Small Cap Value Report (Tue 6 July 2021) - CHH, GTLY, IKA, PURP, ALFA, KINO

6th Jul '21 by Paul Scott

60 comments 12147 reads

Good morning, it's Paul & Jack here with Tuesday's SCVR.

Timing - today's report is now finished.

Disclaimer -

A friendly reminder that we don’t recommend any stocks. We aim to cover notable trading updates & results of the day and offer our opinions on them as possible candidates for further research if they pique your interest. We tend to stick to companies that have news out on the day, and market caps up to about £700m. We avoid the smallest, blue sky type companies, and a few specialist sectors (e.g. resources, pharma/biotech).

A central assumption is that readers then DYOR (do your own research) and discuss in the comments below. The comments, incidentally, sometimes add just as much value as the articles. We welcome all rational views, whether bull or bear!

It's helpful if you include the company name or ticker within reader comments, otherwise some readers may not be aware of what company you are commenting on.

Agenda -

Paul's Section:

Churchill China (LON:CHH) - continued good trading, it's back to pre-pandemic 2019 revenue levels in both May & June 2021. Could this be benefiting from pent-up demand as restaurants re-open, and is it sustainable? Valuation fully factors in recovery, so where's the upside from here?

Gateley Holdings (LON:GTLY) - accounts delayed a week. Strange trading update, which doesn't confirm market guidance for FY 04/2021, but instead strangely refers to FY 04/2022 performance. I think this could be a typo. Have lodged a query with the company, and its broker. I'll update here if they respond.

Ilika (LON:IKA) - a quick, and fairly pointless look at the accounts for FY 04/2021. It's blue sky, and valued at £248m, so not something I can meaningfully analyse.

Purplebricks (LON:PURP) - quick review of results for FY 04/2021. This is starting to look interesting again, in my view.

Here are recordings of a couple of recent webinars which I found particularly interesting (no sections below, these are standalone) -

Cake Box Holdings (LON:CBOX) - FY results webinar from last week. I'm impressed with entrepreneurial management & the business model. A bit pricey now though. On my watch list, and I might buy on any weakness in future -

Studio Retail (LON:STU) (I hold) -…

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abtan

6th Jul '21

Purplebricks (LON:PURP) (I hold)

Things I liked

Gross Margins for the year maintained at historical averages (and hopefully the lower 60.2% in H2 was related to accounting movements and is nothing to worry about).
Note that all contractor/agent fees are included in costs of sale, not in "People Expenditure" further down the P&L.
Portal fees were a lower portion of revenues vs prior periods (2.8%), even in H2 (3.4%).
Expenditure on People was maintained at 22.1%, despite an additional £0.9m given to contractors who weren't generating any income during Lockdown 1.
Hats off to management here.
Marketing as a percentage of both revenue and gross margins is much lower than previous years. Even if it goes up again in FY22, I personally believe there is still a downward trend here.
Cost per instruction decreased. Unclear if this will rise again going forward. (I imagine it will, but it's a good thing that the company is now providing this metric.)
Capex was only £2.5m.
Lots of cash on the balance sheet.
The Money-Back Guarantee strategy. I hope that this makes the land grab quicker before more companies join the market.
I still don't understand how Strike will make any real money. Even the Rightmove listing fee can be obtained by private advertisers on some websites for £1/7days or £30/30 days.

From my notes from January 2021, Strike had accumulated losses of £38m. I haven't checked on updates since then, but clearly the owners have deep pockets.
Cash flow positive and still growing.

Things I didn't like

It's unclear what this -£5m "UK Financing" below cost is.
I'm wondering whether it's the factoring arrangement the company had (which I thought they were getting rid of.)
If it is, this seems a complete waste given the cash resources that Purplebricks (LON:PURP) has at its disposal.
Despite Net Instructions increasing by 14%, market share dropped. This is the most worrying thing.

No position change for me, though I look forward to seeing the new pricing structure in action and hopefully an increase in that market share.

Cheers

GN100

Wynnstay (LON:WYN) I tried to access the webinar today on Investor Meet Company. Unfortunately I was in an area with bad reception. Disappointing that there was a notice saying the webinar will not be recorded for me to see when I get home. Other websites manage this, notably our own Mello - I wonder why they (IMC) don't?

Effortless Cool

IMC do record their investor meetings; videos are available for every one that I have attended, going back to October 2020.

If the Wynnstay (LON:WYN) meeting was not recorded, that would be a decision made by the company management, so you should address your concerns to them.

sharw

Solved - the Marks and Spencer (LON:MKS) capital reorganisation is contained within their AGM notice - the RNS simply announced the date and referred to their website for details.

There is a very detailed explanation here https://corporate.marksandspencer.com/msar2021/notice-of-meeting-2021.pdf (resolutions 15,16,22).

As Paul commented there is no impact on shareholders and normally this little trick is used to boost distributable reserves. However, in this particular case it appears to be to lower the cost of issuing shares to employees.

Deegee Eff

£merc had fabulous figures. Eps of 7p .Nav of 40p. And a very bullish comentary

Mercia Asset Management (LON:MERC) I meant.

Silver Moon

Gateley Holdings (LON:GTLY) and Davidsmyly, according to Stocko the frequent selling of shares owned by its Directors happened 17 months and more so its all water under the bridge. Around the time when all of us should have been selling all of our shares! I do hold.

Silver

Wynnstay (LON:WYN) Thanks for the info - maybe it will appear on WYN Investors website in due course.

grb

I've had a position in Caledonia Mining (LON:CMCL) for about 7 years now. It's clear that the share price got ahead of itself in that spike last year, but I've bought more since it dropped below 1300. It seems to me that two things are not being properly valued - a) the step change in production now the Central Shaft is in use, and b) the sudden ending of the outgoings on that project after several years of investment. I think it's time I topped up again.

Tommy H

On the topic of Audit delays

Creightons (LON:CRL) have just announced they are not presenting tomorrow due to audit with no specified date...

I hold

JimMcLad

£WYN FYI Watched a presentation of their latest results early this afternoon on Meet The Investors . The presentation was recorded and should be on the MTI site fairly soon.

The video is now available on IMC.

Golspie

£PURP. I liked the proposition and recommended an Èdinburgh branch to my son, but it was a mistake. Service has been very poor. He finished up writing the Particulars. They gave no substantive advice on price and were no help on a negotiation. Now I know why they are cheap to use. Never again. I think there is a place in the market for an agent who charges a basic price if the HR value isn’t exceeded but a much higher rate on the excess - that would be a good incentive.

Bullion

I don't get it myself either. We sold a house earlier in the year with a local estate agent and the couple of grand in fees was well worth not having to take time out to conduct viewings, get personally offended by low ball offers and was useful for creating a bit of distance between us and the buyer.

My only regret is that I sold to soon but I suppose thats the story of my life.

Wynnstay (LON:WYN) Late update - a link has now appeared in my email to view the recording. I take it all back.

Paul Scott

I also listened to the Wynnstay (LON:WYN) webinar on InvestorMeetCompany (IMC) and thought it was very good. Particular points were that the freehold property is still on the balance sheet at cost (bought in the late 1950s!) and he estimated was worth £10m more than book value, but also stressed that it's being used to run the business, so isn't surplus as such. It seems crazy to me that accounting standards don't require freehold property to be shown at open market value.

It's subjective, but management struck me as "steady eddies", which is what you want for that type of business.

Good answers to questions about inflation & pricing power - they take a small margin of about 2.5%, and the revenue is largely pass-through. I.e. if input prices go up, they reflect that in higher selling prices almost immediately, which the customers understand and expect.

The big issue for me is the development of agritech. I listened to a fascinating webinar on Moneyweek, where Merryn interviewed Jim Mellon. It's here, and well worth a listen. Mellon reckons that lab/factory grown meat, fish, and dairy could rapidly gain ground, and supplant about half of existing animal-based production. If he's right, then that would be devastating for farmers, and animal feed sellers (like WYN).

I couldn't ask the question during the webinar, because I was trying to cook lunch on a camping gas stove on my very windy balcony here in Bournemouth! (it makes the kitchen smell cooking indoors).

Regards, Paul.

Hi dogon,

Good question, this prompted me to check whether Studio Retail (LON:STU) (I hold) is capitalising an outrageous amount into intangible assets for IT development costs, which is one of the faults I found with similar business model N Brown (LON:BWNG) (which I sold out of recently, when the legal case against Allianz doubled in size from large, to scary).

Here is the relevant section from STU's recent results, cashflow statement.

As you can see, it capitalised software & IT development costs of £8.5m in FY 03/2021, and almost nothing the year before. That's a very much better situation than N Brown (LON:BWNG), where EBITDA is meaningless because the capitalised IT spend is about 4-5 times the size of what STU is capitalising.

Sorry that doesn't directly answer your question about what is expansion vs maintenance capex, but I thought it was relevant to mention.

The more I look at STU, the more I like its valuation.

Hi Dogon,

In the most recent 2 years, STU has generated strong cashflow, especially most recently for FY 03/2021, but it's mostly ended up going into a larger consumer credit receivables book. That's fine by me - revenue grew a lot, so I would expect the receivables book (a key profit generator, at high interest rates charged to customers) to also have risen.

davidallen77

7th Jul '21

cheers paul i work nights at the big big sbry 30 east of bournemouth...

davidsmyly

Hi Silver Moon,

Re: Gateley Holdings (LON:GTLY), you are absolutely correct. I was idle and took the comment on the share sales from Jack's analysis of the company on 6th May at the time of their trading update, when he said that "the scale and frequency of selling is notable".

Small Cap Value Report (Tue 6 July 2021) - CHH, GTLY, IKA, PURP, ALFA, KINO

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