Small Cap Value Report (Tue 7 Feb 2023) - NUM, MTW, EBQ

7th Feb '23 by Paul Scott

44 comments 6553 reads

Good morning from Paul & Graham.

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.

Agenda/Summaries

Graham’s Section:

Numis (LON:NUM)

Share price: 219p (pre-market)

Market cap: £241m

This investment bank was another member of my top ten list for 2023, so let’s check out its AGM statement!

The statement covers the first four months of its financial year, i.e. from October to January inclusive:

The first four months of our financial year have seen a continuation of the difficult market conditions experienced throughout FY22, with very subdued levels of equity issuance and corporate activity. Our revenues for the period were consequently similar to the second half run-rate of FY22.

It’s interesting that markets have recovered noticeably from their lows, but this has not yet translated into the sort of dealmaking which the smaller investment banks rely on.

For example, here’s the FTSE-350 over the past six months:

upBKSCNgkMR-ClyIZ1eOJta_oXwO2WIfyXuDSKYo1VviSpSJuYbL1EjVoGIU5djQrVuwC0JW7sSf0CtI6utjQwS8sELyBmwD3G3D98ZzdWi4Z18MK-JBLMui5_aN11vntTt5Hrw4nzlQGYOJdLgdBK4

And the AIM Index over six months:

IVzAZ2shZ68x-BI43U5QlZJbDVfxWs676O76xMyh5uwFap0QiXqDa_GHWf28ndmTGU2tVOisQIPfp1PNPB0J8dzxhAKp-lJukHpIstmf48tiAY2MF-MnScwPWjHpb_iKgIXwzLhb3lW0_3vM9Hf8BC4

Things are even better in big-cap land. The FTSE-100 made a fresh all-time high a few days ago.

But despite the improved sentiment, we are not yet in an environment where companies wish to IPO en masse. A nice sign that valuations are still very much at the cheap end of…

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Helvellyn

7th Feb '23

Thank you davidjhill, your post just satisfied my daily need to learn something new. Also can i complement you on explaining it in a way that I could understand.

Caduceus

Does anyone know if the stockopedia team are onto fixing the News viewing page. It's virtually unusable, I have to go out of the stocko ecosphere to read them properly.

Snazzytime

hi Davidjhill

Agree with all you say.

However, I was trying to keep it as simple as possible.

The only figure that affects company cash flow in the short term is any deficit funding agreed at the triennial review. Once that is agreed the company are commited to pay the contributions no matter what happens to the accountancy valuation of the fund in between triennial valuations.

You can only find this figure by reading the detailed pension section of the Annual Report.

Snazzy

rmillaree

"The only figure that affects company cash flow in the short term is any deficit funding agreed at the triennial review"

IMHO if its an elephant in the room one would be stupid to pay little attention to where all the figures are trending and simply concentate on current obligations/cashflow- i would be certain the "clever money" is looking at the next revaluation and factoring that in (whether payments are likely to go up or down medium term),The fact a company has decent cashflow for the next couple of years )ie low repayments needed)( would mean didly squat to me if those payments could double or treble in a heartbeat and the clues that will happen are present!

In some respects sensible thing is to stay away from "large obligation" companies unless you are happy with the risk. I have large (for me) holding in Norcors which has large scheme and is therefore risky - i am happy with risks but i am aware things still could deteriorate badlly quickly. Just look at the comments by the ex pm (short served joke of a pm) who was blaming everyone else for not knowing that liquidity could be an issue in pension funds investments - Norcros might be adversely affected in this regard and if they have been i certainly didnt see that coming. (note they did in a recent update advise things were "ok" at the time in in that regard)

If you have any doubts simply red flag it all - plenty of companies dont have that hassle.

garbetklb

Pensions

David - hear your comments about the various hedges pensions funds can take out to try to match liabilities & assets. But aren't some of these akin to the LDI strategy that was in the news a bit recently?

Presumably, affordable hedges protect the fund up to a deviation of x% from the mean? So, if we get another Truss tantrum, the risk is that the fund blows through the hedge? From my past in a different financial field (reinsurance), I'd guess that buying unlimited cover would be one, or more, of : unavailable / unaffordable / uncollectable

Raleigh4343

Thanks Tasmin. I love PI World. Really fab. I was on the Untie Nots website earlier. It’s impressive stuff and the two CEO’s look the biz.

Tamzin. I once misspelled typo. Tpyo.

nettle

A great many thanks to you, and to the others, who have taken such trouble. It has been very educative for me. And this is an example of why the Small Caps report is so useful, and even enjoyable.

I just wonder if any of you think that Stocko could produce somewhere one simple metric showing the size of the Pension Fund Deficit. I have learnt from you all that, to judge the serious aspects, there are many important issues of the deficit that need looking into. That the ramifications aren't simple: it is no good just looking at size.

But perhaps it would just be a useful Heads Up to be alerted in some way if there is a big deficit. After all many companies don't have one. And if one could easily see there was a bit deficit, then this is a useful warning to do the further research that you describe. But one wouldn't have to unnecessarily burrow into company accounts.

Very pleased that my head has not yet been bitten off. But I may take valium just in case.

GTrader

If only I could get £167.68 for my W7L holding!!! 1/100

davidjhill

The LDI crisis was one of liquidity not an issue with the hedge itself nor an issue of leverage. In effect the Gilts market stopped working and those wild swings created large collateral changes. The BoE stepped in to protect the market and effectively provided that liquidity backstop, which is one of the things a central bank should do when the market fails due to an extreme event.

But matching can be done in various forms. At the most simple level if I am due to retire in 10 years time and the pension scheme is due to pay me a single one off payment then it can buy a Gilt that also matures in 10 years that matches that liability. Result - zero pension deficit. Doesn't matter what happens to interest rates or inflation or Gilts during those 10 years - I hold to maturity and settle my liability. My only risk is that the UK Govt defaults and if I really want to I can buy a credit default swap very cheaply to hedge against that unlikely risk.

We've just seen one of the worst types of liquidity crisis in bonds and the markets survived and so did the pension funds because there are mechanisms in place to deal with it, even if they do create headlines!

The point being that if you want to consider whether a pension scheme represents a real risk to a company you need to look at several factors that might include actuarial deficit, current mark to market and hedging strategy and combine that with current funding requirements agreed with trustees and whether those are likely to change, and if so, when.

Anecdotally, despite having been through a financial crisis, plague, war, inflation, liquidity crisis, recession and political turmoil in the last 15 years how many companies have actually been brought down by their pension scheme? very very few and that's because they are largely well run and don't create massive cash drains. Most instances of pension scheme failures (Arcadia for example) are bad failing businesses that go bust on their own rather than due to the pension scheme demands.

Dextro70

Oooppsss! Thanks GTrader. Hope this one is ok now!

"Anecdotally, despite having been through a financial crisis, plague, war, inflation, liquidity crisis, recession and political turmoil in the last 15 years how many companies have actually been brought down by their pension scheme? very very few and that's because they are largely well run and don't create massive cash drains."

A pension company doesnt need to bring down a company to destroy shareholder value - simply look at reach and de la rue for examples of where shareprice has gone nowhere and the realities is the pension issues are beinga very active drag on those companies - slightest bit of bad news and effectively the "pension creditor" effectively can control what hte company does. As ever the lack of any issues does also not mean that there wont be soemthig that goes wrong unexepectedly in the future too.

yiannos1

Did I read that correctly?

The LDI crisis was not an issue with the hedge itself nor an issue of leverage?

I will appreciate if Paul or Graham can explain what happened with the LDI crisis and the reasons why many of the pension schemes have to be hedged and leveraged in order to be able to pay the pensioners what they are supposed to pay them.

rk71

Alumasc (LON:ALU) I hold - re the pension deficit, the paragraph below is from the FY 22 results published 6/9/22, showing both the amount of deficit and company contributions reducing by roughly half

Pension scheme

The defined benefit pension scheme deficit has further reduced in the year from GBP4.6 million to GBP2.1 million. I would like to thank both our Management Team and the Pension Scheme Trustees for the collaborative approach they have adopted to make further inroads to the deficit for the benefit of Scheme Members, through a combination of Company pension contributions, sensible asset investment decisions and the impact of gilt yields on liability calculations. Agreement has also been reached with the Trustees to reduce the Company's pension contributions to GBP1.2 million pa (previously GBP2.3 million) until the next triennial valuation in 2025, in recognition of the reduced scheme deficit.

rwedgbury

Paul, You wrote about your portfolio last week sometime. I now cannot find it. Can you send me the date please

Hi rmillaree,

I couldn’t agree with you more on this one.
I can name at least another 20 companies that they are just trading in order to service these outrageous old defined pension schemes.

I think a careful study of the defined pension schemes will help people understand what exactly happened with the LDI crisis and the reasons these schemes had to hedge and leverage ( due to the low return of gilts and bonds in general ).

Thanks

BishBashBoshShares

It was last Fridays report.

galois

I think a closer review will show it was an issue with leverage. Otherwise there would have been no margin calls, and no problems.

haha - you're kidding right? You understand how hedges work in the financial markets?

Hi galois

I will try to explain this as simple as possible as it was down to over leverage.

The regulator makes it compulsory for the pension funds to invest in gilts. But for so many years the return was minimal and they had to use swaps in order to get a floating rate against the fixed coupon. In many instances they did actually repo out the gilts as well in order to buy shares that paid a decent dividend. And the mess became bigger and bigger as the rates were rising and margin calls started to emerge and the only liquid asset they could easily sell was , of course , equities.

Thanks

Small Cap Value Report (Tue 7 Feb 2023) - NUM, MTW, EBQ

Agenda/Summaries

Graham’s Section:

Numis (LON:NUM)

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Paul Scott

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