Small Cap Value Report (Tue 7 Mar 2023) - FOXT, HAT, WIN, CLX

7th Mar '23 by Graham Neary

63 comments 8444 reads

Good morning from Paul and Graham!

Agenda:

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.

Paul's Section

Wincanton (LON:WIN)

231p (down 24%)
Market cap £289m

Trading Update (profit warning)

Wincanton plc, a leading supply chain partner for UK business, today provides an update on its trading performance and outlook.

FY 3/2023 will be OK, with results to be in line with expectations (PBT up >5%, despite headwinds)

Net cash expected to be £0-10m at 3/2023 year end.

Problems have emerged for FY 3/2024, specifically the loss (on retendering) of a large and high margin HMRC contract, which will now end June 2023.

“More challenging external environment” is also mentioned.

Revised guidance - FY 3/2024 profit will be “materially lower than current market consensus” of £63m PBT. I usually take “materially” to mean at least 10%.

Many thanks to Liberum for crunching the numbers for us, and making them available on Research Tree, this is incredibly helpful -

FY 3/2023 is 41.5p

FY 3/2024 is now dropped 20% to 30.4p, so the PER is now only 7.6x on the reduced forecast, which strikes me as good value, for a fundamentally sound business.

My opinion - this is a disappointment, but not a disaster.

It just goes to show how external investors don’t really know what’s going on at any company. We like…

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Mark L.

7th Mar '23

I'm kicking myself a bit today regarding Calnex Solutions (LON:CLX) . I noticed two large director sales on 17th and 19th January at around £1.92.

They say directors' sales are not necessarily a bad sign, but exactly the same thing happened with Strix (LON:KETL) not long ago. That is a large sale followed by profit warning a few months later.

Not sure what lessons to learn from these two examples if any? With hindsight Strix (LON:KETL) was a higher conviction holding because of its good cashflow and not too demanding multiples. In contrast Calnex Solutions (LON:CLX) was trading ona high PER only justifiable for a growth company.

One thing I HAVE learned over the years is to run profits and cut losses. So I sold Calnex Solutions (LON:CLX) today for 30% less than yesterdays price. Ouch!!!

Spender71

Not if held in ISA or SiPP.

Funnymoney

Slightly tangential, but a UPS driver of 30 years in the home counties told me that it has never been so quiet. Having said that, I do have a small position in DX (Group) (LON:DX.)

Lucky dip

I agree and both suffered this morning, admittedly only 13% drop for SPT.

I still prefer to stay with SPT for the long term. It has good record, a bigger company and the statement was a cautious outlook which may prove to be over cautious looking 1-2 years ahead.

Helvellyn

Commiserations Mark but TBH the director sales you mention and the profit warning from Spirent Communications (LON:SPT) ( a Calnex Solutions (LON:CLX) customer) on Jan 20 were a pretty good indication of what could happen.

Michael C

I have listened to the AEW REIT presentation which neils mentioned and noted the following which is very relevant to Regional REIT (LON:RGL) and also the MEES problem. I think it tends to confirm what I said above.

Offices: Just as an outlook on that sector [offices] I have some concerns about office occupation and not quite knowing where that's going to settle yet. Clearly it's settling at levels much, much lower than prior to the pandemic, and I absolutely believe in offices but I know they will not be used to the extent that they were before and in addition to that the environmental credentials for offices are becoming significantly more important to tenants and that's really being reflected in investment values at the moment, and I don't quite know if the market has quite got a handle on the costs required in order to meet tenant demand there, so I think there's a lot of capital expenditure coming through non-environmentally [?] offices so it makes me slightly wary of the sector and I'm grateful that we have a low exposure in a few select assets. We might look for some opportunity here if it's priced in line with alternative use values but I would expect that to be fairly few and far between. Later in the presentation they expressed marked pessimism about the office market generally - they said they do see a future for centrally located buildings in vibrant exciting cities with at least a B EPC. I guess that means they wouldn't be interested in the sort of property that Regional REIT (LON:RGL) specialise in.

Industrial: [giving an example] we managed to improve the environmental performance of this building and had the EPC re-assessed following improved insulation to the new roof of the building and we moved the EPC from a C67 to a B44... and that means it will be resilient to all the new regulations coming in as of April this year up to 2030 - but it cost them over a million CAPEX to get there.

MEES - [good flowchart at 39m] - confirmed the points I made about the regulations - they have 6 units in 2 buildings which fail the April deadline for an EPC rating of E or better. One building is rated G on its EPC which they are going to demolish and redevelop, and one rated E which they hope to refurbish.

BnB

Calnex Solutions (LON:CLX) At 117p, the share price looks expensive, so the current share price assumes that profits are going to recover considerably in future years.

A fair bit of negativity being expressed in Paul’s report and by those who shared the trip down today. And there may be a second lurch to come before orders turn around. But this is not an idiosyncratic company-specific warning caused by a strategic error or product failure. Every single company in the telecoms testing field has warned on revenues and profits in the last couple of months as big telcos temporarily tighten their belts in anticipation of the recession that may not now occur. Yet the need for investment in 5G is a powerful multi-year tailwind that will reassert itself in the not too distant future. And those test kits will start flying out of the door again. Keysight, Spirent and Calnex are all good companies whose profits will likely rise again to new highs, whatever the short term outlook. Just look at the historical progress and think about what rests on the 5G rollout - IOT, Industry 4.0, e-mobility etc etc. I think Spirent looks attractive as of today and I bought US-listed Keysight after its recent warning.

Rusty2

What tax deduction?

2.24% on my screen.

wolfspirit

Add Kape Technologies (LON:KAPE) to that - directors sold £M at top of the market, now buying it all back at a lower price!

rmillaree

Reach (LON:RCH)

Ref pension - your assumptions as to what they could or should have done seem very optimistic if i am being honest - they have huge scheme assets and huge scheme liabilities - nearly £2 billion a pop - i suspect doing anything isnt easy ref being nimble. I am flumoxed as to why you would be so confident the huge millstone wouldnt be a millstone. Ok some peeps have come along and said "you dont need to worry about that" but i would be pretty certain if they could have got shot of scheme they would have done exactly that. Note i am not saying the future wont be good its just all so "uncertain" and in that regard nothing has really changed - albeit if profits are slipping away this really could get messy quickly if that continues.

richardho

Thanks for those comments . However I can’t get the end of nabil’s reply.

I have great hopes for £spsy I hold

Harry Hindsight

Keysight Technologies (NYQ:KEYS)

Is something happening with the 5G story? Have read not too good around airports as disrupts aircraft landing systems. No real insights sorry but something of import -like drones at Heathrow not so long ago. Need to research why a cliff today for Keysight Technologies (NYQ:KEYS) - but a nice find in the large US forest - thanks. Sorry not SCVR off message.

MrShanker

Thank you all for your help. Much appreciated it

Dojosan

Well SED!

Paul Scott

Yes I agree. We didn't even bother commenting today on LON:ITS, as it was so obviously worthless - as pointed out many times in the SCVRs here previously.

The Boon Fund

In a way the warning signs were there; I'm looking through my notes for Ethernity Networks (LON:ENET), I wrote down, on the 26th Feb (2 weeks ago), that there was news on Ericsson announcing:

"Ericsson AB reported a bigger-than-expected drop in fourth-quarter earnings after some of its major customers for 5G networks pulled back on spending because of an uncertain economic environment.... and then they slashed 6% of their workforce"

So it would be obvious that downstream companies like Calnex, where their testing volumes depend on telco infrastructure rollouts, would suffer. This is an example why it pays to identify leading signals in the market, to then track, to be able to make a quick exit. Companies never announce profit warnings timely, they always do it quite a few weeks after management starts to see weakness.

BTW - if anyone is invested in Ethernity - I would say get out now, given the bad 5G / Telco investment news at the moment.

Graham Neary

8th Mar '23

Hi MrShanker, I'm sorry I didn't get around to this yesterday but I think you have received some excellent replies from the community. RGL will publish their full-year results on 28 March so perhaps we will be able to include them in the report that day,

Best wishes. Graham

mammyoko

I agree - it's short-sighted to value Calnex Solutions (LON:CLX) on one 'very conservative' (Cenkos's words) forecast of a reduction in profit, largely based on the reported deferral of orders by their main customer, Spirent Communications (LON:SPT) . The long-term tailwinds, as you say are in their favour.

While I agree that you are being asked to pay up front for future growth, that is the case with very many shares - some where the price is completely detached from reality such as WANdisco (LON:WAND) which Paul is keen on. I would say that the risk/reward actually looks quite good here. Unless, of course, you think that 5G is going to go away, which I am not sure is either likely or possible.

Only the sale on the 19th could really be regarded as 'large'

Small Cap Value Report (Tue 7 Mar 2023) - FOXT, HAT, WIN, CLX

Paul's Section

Wincanton (LON:WIN)

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Graham Neary

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