Small Cap Value Report (Tue 6 Dec 2022) - HOTC, VNET, VIC, MERC, HSP, VRS, SOLI, SED

6th Dec '22 by Paul Scott

48 comments 8113 reads

Good morning from Paul & Graham!

Podcast - guilt overcame me last night, so I recorded the weekend podcast here, summarising the previous week's SCVRs, and some macro thoughts. Sorry for it being late.

Hotel Chocolat (LON:HOTC) - as promised, I mystery shopped the Islington branch last week, and was left unimpressed with products, which strike me as ordinary, and over-priced -

Agenda

Paul’s Section:

Vianet (LON:VNET) [quick comment] (£18m) - Interim figures to 30 Sept 2022 look OK, with the hospitality sector returning to normal. Outlook for FY 3/2023 - confident in achieving market expectations. Cash position has worsened. Both inventories & receivables look a little high. Negative cashflow in H1, and note that it’s capitalising c.£2m p.a. into intangible assets (£1m in H1), which puts a question mark over the adjusted profit numbers (which seem to ignore amortisation of capitalised costs). Overall, I don’t think this is worth pursuing. No section below.

Victorian Plumbing (LON:VIC) (£221m) - I review the figures for FY 9/2022. It's beaten considerably reduced forecasts, but only if you're prepared to ignore the excessive share options cost. Great balance sheet, with a big net cash pile, so it's decided to start paying divis. I like the business, but not as much now that shares have risen 80% from recent lows, when we flagged it as a bargain here. So it might make sense to top slice, to lock in some of those profits maybe? It's not such an obvious bargain any more.

Hargreaves Services (LON:HSP) - I review below its in line with expectations update. What an interesting value share this is - super low PER, combined with a big dividend yield, and a strong balance sheet. Lots to like here, for value investors. Harwood Capital owning 28% is a good sign for valuation, but could introduce risk for small shareholders, if they try to whip the upside away, e.g. by pressuring mgt to de-list, or make a lowball offer, both of which Harwood have done before. Overall though, HSP shares look very interesting, and it gets a thumbs up from me.

Versarien (LON:VRS) [quick comment] - top faller of the day, down 34%. It’s got the begging bowl out again, raising only £1.85m at just 10p per share. See what I mean about…

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Nanotrader09

6th Dec '22

I think for me the valuation became an issue. Assuming 6m profit the rating is x30. A bit too heady for me. Also with the growth drive, profit may suffer for a few years.

jesseowens

Oxford Metrics (LON:OMG) is a fantastic opportunity to buy a world-leading niche technology business growing rapidly at a cheap valuation. Roughly £125 million market cap after today's rise , £67 million in net cash, and £5.4 million in net profit in next year's broker forecasts , with comments that the risk to forecasts is to the upside . In the next bull market it would be perfectly reasonable for a business like this with a long runway of organic revenue growth , very high gross margins and operational leverage kicking in to trade at 30x earnings ex cash

Bert Fox

thanks for the light comedy of your nose in the hot chocolate

mbarnard

Bank of Georgia accounts for 20.9% of Georgia Capital's assets. Its largest investment is a 77% stake in a retail pharmacy business that owns 368 pharmacies as well as a wholesale pharmacy and medical supplies business. While LON:CGEO does not pay a dividend it regularly buys back its own shares at a discount of around 60% to NAV, thereby increasing the NAV of the remaining shares.

kendal

Why no report on Gooch & Housego - significant AIM quoted company with poor but not very bad results today?

TheFloatingInvestor

A lot of profit taking going on today, more so in the small cap space, which is a little disappointing, and seems upside down to me but is presenting buying opportunities.

Small cap shares do appear to be holding up of late above previous lows, but it all seems a little fragile and I continue to keep a decent amount of powder dry.

We could do with some positive momentum drivers, such as

China fully remove Covid restrictions. (Seems close)

A decent reduction in inflation this side of the pond. (remains stubborn)

Some talks between Russia and America re the Ukraine war. (A long way off)

Its hard to call ATM, but with the recession looming I can't yet see the light at the end of the tunnel, with the exception of perhaps a Santa Rally up to Christmas (FTSE 250 and below?), then a tough period dodging profit warnings H1 2023.....maybe then the last of the Bulls will exit the side door...

Slow and Steady wins the race I think, and good luck to you all traversing this minefield!

Bouden54

I would just buy BP and Shell and save on the fund fees! Alternatively, ishares do a range of energy based ETFs. If you prefer a fund then Guinness Global Energy is pretty good.

peterthegreat

Multibagger prospects are sometimes discussed on this board and one corporate approach which has sometimes generated multibaggers is the serial acquisition strategy (accompanying organic growth of course). This can be a risky strategy if executed too aggressively so I tend to prefer conservatively run serial aquirers. I would suggest that Solid State (reporting today) is one such company. In terms of its corporate style it reminds me a little of Porvair, another conservatively run serial aquirer. Another company reporting today is Oxford Metrics which I have held for many years but I must admit, I never really though of this as a serial aquirer but a passage which caught my eye today was the statement by the compay that it has a:

"M&A pipeline focussed on acquisitions in known markets of
entertainment, Life Sciences, engineering and sports, and on companies which
possess hard-to-replicate, deep Intellectual Property in integrated Smart
Sensing and attractive financial metrics"

So perhaps I had better add that to my list or potential serial aquirers, presumably the funds from the sale of Yotta will be used to buy companies with the characteristics described above.

For me, another attraction of this type of strategy is that depressed share prices of smaller companies may contain a silver lining as they make potential aquisitions cheaper, providing the aquisitions can be made mainly with internally generated cash, although some of the best bargains are of course to be found in private companies, as Judges Scientific would testify.

mojomogoz

Thanks for the info - I don't really know Georgia Capital (LON:CGEO) - however I wouldn't invest other than a drastic discount and after a tough period economically for the country. That's based on quite a bit of experience in emerging and frontier markets directly.

If a discount for what you get is of interest then I'd suggest Petershill Partners (LON:PHLL) with a 50% discount to tangible book -> I've not finished looking in detail but its interesting as have the discount and potentially a growth driver too. However the big ownership by GS is off putting as so dominant

planetx

I’m with Georgia capital big time in this debate .

Pretty much all it’s market cap propped up by bank of Georgia holding .

Bank of Georgia is a great share to own in its own right.

Georgian economy has been strong for the past few years and is surging now 20% with influx of Russia .

The discount to NAV is silly because Bank of Georgia is the prime foundation .

Anyway I think it’s a decent strategy to have a percentage of your fund invested into an economy growing at 20% as opposed to UK / USA that are very clearly not !

Also think Georgia is a bit more than a “frontier economy”

Happy to hold, Bank or Georgia I hold too and is my best performing share this year as I bought after it was sold off following Putin invasion .

davidjhill

Agree : Bank of Georgia (LON:BGEO) has compounded at 17% a year for the last 10 years for me and pays a nice 8-9% dividend! It has a strong CET, good cost to income and leverage ratios and is well capitalised and run. Still only trades on a PE of 4 too so I consider there more to come.

Georgia as a country is hardly frontier either and has good GDP growth.

Most of Georgia Capital (LON:CGEO) price is accounted for by its holding in Bank of Georgia (LON:BGEO) (listed) and cash. One thing levelled at it previously was whether it could realise the value of its private assets through a cycle. It demonstrated that via the disposal of its Water utility business for a good premium to book and in cash (USD).

Current NAV is a few pence short of £20 so this now trades around 37p in the £ (so at a 63% discount).

Note sure why Mojo thinks there is a load of hype around it. I've seen very little other than mentioned on here a few times when results are out.

MichaelFBS

Hi Paul

Have you thought about using:

Either an automated (AI) translation service $10/hour such as Sonix https://sonix.ai. Never used but just Googled.

Or an online transcription service of a real person who do them pretty cheaply. My 16 year old was going to offer the service for very little (to you or me but meaningful to him) but I think his A-level studies got in the way.)

Regards

Michael

catalogue

Solid State (LON:SOLI) is one of the few bright lights in my portfolio @ 1.5 bag so for this company the PE seems justified. I have had Vianet (LON:VNET) for so long it's getting mouldy, I know I should just dump it, but in this climate where do you stop?

Hotel Chocolat (LON:HOTC) Paul, the video was worth watching for your chocolate nose! I share your dislike - whatever happened to the drive against plastic packaging, which doesn't seem to bother anyone anymore.

You are hyping Georgia Capital (LON:CGEO) David to use it as a comparison against Mercia Asset Management (LON:MERC) - just a very different risk.

planetx and David - you may not feel Georgia is a frontier market but I assure you it is - with all the variable capital depth and risk appetite that comes with. Companies that would be safe as houses in UK go under in those markets due to surprising events...think the financial crisis of 2008 in western markets and how that felt here (...like out of control armageddon and even good things could go under!)...that's how many crises commonly feel in frontier markets. They can be good investments but one must adopt a different risk-return mindset to developed markets.

What if the bank that underpins value has a negative credit cycle and decides to cut or hold dividends? Georgia Capital will be looking for capital at exactly the wrong time, just when its acutely so across the whole country (you may grumble at dilutive raises on AIM recently...but there is still funding for some risky things and in Georgia sometime in next few years there will be no funding for good things!)...that's procyclical risk magnification...are you sure you've quantified these risks or you just looking at headline numbers and discovering that frontier markets are priced more cheaply? (and note the asset managers with a holding in the company or the bank -> be aware that this is them using a more liquid and easily accessible instrument for their Georgia exposure...and they will be hard sellers of it for liquidity when the inevitable downturn comes) ...

...which gets back round to the silly idea of saying that Georgia Capital is better than Mercia as its on lower price to NAV -> one you got Mercia discount wrong and the successful profit making operating company must be consider as part of any value calc and I'd suggest bring Mercia to a price to 'fair value' that is less than 60p in £ when translated into NAV speak. And two, the argument above!

I could accept an argument growth is better for Georgia Capital and its cheap for that growth etc....but if you are saying that its 40p in £ (looked 45p to me on quick look) then that's a bad value trade off against Mercia at (IMO) 55p (you can quibble and say 60p) in £ on crude equivalent (and Mercia probably has decent growth operationally and in NAV terms).

So I think you guys really don't understand the risk you are taking. I say this having invested directly in emerging and frontier markets spending significant time in them.

Whatever...I like Mercia...I might be wrong. You can find big discounts elsewhere. I like the ones at Petershill Partners (LON:PHLL) and, sideways but related to this discussion, Secure Trust Bank (LON:STB) for example and think they are severely discounted good assets....I don't like the one at Molten Ventures (LON:GROW) as I see NAV and funding stress.

Georgia Capital may continue to do very well. I'm no expert on Georgia. But your arguments hint to me you don't really comprehend the risks you are taking.

PS high GDP growth economies tend to provide poor equity returns compared to more moderate growth econs. There is no pro-risk argument there. The reason is that the downside tends to be brutal and reveal a lot of bad risks were taken plus foreign capital flows out fast compounding it.

PPS if you want to find a frontier market that seems like it isn't then I have you Argentina to sell. I love it as a place and got some truly great cos (as they have to be to survive the cycles). BUT it is very definitely a frontier market...and when people locally and internationally lose confidence in it its messy.

Its truly reckless to compare frontier risks to developed markets!

mammyoko

7th Dec '22

On the theme of mystery shopping, I wonder how many holders of Georgia Capital (LON:CGEO) or Bank of Georgia (LON:BGEO) have visited the country. I have. While it is a beautiful country full of wild, wonderful places and friendly, hospitable people, it is also riddled with corruption despite huge efforts to tackle it. They sacked all policemen over the age of 30 at one point to tackle this.

I do hold Georgia Capital (LON:CGEO) on the basis of its recent price performance against Bank of Georgia (LON:BGEO) but I hold in pretty small size for the reason that, having visited the place, it would not surprise me one morning to wake up and find that Bank of Georgia (LON:BGEO) had discovered significant accounting irregularities.

Sailorboy

Any chance you could look at Inland Homes following the appointment of a new CEO. It looks well undervalued!!

I agree mammyoko

Georgia Capital (LON:CGEO) and Bank of Georgia (LON:BGEO) may be great cos and stocks - I don't know and haven't done work. My naturally contrary mentality makes me wary of 'frontier market' stocks in country experiencing a boom with positive capital account flows (probably more speculative than structural...usually the way unless there are explicit capital controls) that neighbours such a big, dysfunctional and (to them) economically important country. My inclination (based on past sore slammed in door greedy fingers) is to be thinking about the exit rather than the entry. Frontier markets should be bought at bottoms when no-one likes them. That said, a growth period can prove elongated and powerful...maybe this is Georgia's time to shine...but its important to know that about Georgia to believe in the value of two discussed stocks.

My bemusement and annoyance is around the idea of making a discount to NAV/book value comparison between a frontier market stock and developed market ones. That basis of comparison would very rarely have one out of frontier markets...

...it makes no sense as a comparison.

As an example I exited NAK Kazatomprom AO (LON:KAP) earlier this year as internal Kazakh things got hot and we had Ukraine rumblings. Great assets and super cheap...but other circumstances looked dicey. I'm a uranium market structural bull and believe Kazatomprom is the best asset globally by a mile. If it were Canadian or Australian I'd have bags full of it. But had to let it go...knowing it could triple in value if things okay and uranium bull market actually gets going

Small Cap Value Report (Tue 6 Dec 2022) - HOTC, VNET, VIC, MERC, HSP, VRS, SOLI, SED

Agenda

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Paul Scott

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