Small Cap Value Report (Tue 4 Jan 2022) - TAST, DX.

Good morning, and happy new year!

For anyone who missed it, I posted my personal portfolio review of 2021 here. Warts & all. A disastrous Q4 wiped out most of my gains for the year, but at least the figures were still positive overall, so it could have been worse. I definitely need a re-think on my portfolio management, but apart from Boohoo (LON:BOO) (I hold) the stock picking generally went quite well. Here it is again, if you've not already expended 39 minutes of your life listening to me waffling on!

The trouble is, I've always tried to shoot the lights out, in terms of chasing very high annual gains, using gearing, and portfolio concentration, which produces violent moves up & down in my portfolio.

However, my SIPP has been quietly chugging away at a fairly pedestrian +17% p.a. for the last 9 years since inception. Sounds boring, but it's actually compounded to +360% in just 9 years (with no new money added - I started it with a transfer in of existing pension policies). Do that for another decade (or even two), and it would produce a spectacular overall result. So maybe I should forget about gearing, and just go for steady, ungeared, lower risk returns over the long term? That's what the best investors do, after all (stating the obvious!)

Outlook for 2022 - We seem to be entering 2022 with covid reaching a climax in terms of case numbers, but with a mild variant - surely the ideal scenario to achieve herd immunity? The main issue now seems to be staff absences, which should be resolved in weeks rather than months.

US markets are once again hitting daily new highs. Sooner or later, I imagine that bullishness should rub off on UK small caps.

So personally, I'm going into 2022 feeling quite positive about my small cap positions. Providing companies can pass on cost increases to their customers, then business should be good. Supply chains sort themselves out over time, although I have no idea when.

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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 the day, with market caps up to about £700m. We avoid the smallest, and most speculative companies, and also avoid a few specialist sectors (e.g. natural resources, pharma/biotech).

A key assumption is that readers DYOR (do your own research), and make your own investment decisions. Reader comments are welcomed - please be civil, rational, and include the company name/ticker, otherwise people won't necessarily know what company you are referring to.

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Tasty (LON:TAST)

5.13p (pre market open) - mkt cap £7m

Too small, and very illiquid I’ve found in the past. However, it’s the first casual dining chain to report on Christmas trading, so there’s likely read across for others e.g. Restaurant (LON:RTN) , Fulham Shore (LON:FUL) , and Hostmore (LON:MORE) (I hold).

Trading Update -

My summary of the announcement -

• Trading from Jul to Nov 2021 was “extremely encouraging”
• Dec 2021 trading was “disappointing… considerably weaker than anticipated” (normally the best month)
• Covid-related downturn in December - “deterred the larger Christmas bookings”
• 50 restaurants remain open (out of 54)
• 2 or 3 possible disposals
• “Adapted well”, and “navigated its way through” covid, staff shortages, and supply chain issues
• Outlook - challenges: ending of Govt support (reduced VAT, and business rates)
• Confident in brands (Wildwood & dim t)
• “Strong revenue stream” from takeaway & delivery

My opinion - this update seems reasonable in the circumstances. The challenges in Dec 2021 have been widely publicised, are impacting the whole sector, and shouldn’t surprise anyone.

Therefore I see this announcement as neutral, maybe even slightly positive, because the market is meant to look forwards, not dwell on temporary problems. Although that’s clearly not working at the moment! But it should do, in time, when Mr Market (UK small caps) switches from depression to optimism again.

Overall, I’m currently neutral on TAST. I did have a dabble in it when the price was really bombed out a while ago, but decided to exit in stages (difficult to sell) in 2021, as the upside seems quite limited & uncertain now, possibly.

The trouble is that TAST wasn’t performing at all well before the pandemic, so why should it suddenly become a good business in future?

There again, £7m market cap is not much, for a nicely fitted out chain of c.50 restaurants. Especially now deals have been done with landlords on some sites.

We’re not given any actual numbers in today’s update, so there’s not really much to go on.

In this sector, I think MORE (I hold) is the stand-out undervalued option, so I’ll stick with that.

We’re likely to see the 3 larger competitors mentioned above also complain that Dec 2021 trading was disappointing. It will be interesting to see if traders focus on that, or the improving outlook as the pandemic recedes? Or taking a bearish view, will investors worry about the possibility of another mutation causing renewed lockdown restrictions? Who knows? As we’ve seen over the last 21 months, re-opening trades in travel/leisure/hospitality can be unpredictable.

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Dx (group) (LON:DX.)

30p (shares suspended) - mkt cap £172m

Background - Jack wrote up the FY 6/2021 results here on 8 Nov 2021, from this specialist logistics/delivery group. The figures showed a strong turnaround, back to profitability, after several years of major problems, and losses.

DX dropped a bombshell on 26 Nov 2021, which I covered here. A vague, and badly handled announcement indicated that a “corporate governance inquiry” would delay publication of the Annual Report, and would likely cause suspension of the shares. This hit the share price by c.30%. Although the announcement did say that trading remained in line with expectations.

Directors then bought c.£115k-worth of shares at 18.18p later that day, despite them being the only people who knew what this corporate governance inquiry actually related to! Which seems very wrong to me. According to posts on another bulletin board, Directors were telling people who rang them up, that the issue was nothing to worry about. Again, very wrong, if those bulletin boards comments are true.

It warned on 26 Nov 2021 that the shares were likely to be temporarily suspended on 2 Jan 2022.

Today’s update -

Roll forward to today, the first trading day of 2022, and DX shares have indeed been suspended. We still don’t know what this issue is about! This is the latest news -

As detailed in the Company's announcement of 25 November 2021, the Company's Audit & Risk Committee recently raised a corporate governance inquiry relating to an internal investigation, which commenced during the financial year ended 3 July 2021. Whilst the inquiry is progressing steadily, it has yet to be concluded.

As stipulated by Rule 19 of the AIM Rules for Companies (the "AIM Rules"), the Company was required to publish its audited Annual Report by 2 January 2022. As it was not in a position to do so, trading in the Company's Ordinary Shares on AIM will be suspended with effect from 7.30 a.m. on 4 January 2022 pending publication of the Annual Report.

Suspension from trading will be lifted with the publication of the Annual Report.

My opinion - this has been appallingly handled by DX and its advisers, in my view.

However, we can’t ignore the fact that it now looks as if the spike down in share price to 18p appears to have been a buying opportunity, which the Directors took advantage of. We’ll find out for sure once the Annual Report is actually published, which is presumably when the company is going to reveal the facts as to what has happened.

This is all very unsatisfactory, and irregular. Well done to anyone who had the courage to buy the spike down, but for me personally, I’ve been bitten too many times jumping in when irregularities of some kind emerge. Remember Conviviality, and Patisserie Valerie, for example? Although in the case of DX, it doesn’t seem to involve false accounting, because they said trading was in line with expectations - but who believes company assurances, when something iffy seems to have been uncovered?

All of this completely puts me off going near this share, not that I’m interested in freight companies anyway.

The other issue with DX is that, as far as I am aware, it has never split out how much profit is made from the declining private, secure postal service for lawyers. That used to be highly lucrative, but is in structural decline, as legal documents are now often moved online. Do please leave a comment if this split of profitability has been disclosed more recently.

Not for me this one, but good luck to holders.

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