to enable further organic investment to meet elevated demand levels and to ensure leverage stability

The less charitable may interpret "ensure leverage stability" as "we bought back our shares too early, and now we are getting too close to our covenants"?

The losses on the armour business (which will continue through H2) are more than eating up the profits from the much bigger continuing respiratory/helmet business which is probably why they remain subdued about the near term, which also highlights the margins in the ongoing business are quite slim. Which is perhaps what you get if you are supplying one dominant customer?

A new CEO will probably resort to the kitchen sink to try and set a low base from which to proceed. On the other hand once the discontinued armour losses roll off it could be a very sharp bounce back in earnings.

It's just a shame they split off the dairy business as we can't make jokes about spilt milk.

BritishExpat70

If Paul or Jack get time, I would value a viewpoint on Lords Trading (LON:LORD) results and progress announced today. I am 15% down on my buy price from earlier this year (that is not bad compared to some stocks I hold) but I like the potential for this 'buy and build' consolidator in a fragmented sector. Only a 4% bounce today despite strong results, including announcement of maiden dividend. All views appreciated.

Paul Scott

Hi BritishExpat70,

Yes, I've been looking at Lords Trading (LON:LORD) this morning, the section is already up!

IMC webinar is at 1pm today, imminently, so I'll check that out too.

It looks quite good, and has gone on my watch list.

Regards, Paul.

Hi sharw,

Thanks for flagging. IIRC, I quite liked Driver when last looking at it, as a credible, cheap turnaround. So I'll have another look.

Discodave4

Hello Richard, no expert but I believe the significant differences with regards to their eps numbers is due to there being circa 14m and 9m more shares (post IPO) for basic and diluted share weightings respectively. Thus reducing the actual reported earnings per share/s.

Thanks Paul. Appreciated.

sevenccc

Zipman - Forterra (LON:FORT) price increases at this regularity and size might then be a challenge for the house builders to absorb don't you think?

colin1862

thanks for replies on £VTU. Query is really for my Dad who is 99 this year. His GP told him he was only dying slowly so he's optimistic he'll make the 2 year threshold so I suggested VTU but was worried if he makes the 2 years and then finds out they don't qualify which really would be a killer. PS He refuses to pay the £5 to check on Investors Champion

danjamesbaker

Positive update from Frontier IP (LON:FIPP) as they announce that one of their portfolio companies, Cambridge Raman Imaging, has raised £1.1m in a new funding round at 4x the valuation of the last funding round in July 2020. I estimate that adds on around 2p to the NAV to bring it to 70p using the last price for listed holding Exscientia and means the company sits at a 5% discount to NAV despite numerous positive updates recently. Also positive to see Exscientia reversing some of the recent losses and is up 15% in the last week as it has been caught up in the global biotech selloff.

Teast17

i remember hearing Phil Oakley discussing Forterra (LON:FORT) a few years back - i believe bricks represent low-mid single digit % of the overall build cost so price increases don't impact the housebuilders as much as you might expect

Gostevie

Re Parsley Box (LON:MEAL) , I think these director incentives are disgraceful. Since the IPO the shares have fallen by about 90%, so what are they being rewarded for? I hope a certain potty-mouthed financial journalist might have something to say about this.

RichardK

Thanks, Dave. Re Calnex Solutions (LON:CLX) I don't think I would have picked that up. There remains a big gap between statutory pre-tax (+64%) and adjusted pre-tax (+18%) which I will try to unravel this evening.

Richard

Flame007

Is Calnex Solutions (LON:CLX) not being covered by SCVR anymore?

Zipmanpeter

"price increases at this regularity (16% Jan 22, 12% April '22) might then be a challenge for the house builders to absorb don't you think"

The brick builders say bricks are only 2% of the total cost of building a house and house builder margins are huge since they are selling land they bought several years ago. As long as all the highly concentrated brick builders price up, then yes, I think they can!

25th May '22

Hi Flame007 - we normally cover an average of 5 companies' trading updates/results each day. So if there are more companies reporting, we can't cover everything. Yesterday there were 10 companies reporting, so we had to pick the ones that looked the most interesting, and moved share prices the most.

Calnex dropped 4% on publication of final results. I'm just looking at the highlights now, and the figures look good - v good gross and net profit margins.Net cash. EPS Fell though, even though profit rose - a much higher tax charge, and exceptionals last year but not this year, seem to be the culprit.

Overall, I quite like the look of Calnex. By all means post your thoughts on it here, and sorry we didn't get round to having a proper look at it.

FYI, here's (below) yesterday's list of companies that Jack & I decided to cover, and the ones we didn't get round to. As I say, we can't cover everything, and would need a team of maybe 4-5 people to cover everything!

Berksbee

Hi Jack, Real useful write up on LON:AVON. I too wonder about the share buy back given debt levels. Maybe it's a sign of confidence - but then again they were equally confident about their investment in the Body Armour Business.

Long term I am a big fan. Their main product is seeing a sustainable surge in demand , which may take sometime to turn cash but will come good provided they don't screw it up.

If I was a candidate for CEO I'd think its a good time to take over. I don't even think it needs someone that special.

A_Private_Investor

I had a similar experience recently and left the staff a 20% tip as a result. In my case, as well as the kids, it was my wife who is gluten & dairy free.

May I correct the above....it was Jack's good write-up, not Paul. Apologies

Small Cap Value Report (Tue 24 May 2022) - RTN, RWI, MEAL, AVON, LORD, EPWN

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Paul Scott

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