Small Cap Value Report (Tue 3 May 2022) - CARD, OOUT, IUG, QRT

3rd May '22 by Paul Scott

42 comments 7840 reads

Good morning! Paul & Jack here with Tuesday's SCVR. Welcome back Jack! Today's report is now finished.

Agenda -

Paul's Section:

Card Factory (LON:CARD) - FY 1/2022 figures are out. Real profits are a small fraction of the inflated EBITDA & cashflow numbers. Balance sheet still very weak, and the company is completely dependent on bank facilities - recently renewed, so not an immediate worry. I don't see any attraction to this share, unless you believe it can significantly increase sales.

Intelligent Ultrasound (LON:IUG) - my first look at this heavily loss-making niche medical equipment maker. High gross margins, and strong revenue growth in 2021 results caught my eye. But admin costs look way too high, and it's running out of cash, flagging up the need for another fundraising in the going concern statement. So probably not the right time to buy, as it's so speculative, but could be an interesting company to watch for signs of accelerating order intake in future, maybe?

Quarto Inc (LON:QRT) - see the reader comments section, where we have a discussion about this book publisher which is demonstrating a strong turnaround. Many thanks to mjfgs and jimrog64 for flagging up this share, and apologies we didn't spot the turnaround (after 8 years of writing about it, we gave up coverage right at the low. Typical!) [No section in the main report - see reader comments section only]

Jack's section:

Ocean Outdoor (LON:OOUT) - digital out-of-home advertising specialist (DOOH) currently looking to sell itself due to ‘technical trading challenges’ with the share price. Business is recovering nicely as economies open back up, but a lot of this recovery is priced in. I’m happy to watch from the sidelines as Ocean’s largest shareholder weighs up whether or not to bid for the company.

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 news on…

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About the Author

Paul Scott

Premium Member

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for Stockopedia.com on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »

42 comments

rmillaree

3rd May '22

Has Buffet not been hoarding cash for years whiole the stockmarket has been flying ?

arfournier

3rd May '22

The meme stock crowd is certainly in a panic. This is obviously an anecdotal evidence but some investors that were all in on growth stocks are now talking about having a balanced portfolio. Personally I have been incrementally building positions in some names since January and will continue to do so for the foreseeable future. I may not be able to time the bottom but there is value to be had currently/

TheFloatingInvestor

3rd May '22

Yanggu Xiangguang Copper Co, Ltd. sold a chunk (through no fault of Atalaya, Yanggu needed capital) a few weeks back and it had a negative effect on the share price, although it did bounce back the same day I think it rocked confidence.

I think its latest RNS hinted at higher energy prices for converting the copper, some kind of transport strike (from memory) and lower output than expected which started a sell off. I note that shares such as £THS are also off a high ATM.

I sold out just after the RNS...thinking it would come down a bit. Energy prices swung it for me.

Its a good story, the new mining rights, the solar farm etc...but I feel along with many shares its taking a fall...maybe some to go...

Paul Scott

3rd May '22

Hi Brookeda,

Paul/Jack - hope you aren't feeling disillusioned with it but I think a lot of us are just feeling a bit down at the moment on the market and don't have too many things we want to shout about.

We're all human, so of course it's very painful to see our portfolios decline, but that's what markets do sometimes.

Our job here is to crunch the numbers, review company updates, but it's obviously then up to readers to decide how to finesse things, timing your buys & sells according to your own assessment, outlook, and risk tolerance.

I've been through a few market cycles, and the way I see bear markets is that they lay the foundations for super-sized future profits. So many people end up getting despondent & selling at irrationally low prices, that they're handing us the future multi-baggers on a plate.

Maybe we're not quite at that point yet, but it's coming. We're probably at the stage of the market scrubbing off excessive valuations, esp on the tech bubble - some staggering falls in the US, but on stuff that was wildly over-valued (and plenty still is).

At some point though, inflation is likely to peak, Govts are likely to be forced to backtrack I reckon, and turn on the spending & cheap money taps, and then off we go again. Absolutely no idea when that happens though, my crystal ball is not working at all well at the moment!

Supply chains should sort themselves out, as consumers spend more money on services instead of stuff, and several companies have already said that supply chains are beginning to ease. There again, there seem to be other problems building, e.g. shortages of key foodstuffs due to Ukraine. Who knows where it all goes?

As regards equities, if 2022 earnings are hit badly, as plunging share prices seem to be telling us, the logical progression is that 2023+ earnings tend to recover. Hence shares would once again start the positive cycle of beating forecasts, and PER expansion gets going again.

It's all about timescales isn't it? Patient investors buying fundamentally good companies, at bombed out valuations, are likely to do very well with a say 5-year timeframe, if we pick well.

There's tons of money on the sidelines too. I'm struggling to remember when so many of my more successful investor friends are holding lots of cash, which they are now. That's another reason why there could be a big move up at some stage, I just don't know when.

Basically, if we've picked sound companies, then there's almost certainly more upside than downside, taking a longer term view. In the meantime, there could well be lots of profit warnings, and more short-term downside. Nobody knows.

Regards, Paul.

TheFloatingInvestor

3rd May '22

Am 40% cash ATM, and am not really seeing a lot to decrease that...in fact am thinking of heading further into cash.

I am looking at a set of scales and the bad news side just fully outweighs the good going forwards ATM.

If the Ukraine war were to end I do feel that's a tipping point...but as things stand, looking out 6 months, where is the good NEWS going to come from to balance things up?

Yes I am looking but am not going to buy if I think its got further to go and there lies my problem...

Tommy H

3rd May '22

I have watched Atalaya Mining (LON:ATYM) drift and it has gone past my manual stop loss of 10% so sold out today, like the company think a good long term story, but considering it is £5 to buy/sell I am happy to watch it drift some more, maybe it will bounce, but like a lot of things I am staying heavy cash right now rather than watching another day of red screens.

Tommy

arfournier

3rd May '22

He made some ill time buys prior to Covid. He bought shares of all the major American airlines save JetBlue which he liquidated at some point in 2020.

The irony is he had been saying for years that as far as investors were concern they would have been best served if someone had shot down the Wright's brothers first plane flight. Needless to say he sold at a massive loss.

Overall while he was deploying small amounts of cash by Berkshire standard it was easily surpassed by the accumulation of cash generated by the businesses.

jimrog64

3rd May '22

Thanks Paul. I don't comment often on here as I usually don' t think that I have the expertise. I still consider myself to be a novice and only started investing at all a couple of years ago. I guess the lesson for me is to be more confident about bringing things to the discussion when there seems to be a well argued case and relevant information/ reports.

FREng

3rd May '22

Mark,

Are you willing to share your highest conviction holdings and your reasons?

FREng

3rd May '22

The Annual Report of Ekf Diagnostics Holdings (LON:EKF) contains a statement that EKF intends to distribute its holding in Verici Dx (LON:VRCI) in specie to EKF shareholders.

"Investments

At year-end, the Company continues to hold 1.39% of the issued share capital of Renalytix plc, a developer of artificial intelligence enabled acute kidney injury products, and 1.89% of Verici Dx plc, a developer of advanced clinical diagnostics for organ transplant. The market value of these investments increased by £1.1m during the year. Post year end the Company invested a further £2.5m in Verici alongside other existing and new investors participating in a placing of new ordinary shares. Further to the investment, the Company holds 5.8% of Verici DX plc. EKF intends that its holding in Verici will be distributed to its own underlying shareholders as soon as reasonably practicable and subject to appropriate arrangements to maintain an orderly market in Verici’s shares following such distribution."

Harry Hindsight

3rd May '22

Often compile a well worded considered and informative point of view - then bottle it as - the first wine takes over and have not actually done much DYOR.

The post on Serica Energy (LON:SQZ) by Mr Cooper with a reply by Mr Pavey was highly informative on both the company and DYOR - the information is there on company websites and RNS - just need to read and correlate it, form an opinion, and hopefully beat Mr Market (busy eating other fish).

Paul Scott

3rd May '22

Hi jimrog64,

I guess the lesson for me is to be more confident about bringing things to the discussion when there seems to be a well argued case and relevant information/ reports.

Yes definitely! :-)

I like ploughing through the figures, but successful investing is about far more than that. I know lots of very successful investors who have their own approach, which often just relies on shrewd common sense - e.g. seeing a product taking off, Directors buying repeatedly, etc. It's what makes investing so fascinating - you never know what's going to happen, and the market makes a mockery of experts every day!

Best wishes, Paul.

Paul Scott

3rd May '22

Hi Lgarvey,

CK Lau by far the biggest share holder also owns a Chinese printing from called 1010 printing.

Interesting. In such a situation, I think it would be very important to scrutinise the Related Party disclosures in the Annual Report. I'm certainly not alleging any wrongdoing at all, but am just flagging the risk that an overseas controlling shareholder in the same sector, would have a lot of flexibility to move profits around the group, by adjusting prices charged for intragroup purchases.

There were vague allegations of this made by Tom Bower, in one of his hatchet job books (on Philip Green) about Arcadia & BHS, that their miraculous turnaround could have been at least helped by having a friendly supplier in the Far East indirectly linked to the major shareholder, that supplied product at cost price (or maybe even below?), thus driving a big rise in Arcadia profits, and hence the value of the business. Which could then be sold for an inflated valuation, at a high PER. Thus creating a big UK-based asset for someone looking to extract value from the Far East by the back door.

Regards, Paul.

gringo

3rd May '22

Theres certainly been a reset in tech valuations in the US since Oct 2021, especially the jam tomorrow stocks. Was very much needed.

Who knows where the bottom is, but it's getting closer. There's some nice looking opportunities on low or sensible valuations, which with a little patience should be very profitable.

illiswilgig

3rd May '22

Are you willing to share your highest conviction holdings and your reasons?

Of course. How kind of you to ask :-)

Though it turns out to be easier said than done. The reasons, not the sharing. I'll try to provide something tomorrow as I failed this evening.

I didn't name then on my post as the OP asked about approach and in my experience a list of shares tends to distract from a discussion of approach,

cheers

Mark

illiswilgig

4th May '22

Warning Long Post!

Are you willing to share your highest conviction holdings and your reasons?

FREng: Of course. How kind of you to ask :-)

Sorry it’s taken me a while to do this. Listing them is not a problem – but including the reasons - turns out to be much easier said than done. Still its good discipline so I’ll give it a try.

I didn’t previously list the shares as the OP asked about approach. It’s my experience that a list of shares tends to detract from a discussion of approach. Likely more so in this case as these companies are not conventional picks. Quite the reverse, normally for one reason or another, quite often buried in the history they tend to be – Marmite – love them or hate them shares. Except most are so small and illiquid it’s hate them or hate them a little less. These should carry a health warning up front. But that’s one of the few places as a private investor my research can have an edge? When there isn’t any public research – or the history gets in the way of current progress?

Without further obfuscation here is the list of my largest 5 holdings by current value – accounting for around 50% of my portfolio.

Ms International (LON:MSI)

Anglo Pacific (LON:APF)

Macfarlane (LON:MACF)

Zytronic (LON:ZYT)

Vianet (LON:VNET)

Though whether they are also my highest conviction holdings is an interesting question. Not necessarily. You might think so, but the market fluctuates and prices go up and down. My assessment of conviction is not the same as my assessment of reward versus risk – which is another factor.

The reasons. Well they all – to a large extent but not exclusively – share characteristics of management, quality product, product development, margins, cash (or cashflow) and growth market/opportunity.

In addition they all have an additional characteristic – which is one or more factor or asset that are neglected, overlooked, undervalued or mis-priced by the market. Or if not currently mispriced a basis upon which I expect the price to rise significantly in the future.

Here is the briefest I can make it.

Ms International (LON:MSI) £47m mcap – engineering microcap based in Doncaster. Long time management, also the largest shareholders, have maintained R&D. The defence division has recently won a long term contract with the US DOD to roll out its GWS (Gun Weapon System) across the USN and Coastguard Fleet. Doesn’t get much more coals-to-Newcastle does it? Hard to assess the long term benefit of this but it seems seriously under appreciated to me despite the recent strength in share price.

Anglo Pacific (LON:APF) - £385m mcap – until quite recently a largely neglected – for understandable reasons - traditional and cyclical coal royalty company. The company has been in transition towards a portfolio of energy transition minerals and I bought for exposure to the portfolio of Cobalt, Vanadium, Copper, Uranium and some precious metal and non-precious minerals. The enormous extent of the windfall income coming from the remaining metallurgical coal royalty as it winds down is not yet fully appreciated – the company should be net cash by H2 and able to fund an existing deal for a royalty on a Nickel mine in development by Brazilian Nickel. The value of this asset is undervalued as the royalty can be stepped up with further payments on an agreed schedule and the structural deficit of Nickel is forecast for some years yet making it extremely good value. A deal that would not be available today. I still want exposure to these minerals – but I will likely reduce the size of this holding should I be lucky enough that the extent of the current cash windfall and the value of the Nickel royalty is at least partly in the share price.

Macfarlane (LON:MACF) - £190m – starting to get some coverage, around here at least. According to the stock report this company qualifies for three screens – one of which is the neglected firms screen. I agree with that. ROCE and operating margin and consistently high for packaging distributor indicating it has some price setting ability not held by its peers. The extraordinary ability of the long time management to acquire, integrate and grow business in the fragmented regional packaging segment is not currently reflected in the company valuation.

Zytronic (LON:ZYT) £19m mcap – another microcap. A former high flying developer and manufacturer of bespoke touch screens for the ATM market. Rather than chase dwindling contracts and margins, or spend its cash on acquiring other businesses long time management has stuck to what it does best and developed its technology for new growth markets. It has launched new (award winning) ‘touchless’ touchscreens and moved up the value chain to supply hardware/firmware and encypted controllers (touchscreen pin pad) and software with standard interfaces. During the pandemic lockdown the company reduced its cost base and invested extensively in its production facilities. Used part of its enormous cashpile to buy back shares via a tender offer. As the full number of shares were not tendered shareholders have given permission for buy backs to continue which sets a floor under the current share price. Subtracting the still enormous cashpile the EV is only £9m. At the recent AGM statement H1 revenue at 5 months was up 25% yoy and order intake up 45% yoy. I anticipate buybacks will continue until the H1 results and H2 outlook statement when the shares will likely re-rate - should I be so lucky. This is likely my highest conviction share – by a whisker from MSI.

Vianet (LON:VNET) - £26m mcap – and another microcap turnaround. Primarily known for its origins in digital flow monitoring and its Brulines beer flow monitoring operation which has been the cash cow funding devlopments, Vianet has been transforming its business in recent year. Vianet has outsourced its manufacturing operations and developed a data management and analytics platform (cloud based of course) with contactless payment services which manages connection to multiple devices in its smartzone hubs (typically hospitality venues – like the AMC cinema chain in the US) and to single devices in its smartmachine division (typically vending machines or remote assets). Once a connection is established the recurring revenue from data management, analytics and contactless payment services is quite sticky and high margin. Smartmachine division growth in connections is currently running at 20% annually and I anticipate this rate will increase as new contracts are signed – and subject to availability of semiconductor components for the connections. Of these shares this one is perhaps the most questionable, Vianet has quite a long history of not quite making the growth opportunity. The company is not highly valued – by pre-pandemic figures and this time it has the technology, platform and sales team in place – whether it can capitalise on this growing market opportunity remains to be seen.

That’s more than enough from me. I should quit whilst I am ahead. I hope. Just as well you didn’t ask about the next 5 shares – which takes me to 80% of the portfolio – they are even more fascinating :-)

Whilst writing this I’ve just realised another shared characteristic – with the exception of APF – they are all Northern based. Stockton, Newcastle, Doncaster and Glasgow. Not my bias as I am Somerset born and bred, living in darkest, deepest West Sussex. The next 5 shares also share the same bias being based in Stoke, Osset, Barrow, Darlington and finally Cambridge, one not based in the North. How intriguing.

cheers

Mark (CEng MIET - on extended career break)

Brilliant Leader

4th May '22

That’s a terrific post Mark - thanks for making the effort. I hold £Apf and have previously held £vnet and £zyt - if you ever get the urge, I would love to read about the next 5.

Cheers
Simon

ridavies

4th May '22

Thanks a lot to all for comments on Atalaya Mining (LON:ATYM) which make a lot of sense, and should have picked up for myself. Have been taking my eye off the ball for personal hurt reasons for a little while so especially grateful for helpful (though not profitable) comments from you guys on the reasons why.

djack

16th Aug '22

Late to this but thought I would add what I know. Trustpilot actively encourages positive reviews. It's quite hard to add a negative review.

Rusty2

16th Aug '22

I don't agree, I have left negative reviews, sometimes its the only way to get the company to respond.

Plenty of negative reviews, here are some: https://uk.trustpilot.com/revi...

Many others with worse reviews than that.

I may do one, phone charge going up from 4p to 15p, what a joke.

Here is another: https://uk.trustpilot.com/revi...

Small Cap Value Report (Tue 3 May 2022) - CARD, OOUT, IUG, QRT

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Paul Scott

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