Small Cap Value Report (Tue 29 Nov 2022) - SFE, ALT, REC, SUP, GBG, VP.

29th Nov '22 by Graham Neary

56 comments 7674 reads

Good morning from Paul & Graham!

13.55. This report is now finished. Thank you for the comments and the feedback as always!

Agenda

Graham's Section:

Safestyle UK (LON:SFE) (£34m) - a profit warning from this double glazing company. October orders were too low, and November orders were too high! The November orders have helped to boost the order book to a very high low, but also have the effect of increasing costs without generating any revenues for the current year (FY 2022). Therefore, FY 2022 is now set to produce a loss. Estimates are slashed for the current year and despite the increased order book, both revenue and profit forecasts for next year have been cut, too. This company always seems to have problems and while it could make for an entertaining bet on the economy, I don’t see it as a stock that’s suitable for holding long-term.

Altitude (LON:ALT) (£23m) - interim results are in from this platform that provides services to suppliers and distributors of promotional products. We already had a trading update last week so there are few surprises in here, but it’s good to see confirmation that the company is trading close to breakeven and still has a net cash position, plus a small borrowing facility giving it some headroom. While the stock got overheated in 2019, the market might not be giving it enough credit now for its reasonable financial performance and the possibility of operational leverage in the years ahead.

Record (LON:REC) (£173m) - excellent interim results from this currency specialist. Performance fees are back, boosting the bottom line, and management fees are up too thanks to eighteen months of strong net inflows. The inflows aren’t showing up in AUME (“assets under management equivalent”) yet, due to negative market movements. But customers are clearly happy, as they continue to sign up for Record’s services. The company, and I, are excited to see what it can achieve with fund management and other currency-related products. To that end, a new fund has been launched in Luxembourg. The shares still don’t strike me as expensive even after recent strength.

Supreme (LON:SUP) (£120m) - I attempt to make sense of the interim results at this fast-moving consumer goods business. The lighting division has seen its performance collapse due to retailer destocking and the revenue performance is only saved by…

Unlock with Email

Unlock with Google

Already have an account?
Login here

BnB

29th Nov '22

Good to have some discussion on the name. I certainly agree on the ROCE disappointments but FCF growth has been strong for a decade. I suspect this challenging year is a victim of pandemic liquidity withdrawal and expect GB (LON:GBG) to resume growth on the back of its attractive markets. And I would not be surprised by another bid in due course, perhaps even from an Experian (LON:EXPN). Then again, who knows?

shipoffrogs

Looking at the VC funds and companies they name in their report - they're all in the crypto space, they had no need to go there.

Snazzytime

hi Graham

re Record (LON:REC) - I hold

Thanks for your summary. Whilst I share your positive thoughts, especially the progress in the higher margin asset management strategies, I do see some real risks here.

The new additional strategy of investing in venture capital is something of a surprise and I share your doubts as to whether they have the skill set to do this successfully. Funding is to come from unutilised spare cash which presumably spells the end of special dividends.

Also regarding the increased staff headcount, the high level of bonus payments at 33% of profits and the introduction of a new LTIP scheme (no details yet) all seem to point to staff rewards being of higher priority than shareholder returns. I know this is a sector wide issue but it does give some cause for thought.

At your last review in June I raised the issue of Executive rewards...............

The CEO, Leslie Hill received total remuneration of £2.395m (£724k fixed, £1.671m variable) whilst the CFO, Steve Cullen, received £258k (£153k fixed, £105k variable). So the CEO's total remuneration was a multiple of 9.3 times the CFO's. I find this quite staggering.

I wonder what the CFO thinks of this and what effect it might have on their working relationship?

In the company's defence the Remuneration Committee Chair states;

'The Group is in a three-year transitional phase where the current senior managers prepare to hand over to the next generation under our succession plans'

and

'To deliver the Group's three-year strategy, the Board believes that it is imperative that our current CEO, Leslie Hill, continues to drive this strategy. Our new Remuneration Policy for our CEO has therefore been designed to ensure that she is motivated and incentivised to deliver this three‑year
strategy'

Although Leslie Hill does appear to be doing a good job in this transitional phase the huge imbalance in total remuneration between CEO and CFO seems way out of kilter to me. I'd very much appreciate your views please.

Have you had an opportunity to consider this further?

regards

Snazzy

Bronstein

Diversification to reduce risk. What are they gonna do if vaping gets banned?

NeilS

And if you only buy a brand once a year you probably won’t even remember where you bought it from!

Fully agree on pricing. Being cheaper than the competition has it's merits but too cheap puts buyers off and given today's figures with revenues up but profits down and keeping in mind every FMCG company with any sort of brand strength is putting up prices, they really should wake-up here. I'd like to see higher prices and dividend restored. Currently I hold but having second thoughts now. I feel this company has great potential which they are not making the most of. Will see how I feel after today's presentation before deciding next steps.

Howard Adams

Hi Berksbee

REf Avon Protection (LON:AVON) share price fall today ...... I have just spotted this snippet from Sharecast ........

Avon Protection was under the cosh on Tuesday after a share placing.

According to traders, JPMorgan placed 1.8m shares for an undisclosed institutional seller at between 1,061p and 1,100p.

At 1110 GMT, the shares were down 12% at 1,036p.

Avon specialises in the engineering and manufacturing of respiratory protection equipment for military, law enforcement and fire personnel.

I hold sadly (but not too much).

Regards

Howard

Graham Neary

Snazzy, thanks for the input. I must admit that I've not studied the pay issue in detail at Record, so I appreciate you giving us some of the figures here.

If I had to defend the company, I would say that it does continue to earn very high profit margins for shareholders, even after increasing personnel costs. It is fundamentally a people business, and a financial business, and that is going to be reflected in salaries at the top.

Clearly, Neil Record thinks that Leslie Hall is "worth it"; she has been there for 30 years and could probably choose to retire now, if she was that way inclined. Mr. Record obviously wants her there and is happy for her to be handsomely rewarded. He owns more shares than anyone else and to be honest, I would be inclined to defer to his view on this.

Of course if the profit numbers went in reverse, I would hope and expect personnel costs to get trimmed. There is a risk that the fund management initiatives won't work out, and a very obvious risk that the VC deals will turn out to have been a waste of shareholders' funds. It would be good to see the detail on the LTIP.

Best regards

Graham

topvest

There is one distribution channel for all products so it does make sense to me to have multiple categories, albeit vaping is the vast majority of gross margin at the moment.

Berksbee

Thanks Howard. I also hold and am happy to. A lot of upside from here IMO but maybe not everyone agrees. That said there can be all sorts of reasons for an undisclosed institutional sell. Guess the SP will be subdued until the full amount is sold as it is more than 5% of the market cap!

Yes I agree I used the dip to add to the cost pound averaging stance I am taking with Avon Protection (LON:AVON) as I think some factors are pushing it in favourable direction are falling into place.

sharw

Graham - thanks for your write-up on Supreme (LON:SUP)

I hold and have followed this for some time so perhaps I may elaborate on one point:

"The lighting category appears to have been a disaster". It is important to understand the nature of this. Supreme hold exclusive licences for Eveready , JCB and Energiser. This means that apart from supplying small retailers from their own warehouse they supply the big boys by the containerload. They simply order from China and the container goes directly to the customer so profits go straight to the bottom line. It is no wonder that these customers stocked up in the period of uncertainty of getting containers from China to the UK (and then through the Tilbury bottleneck) and equally no surprise that now that has eased they are destocking. A good example of a big customer here is B+Q stocking 74 different Energiser bulbs: https://www.diy.com/search?ter...

In the last presentation there was a 14 minute section on lighting starting 7m 16s in here:

Much of this company depends on the entrepreneurial nature of Sandy Chadha, CEO and 57% shareholder. Watch this afternoon's presentation and form your own judgement!

GB (LON:GBG)

I just don't understand why ROCE and margins are so poor for a technology company that is a "pure-play leader" in a growth industry?

Digging into the numbers and adjusting for cash and provisions gives an average return on operating capital around 30% for the last decade. Admittedly the trend is downwards but that’s hardly shabby and certainly well clear of the cost of capital. Gross and operating margins have both expanded by large increments over the same period and sit at respectable levels of 71% and 25%. Are we looking at the same numbers?

Perhaps the yo-yo-ing price action today encapsulates the divergence of possible views!

Well, I asked the question in today's investor presentation about prices and the CEO seems remarkably reluctant to put them up. He seems worried it would reduce demand. Hard to believe given where they are relative to competition. For comparison, Greggs sausage rolls are up 15% this year. I am sure Supreme 88vape could match and demand would hold up.

Camtab

Many thanks Graham. I do find your insights extremely useful.

simoan

I was looking at the StockReport ROCE numbers for FY17-22. It really depends on your feelings about the EBIT adjustments, as ever. I'm really quite conservative when it comes to such things, as I presume is Stocko. For instance, of the £28m adjusted EBIT reported today, £2.7m is share based payments and a rather large £21.3m in amortisation. Without these adjustments, reported EBIT was a meagre £2.5m. ROCE and EBIT Margin numbers are reliant on how you want to treat the EBIT adjustments. As I said, good luck with it; doesn't float my boat and so I no longer wish to discuss this company.

All the best, Si

Roger Lawson

Re all the comments on GB (LON:GBG) the accounts are complex but it helps to watch the company's presentation here: https://www.gbgplc.com/en/inve... . There has clearly been negative impacts from declines in cryptocurrency and internet companies generally but I am not as negative as others about prospects. A lot of the issues are one-offs and judging a company on one half-years results is not wise in my view. I am a long-term holder and am likely to remain so.

Indie

Ah well, you snooze you lose. I’m still watching it.
Very happy for them.

davidjhill

30th Nov '22

that's a hilarious comment. Vaping gets banned???....hmmm....that plays well into Governments attempts to switch people away from cigarette products. The far more likely scenario is that taxes increase on vaping products - the one thing about vice is that Governments like it because it generates outsized tax they can't get elsewhere.

Pat W

This is really helpful. Thanks

Small Cap Value Report (Tue 29 Nov 2022) - SFE, ALT, REC, SUP, GBG, VP.

Agenda

Unlock the rest of this article with a 14 day trial

About the Author

Graham Neary

56 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...