Small Cap Value Report (Tue 3 Jan 2023) - HOTC, BIDS, APTA, CINE

3rd Jan '23 by Paul Scott

30 comments 8281 reads

Good morning from Paul & Graham, and a very happy new year!

There's little news today, so Graham's going to be writing a year end roundup type section today, and I might cover something similar but not overlapping. So we should have something interesting up by 13:00. Leave it with us!

Agenda

Paul’s Section:

Hotel Chocolat (LON:HOTC) (156p pre-market, mkt cap £214m) [quick comment] - we had previously been told that HOTC was trying to salvage something from its disastrous Japanese joint venture. A new arrangement for 21 Japanese stores is announced today, with HOTC owning a reduced 20% stake, but set to receive brand royalty revenues (not specified at what rate). There’s not enough information for me to assess how good this deal is, but anything is better than what looked previously like it might be a total write-off. As yet, there doesn’t seem to be any information from brokers. I reviewed its FY 6/2022 results here, and remain of the view that the investment story looks stale, the product tastes completely ordinary to me (and seems overpriced), and aggressive forecast profit growth for FY 6/2024 and beyond doesn’t look credible. Which leaves us with a share that’s probably over-priced, and vulnerable to more profit warnings in the current climate. Solvency/liquidity look fine though, with a sturdy balance sheet. For me, overall it’s an avoid, based on current information. (no section below)

Bidstack (LON:BIDS) (2.8p pre-market, mkt cap £36m) [quick comment] - another worrying announcement from this speculative, jam tomorrow, in-game advertising company. There were previous signs that its key relationship with partner Azerion was going wrong. Today we’re told it’s now become a legal dispute, with Azerion withholding payment for invoices from BIDS, and terminating the agreement. This is clearly a major blow for BIDS, however they try to gloss over it today. The interim accounts commentary showed how significant this $30m 2-year deal was for a company with previously negligible revenues. Without it, BIDS shares look too high risk, as it looks like the wheels are coming off. I don’t imagine FY 12/2022 results will be out any time soon, due to disputed invoicing, and how long will the last £10m fundraise keep it funded for? I’d vigorously avoid this share now, to be on the safe side, and salvage whatever you can. (no section below)

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PDiddy

3rd Jan '23

Combination of supposed new C19 variants out of China, the announcements of testing required of people from China into certain countries, the recent approval of new tests for new strains means they are best placed if C19 causes havoc again. It's also listed on French stock market and what we see now is what happened on their market recently due to them being ahead and trading when we were closed.

nevphillips

It is a good company I'd say now, with a very strong management team, who have very strict risk criteria in assessing new bids. Formally it had built up a lot of debt having been engaged on a number of projects that went south and left it struggling and had to sell of some of its business, eg Linden Homes, to maintain solvency.

I think it's incredible it trades at a discount to cash, but it has done for some while. That looks to be driven my negative sentiment rather than business strength. One of my bigger holdings, as the downside now looks marginal, the dividends are attractive, and if sentiment changes then a re-rate is long overdue. I've held this shares since the early days when it was Try, but added over the last few years on that cash underpin basis.

Tortoise investor

Happy new year Paul and Graham. Thank you very much for all your insight during 2022. I was a bit less active on here last year as I was really busy with work, which made your contributions even more valuable for helping me to keep abreast of small caps and macro-level economic news.

For lessons learnt and community sharing I thought I'd post my lessons from 2022 and 2023 look ahead which I compiled over the Christmas period.

2022 lessons:

I ended the year -14% which was my worst performance since investing in 2014. I know lots of others have had worse results than that so won't complain too much but it's still frustrating especially when you spend time and energy managing your portfolio and researching. Since investing in 2014 my cumulative gain is 142.67% (though last year I was at 182%) and average annual performance is 11.37% - although again last year's performance was such that I was over 14% average. Hopefully 2023 improves that!

Lessons from 2022:

I was intentionally overweight in counter-cyclicals (e.g. Begbies Traynor (LON:BEG)) and companies that gain from inflation (e.g. Appreciate (LON:APP) & Shell (LON:SHEL)). Without those I would have been in the minus twenties if not worse.
In the second half I started trading around results. I noticed a pattern where some companies were trading much better than their share price suggested and they tended to have big rises on trading updates and result days, but then fall back down pretty quickly afterwards once wider market sentiment took over. So I would buy slightly ahead of results and sell on the day or a day or two after. This only boosted my portfolio about +2% because my positions were maybe a bit small and I only did this on about 6 shares where I was confident their trading performance was better than market expected. Perhaps then this is quite a good tactic during a bear market and I should use it more agggressively? I imagine it works less well during a bull market where markets overestimate company performance perhaps.
As with previous years, learning from Stockopedia research on profit warnings (sell immediately on the first one!) helped shield me from worse share price falls - e.g. at Joules (LON:JOUL^L22) & Studio Retail.
Focusing on companies with good balance sheets also helped. In previous years I always had two or three more speculative positions, often companies with more questionable balance sheets, which always ended badly. But I avoided that this year.
More "negatively", I wish I had exited positions more aggressively following the Russian invasion and the rise in energy prices. I remember thinking to myself I probably should, and reduced a couple of positions, but thought my portfolio was already pretty undervalued so how much lower could it go? Similarly, in 2020 I should have acted more quickly in the first few months when the global news was looking pretty dire. In such situations I've tended to take a 'bit' of action - possibly to satisfy myself psychologically that I am doing something - but it would usually have been better to be more decisive. Perhaps this is a benefit of hindsight thing that Ed talked about in his recent NAPS post, but I do remember thinking I should probably do something but I never quite manage to be decisive enough!

So what about my strategy for 2023?

I feel reasonably positive about 2023 as markets usually bounce back and I think inflation will start to come down which will drive positive market reaction. At this moment in time I am positive on:

Fund managers: lots are trading around NAV which tends to be their historic low and they are paying good divis. Graham has commented on a number already. I like Cenkos Securities (LON:CNKS) and have been in and out of that quite nicely over the years as I think it never or rarely makes a loss and you take the dividends while you wait for the business to come good again and in the boom years you can make 100%+ if you buy at or around NAV (look at the chart from COVID until last year) - they won't have the boom years they enjoyed when associated with Neil Woodford but they should still recover nicely at some point. Speaking to another post today they also did well out of equity raisings in 2020 so maybe they will benefit from those if CFOs turn more to equity fundraising than debt finance. I also like Polar Capital Holdings (LON:POLR) - I was watching their results presentation over Christmas and pleased to see they're sticking with current dividend levels which is a stonking 9.6%. They're not trading at NAV though and they are heavily invested in US tech which suffered disproportionately last year.
Commercial property companies: I think their share prices have overshot on the downside following the post Truss budget sell-off and interest rate rises. I particularly like Tritax EuroBox (LON:EBOX) as their rents are inflation-linked, their dividend is now covered as of the last quarter, they have very high occupancy rates, and their occupants are fairly big stable companies like Amazon. Plus I think there is still good demand for the sorts of warehouses they do - worth watching their recent results presentation. At c.60p that's half the price of their recent NAV per share - there is surely no way NAV is going to fall by 50% during 2023?! Meanwhile the dividend is 8.3%.
Counter-cyclicals: I think companies like #BEG have further to run and I am targeting 200p share price which is still another 33-40% upside. The downside feels very limited in the present environment.

I still feel negative about retailers and similar cyclicals. I think their worst results are yet to come and so plan to stay out of them for Q1 but think Spring might be a good time to re-invest given markets tend to anticipate news and work 6+ months ahead. However, maybe I will be too late - this winter has been largely quite mild so far so that's surely good for reducing energy demand and therefore inflation?

Would love to know others' thoughts on what you're positive on for 2023! Happy new year and I look forward to continuing to read this fantastic SCVR and making a contribution where I can.

ps. I am on Twitter as @InvestTortoise if there are any other investors active on Twitter

Bert Fox

Happy New Year Paul & Graham. Nice sign off to 2022 on your last podcast Paul.

MichaelFBS

Thanks for the review Graham. I keep telling myself that finishing less than 20% down in 2022 was a pretty good result. I finished down 19.1%, so I am going to keep telling myself that! Without Boohoo (LON:BOO) Tremor International (LON:TRMR) and Reach (LON:RCH) I would have had a reasonable year, probably in the region of negative 2% or 3%. Unfortunately I held them and still do except £BOO.

Q4 was a very kind to me with above 20% gains in Games Workshop (LON:GAW) Anglo Asian Mining (LON:AAZ) Reach (LON:RCH) Bioventix (LON:BVXP) Netflix (NSQ:NFLX) (very small holding) Sylvania Platinum (LON:SLP. These represent 56% of the portfolio. So I am glad I did what did and sat tight, looked little and barely traded. If I had been “clever” enough to sell at the beginning of April would I have been clever enough to get back in at the beginning of October. I doubt it.

Who knows what 2023 will bring. It seems that almost every commentator from Mr Roubini (I am not a fan) down, is full of doom and gloom on whatever front you look (recession, inflation, interest rates, Ukraine war, gas prices, climate change, etc etc etc) so maybe markets will get a nice surprise to the upside.

Here’s to a good 2023.

Regards

Michael

ar7268

I added it to my watchlist recently for the reasons you state above, however one concern i have is the working capital / liquidity situation (negative). Although they should be able to take on more long term debt (they have none/little currently) to solve the problem if needs be.

I've put it in my list to do more research on because I'm always a bit wary of companies that fly close to the wind with their balance sheets.

Aislabie

From time to time I have ranted about how micro cap prices are ludicrously adjusted for ridiculously small sells, so it’s only fair to note one going the other way.

Crimson Tide (LON:TIDE) (I hold, no sniggering please) today is showing a 4.2% rise on a purchase of 200 shares - an amount of £5 ! So for a fiver someone has increased the market cap by over £600,000. Crazy

Rusty2

Crimson Tide (LON:TIDE) Are you going by Stockopedia figures? If so, don't, they go on the last trade which was a buy. My broker with live prices has this as a non mover. If someone sells then will probably be negative on Stockopedia. This is really annoying.

Boon

Japan is where many Western companies slip up, thinking they can do the same business model there which worked so well in Western countries. So I am encouraged that Hotel Chocolat (LON:HOTC) has now gone the licensing route, allowing a local player to do all the strategy and execution. Could be big, if they crack it. Its a huge economy in terms of consumer consumption.

homosap

Thanks for a useful analysis of your performance.

My own losses on my SIPP stand at 12.58% excluding pension income taken. I have made virtually no trading decisions this year.

My more significant holdings above 3% of the portfolio are:

Begbies Traynor, BHP, H&T Group, Northgate and Somero.

A further layer above 2% consist of:

CLIG, IG Group, Plus550, Sylvania Platinum, Wisdom Tree Physical Gold, and Wynnstay Group.

Like MichaelFBS I should have done better not to have held BOO and Tremor throughout the year. Nor has Saga done me any favours. A number of takeovers and fixed interest (Inflation indexed) provided a cash influx that has not yet been invested.

Ironically I have a momentum investment screen that had I followed it I should have done much better.

What is more depressing is to contemplate one’s losses of capital against any of the cost of living indices that nearly doubles my losses in percentage terms although over a three year period my returns merely return to track the RPI index from having been comfortably above it.

Mulberry

Please see my previous comments on HOTC when I said it was insanely overpriced at 400+p. It's still overpriced: poor product (and I make chocolate so I know !), saturated market in the UK in a falling "luxury goods" market, failed Japanese and US expansion. For chocolate makers and retailers, everything depends on ability to sell in the USA and Japan/China. Without this, HOTC is just another high street shop with a poor product.

I have never tried Hotel Chocolat (LON:HOTC) chocolate but I used to have Aldi Mosser Dark chocolate, I thought it was quite good but it had a high sugar content, I don't know how it compares with others.

simoan

Graham,

At a forecast P/E ratio of 13x, for a quality index, I think this also looks very interesting.

IMO you have to be very careful looking at the FTSE250 index in these terms. Yes, it contains some good companies but it also contains 77 Closed End/Investment Trusts and 21 REITs. How on earth you can meaningfully calculate a P/E for the index given 40% of the constituents are not "normal" operating companies, is beyond me.

All the best, Si

Camtab

Thankyou Graham an interesting overall take. In normal years I measure myself to AIM as I like to think I am an ace stock picker!! (Ha ha ha). But at the beginning of 2022 I just felt it was going to be more complex this year for a number of reasons which I won't waste time on now. But ended up shorting 10 year gilts and buying an index linked gilt for the first time in my life. (Putting aside the NS&I Index linked certificates which you can no longer buy but when you can grab em!!) I am about 30% cash now as well. Also invested 10% in Ruffer Absolute return fund and Gold. It left me about 30% in Avacta, Spectra Systems, SRT Marine, Rolls Royce and Record. Anyway 3% down on the year which adding inflation is a double figures loss, but it could have been a lot worse. It is interesting in investing you can sometimes make one decision at the asset allocation level and it is more important than all your stock selection decisions. Diversification works on many levels. Anyway all the best to you all and to be honest I am far more nervous about this year because I simply have no idea what is going to happen in the year ahead. I know I never do, but sometimes I think I do.

tic_tac_toe

I wonder if a large part of the forecasts for Hotel Chocolat (LON:HOTC) are in their velvetiser range, which they are maketing quite hard. Popped in a shop towards xmas and the machine is knocked down from over £200 to about £90..
I reckon they will warn on profits this year.

Graham Neary

Thanks Si - good point.

Wow, well done Camtab! Some serious outperformance there compared to what could have happened. Congrats. G

Robbie Burns

I totally agree with all that hotel choc chocs are awful! I'd rather take a twix any day. Or a Freddo. In 2020 after a hip op I got boxfuls of sympathy Hotel C chocs from friends. Hampers and hampers of the stuff. I could have opened my own Hotel C pop up shop. My son and Mrs didn't like them either. Nor did our 80-year-old neighbour who prefers the inside of creme eggs as she only has three teeth left. We stuffed the cupboards with them. Then came Xmas. Loads more arrived.

Just when we thought there wouldn't be any more a package arrived from Marriott Hotels on Xmas Eve thanking me for all the business. Guess what? More Hotel C. Finally that afternoon a package from my publisher. Yep, you guessed it. Two larder shelves were now packed with HC.

Worse, I had a short in HC on the silly valuation grounds. But after all the deliveries I thought "Bloody hell they must be selling s-loads!". I closed the short - what a mistake!

We spent the next year re-gifting. And handing them out to anyone we could find, postman, delivery drivers, anyone that came to the door. "Thanks a lot, have some chocolate on us!" T

Five months later we had cleared them all. I worried about my birthday and Xmas in 2021 and getting more HC. As I'm a terrible people pleaser I didn't want to upset friends and say "no more HC". But the mrs came up with a plan and I sent a round robin message saying I was ordered to give up chocolate on health grounds. This worked but I now have 25 packs of salted caramel biscuits.

cholertonandrew

Happy new year Paul and Graham and all readers too.

Andrew

4th Jan '23

Thanks Andrew. Happy New Year to you too! G

Small Cap Value Report (Tue 3 Jan 2023) - HOTC, BIDS, APTA, CINE

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Paul Scott

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