Small Cap Value Report (Tue 7 Dec 2021) - SOM, TND, SUP, SDI, MERC

7th Dec '21 by Paul Scott

91 comments 12459 reads

Good morning! Paul & Jack here. I'm working on a market comment section, so that should be up later. I know people like us to publish an opinion on markets, especially at times of great volatility.

Mello - tonight. There’s a free show tonight, starting at 17:30, with 6 company presentations.

Details here

Agenda -

Paul's Section:

Somero Enterprises Inc (LON:SOM) (I hold) - another upgrade to estimates, as I suspected might be the case when guidance was raised 21% on 8 Sept, but still looked light. We get another 7% earnings increase today. The PER is now only 10.7, and the divi yield over 7%. It's got pots of cash on hand too. The valuation looks crazily cheap to me.

Supreme (LON:SUP) (I hold) - interim results and outlook are pleasing. Balance sheet is solid. I like this company - entrepreneurial management, and it's establishing a good track record of decent & growing profits & cashflows. Valuation looks reasonable - looks a decent GARP share.

Sdi (LON:SDI) - very impressive interim results, boosted by one-off orders (as previously disclosed). I like this share a lot, and see it as an impressive acquisition vehicle, with experienced management. The valuation's a bit toppy for my personal taste though. It reminds me of Judges Scientific (LON:JDG) - which has been hugely successful for investors, pursuing a similar acquisition-driven strategy for niche, high margin small businesses.

Jack's Section:

Tandem (LON:TND) - (I hold) - Q4 revenue flat year-on-year (after being up 6% in Q4 2020) - a tough comp, as customers previously caught up on delayed orders from the first lockdown. Full year profit to be in line or slightly ahead of market expectations. Signs of cost pressures easing. Short term share price performance is difficult to predict as the low liquidity means relatively low levels of buying or selling can move the price, but the valuation remains modest.

Mercia Asset Management (LON:MERC) - positive momentum and the company’s core activity of investing in private, growing, regional enterprises in attractive sectors means it could play a useful role in portfolio diversification. Two aspects to consider: the direct investments and the third-party funds business. Not the most straightforward to value or forecast, but perhaps therein lies the opportunity.

Explanatory…

Unlock with Email

Unlock with Google

Already have an account?
Login here

mark1308

8th Dec '21

Me too !

Liquidium

Completely agree with Edward below, i have no idea why people seem to obsess over the US withholding for SOM, i'm more than happy taking 85% of a roughly 7% yield on a fantastic business where growth is by FAR the primary driver of returns....

74% return over the last 1 2months and people are put off by the thought of losing 15% of the dividend yield!

Am i missing something here?

Over the last year £1k invested sees £740 in growth + £121 in dividends (rough example and paid at the end of the 12 month)

£18.27 is withheld for US tax.....

mojomogoz

Hi Jack. Thanks for covering Mercia Asset Management (LON:MERC) . Tricky company to get to grips with. The starting point IMO is to split in two pieces and look at the dynamics and price of those pieces:

1) A listed VC vehicle trading at NAV. IMO its a pretty conservative NAV too due to the stage of investment and how Mercia invest. By being an accelerator for very early stage EIS or now VCT companies that they have nurtured Mercia tend to own dominant stakes in their portfolio companies. This means there's very little 'market price' in the mix (as opposed to something like Molten Ventures (LON:GROW) which is riding the market dynamics and aggressive pricing of VC and 'exciting' cos). I'm not saying their valuation are low (eg their largest position nDreams a VR/metaverse company is on high price to sales etc) but just that they have tended to not head into stratosphere. This gives downside protection and a degree of upside on exit and/or finance rounds that are more broad based. Clearly it introduces a risk in that they do need to socialise their holding into the broader marketplace (market and industry buyers)...but they have presence and seem to be able to this

2) A £760m FUM asset manager with high fee sticky business. This business currently not in the valuation at all so is free for investors today. What value should it have? Dunno. The dividend they pay comes from the op cf from this (they said on call yesterday that they may also sometimes use excess cash from proprietary realisations too...inc special divs...this is more idea than policy at the moment it seems). So above when I said 2.5% yield for fy22 (might be a touch high but just using for illustrative purposes and is where I think they will go...they are on course for at least 1.6%) that's being paid wholly or mainly from asset management earnings. 2.5% translates into a 17% yield on asset management if we give it a conservative (given type of biz they run) 3% of FUM valuation.

3% FUM valuation means asset management has £23m value. So add that onto £163m market cap. 3% seem low and then factor in that its a growing high fee long term mandate business. What can we get to? 10% of current FUM wouldn't be ridiculous if fulsome and something to be earned.

Clearly the two businesses are intertwined and not separate so sum of the parts analysis needs to be done with that in mind. Also, they don't hide that they could seek equity finance to make another acquisition like Northern Ventures. They've made a good job to date of that acquisition so why should they get a discount to valuation for that ambition when say an Sdi (LON:SDI) gets priced up for the same?

Moving parts....I think when you unpick the biz is undervalued for what it is and that is before factoring in growth which comes from both balance sheet investments (that are now maturing whereas 2-3 years ago still a bit unripe) and asset management 3rd party FUM.

In addition, current NAV of VC piece only (which equates to whole market cap as if asset mgt doesn't exist!) is about 1/3rd cash. This is safety...but its also a cost in that VC investing has J curve effect whereby new investments take time to show value...but they do have maturing investments to put opposite that...so on balance there isn't a reason to value below NAV unless sceptical about them (remember that costs don't eat into NAV as asset mgt biz covers them)

peterg

I agree, 75% of a good div is good, and not worth obsessing about. However, there have been cases reported in the past, and I can't remember where, of people who should have been paying 15% actaully paying the full 30% as their broker failed to reclaim. That sort of issue is worth chasing up and checking.

Rusty2

Somero Enterprises Inc (LON:SOM) @peterg I think you mean 85% not 75%? Yes worth checking, some platforms fail to claim back the 15% tax. Or 30% if in a SIPP.

HL are pretty good on this sort of thing.

OK, I can't subtract!

illiswilgig

Mojo - thanks for an excellent write up on Mercia Asset Management (LON:MERC) (I hold)- which is not to diminish Jack's coverage - just to say that in my view multiple independent views give a much richer picture. And it seems that you likely have quite a lot of experience in this area - so thanks for sharing.

Like you I particularly like the evolution to the current position where the fund management funds the organisation without diminishing the growth story of the investments. But then I am a sucker for a growth story sitting on top of a business that pays the daily bills and this one ticks my boxes there.

Reasonably impressed with management so far as well. But I reckon it will take a while to get to know them. I think I'd be worried if they came over too polished and shiny?

And of course I like that it's been fishing long-term in a non-London pool and developed broad connections to Universities outside London - which I think offers opportunities to outperform in the very longterm. After all its not an accident that the industrial revolution did not start out in the square mile :-)

I only have a modest (for me) holding here - but assuming things continue to develop as well as they seem to be I'll be looking to increase it as soon as I can free up some funds,

cheers

Mark

It looks like Ig Group (LON:IGG) have paid Spectra Systems (LON:SPSY) dividend with 30% deducted, I will take this up with them.

Revs8

A J Bell appear to have deducted tax at 17.6% for my Somero Enterprises Inc (LON:SOM) dividends in my ISA (0% for those in my SIPP). I’ll ask them to explain the calculation.

ignore the above comment. It’s15%. Well done AJBell.

Thanks. Its a tricky one to understand. One where the layers peel back a bit. I have a moderate to large position for me. I tend to be a bit early/contrary and then will run with things. I'm hoping to run with Mercia Asset Management (LON:MERC) for long while. Not my most exciting holding but I can see a double over 3 years from here which is my usual minimum criteria.

I've been in for a while (2019 sometime). Actually from before there last raise which annoyed a number of PIs...however I expected a raise as it was clear the business would need a bit more financing if one looked in detail so I was surprised at the surprise! Then surprised at the Northern acquisition...but impressed that it looked good buy.

I'd bought a bit sub 30p thinking cheap enough even tho raise coming (and an exit would have bumped price on me so decided to take a piece). Then participated in the raise but only modestly. Then I got lucky with covid sell off and double whammy on their sp whereby discount widened AND they needed to write down value of some of their more industrially exposed investments...the nature of the beast here is that you need to recognise your lumps early and wait for the sugar...and the biggest write up in value of a holding this interim was one of the industrial companies they had written down.

Overall I think they are good. The negative that everyone knows about is that they will tap market if they find another acquisition that fits...hopefully they can acquire the AUM without much dilution through good structuring. But at c.£1.4bn 3rd party funds which they are approx targeting through organic and inorganic (hopefully lot of former) it becomes v hard to ignore the value of their 3rd party asset management business.

Ig Group (LON:IGG) have taken off 30%, just been on the phone for about 1 hour with them, they will be looking into it. I won't hold my breathe.

smilingmickey

Hi Paul,

I've held Somero Enterprises for a number of years now.

I spent some time in the flowing concrete business, whilst working in Canada/USA. a few moons ago.

This has enabled me to understand how Somero has managed to capture value from this market for such a long period of time.

It would appear that Somero is categorised as a Construction Stock. It should be looked at in a different way!

Yes I was tempted to sell up. at one point I did reduce my holding slightly during these dark days. However Somero always generated enough cash and continued to pay handsome dividends when they considered it prudent to do so.

Holding an undervalued stock for the long term can be no bad thing!

abtan

Somero Enterprises Inc (LON:SOM)

Hi SmilingMickey

Thanks very much for the comment.

I wondered whether you would be able to share any of your own personal insights from the world of flow concrete?

Does Somero really have a unique, niche product as they claim? Is the ability to produce a flat level floor the true benefit of using Somero, or is it the machines they produce and high customer service that give them their USP? Maybe both?

I'd definitely be interested to see how you would categorise them, if not under Construction.

Many thanks in advance!

Paul Scott

Thanks Neville.

My market comment stuff might have to wait until the weekend, there's so much going on, and now market sentiment seems to be turning positive again, so it's maybe irrelevant? (I was thinking about how to deal with a downturn).

It's the same for everyone, you can only write interesting things when you want to, and it flows.

Best wishes, Paul.

9th Dec '21

I've had an update from Ig Group (LON:IGG), they did initially deduct 30% but there was contra entry some weeks later and then a new payment with 15% tax deducted, so they got there in the end.

11th Dec '21

Hello Abtan,

Somero's US customers are in the main smallish local construction businesses who have experience of use of flowing concrete in flooring. They would be run by entrepreneurial folk who employ construction workers as and when they win contracts. If they win a flooring contract (with say Amazon) for a building, they will probably not have the in house expertise to progress it without support. This is where Somero comes in. Their costs will have been allowed for in the quote! The end user/contractor will both have the confidence that a flooring job is likely well done and will not require ongoing expenditure on repairs etc if it is supported by Somero's expertise.

Note that Somero's volume of business moves up and down (in the US) depending upon the overall level of construction business at the time. However its margins do not. They are the market leader by a mile. In my view they are a service business with a superior level of IP in a market they dominate (for now.)

Thanks smilingmickey,

I'm particularly surprised that "Their costs will have been allowed for in the quote!"

This is quite remarkable really. I always thought the construction business would pay for the Somero equipment, but if it's Amazon et al essentially paying for this, then that makes Somero an even more enticing proposition.

Presumably once a contractor is on-boarded they may continue to use Somero in the future too, irrespective of whether the end warehouse user specifically requests them?

Thanks very much again for taking the time to respond - most appreciated!

ChattyChimp

14th Dec '21

iweb are 'proper rubbish'. It is run on the cheap, trying to contact them is a nightmare and when something goes wrong, as it inevitably will, they are unable to sort it out, even when you make a complaint. I moved, and haven't regretted it.

Small Cap Value Report (Tue 7 Dec 2021) - SOM, TND, SUP, SDI, MERC

Unlock the rest of this article with a 14 day trial

About the Author

Paul Scott

91 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...