Small Cap Value Report (Tue 8 Nov 2022) - AGFX, PSN, ARB, MRK, HFG, ZOO, WHR

8th Nov '22 by Paul Scott

59 comments 8340 reads

Good morning! It's Paul & Graham here with you today.

Agenda

Paul's Section:

Housebuilders - I want to know what's going on in the housing market, so have strayed out of small cap territory, to look at a trading update from Persimmon (LON:PSN) today. It's guiding down expectations for 2023, which shouldn't be a surprise to anyone who watches the TV news. There's a large increase in its cladding provision, which is unsettling, so that's an important issue not to overlook. The whole sector looks dirt cheap to me, with many well below their own NTAV. Again, fairly obviously, a cooling property market is bound to have read-across for other consumer sectors - e.g. furniture, estate agents, DIY maybe?

Marks Electrical (LON:MRK) - interim figures are as expected, and the outlook comments seem encouraging. Balance sheet looks fine. Cashflow has almost all come from increasing creditors, so that might reverse in future perhaps? It seems a good, well managed company, but in a horrible low margin sector. It's difficult to see much immediate upside on the share price, after a recent 25% bounce.

Hilton Food (LON:HFG) - it's another profit warning. I can't see any appeal to this share, now that earnings have stopped rising. That's caused the shares to de-rate this year from a PER in the twenties, to now about 12. Why was it ever valued so highly in the first place? It seems to me that the valuation has reset to something more sensible. There's a fair bit of debt on the balance sheet too. It's not for me.

Warehouse Reit (LON:WHR) - I refresh my memory on this property REIT which specialises in owning & renting out warehouses. Asset values have fallen, although the shares trade at a 20% discount to net asset value. The dividend yield of 5.2% isn't exciting, in a higher interest rate environment, so it doesn't float my boat unfortunately, despite the recent plunge in share price.

Graham's Section:

Argentex (LON:AGFX) (£136m) - excellent H1 results from this FX broker, as expected after a terrific trading update in October. Cash conversion has cooled down but in exchange for this the company is enjoying the excellent margins that are achievable when dealing in forwards and options contracts. Looking ahead, I expect that forex conditions will normalise and perhaps result in calmer market…

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valueman

8th Nov '22

I think you’re factually incorrect here . ‘“Zoo’s fortunes are closely tied to Netflix, and is a key beneficiary of Netflix’s drive to fund high-quality foreign (non-US, non-English language) productions that can be enjoyed by a global audience.”

Zoo’s main customer is Disney and the other major studios .Netflix is a tiny customer who mainly operate through Zoo India . They do their own localisation . They used to be a big customer years ago but since set up their own . Zoo’s future is tied to Disney ,Paramount, Peacock ,HBO .

nettle

Paul,

Following your comments on Persimmon, a very large company, it would be most interesting to read your comments on M.J. Gleeson ( I hold) , which is a much smaller company, and, perhaps more important, has a particular niche in the market - building very cheap houses. I think i'm right in saying that, so far, it has been cheaper to have a mortgage on a Gleeson house, than to pay rent.

I know nothing about the housing market, but one friend in the trade tells me that Gleeson is an ethical company. Which is quite refreshing, if accurate!

BnB

Following your comments on Persimmon, a very large company, it would be most interesting to read your comments on M.J. Gleeson ( I hold)

Paul is a most helpful and responsive fellow but please don’t waste his valuable time asking for information that you could simply look up yourself by searching for his analysis of Gleason on Stocko. It’s easy enough to do.

Graham Neary

Thanks for the comment valueman. In the 2022 annual report from Zoo, they strongly emphasise the investment by Netflix in international content. Netflix is mentioned 14 times in the report, and they analyse many different aspects of Netflix's reach and its spending patterns.

Michael C

Ashtead Technology Holdings (LON:AT.) popped up on my risers and fallers and I'm scratching my head trying to work out why I've never looked at it before today. Great trading update dated 10 October. Revenue and profits growing, debt reducing, and they are positioned in both the hydrocarbon and wind sectors - hard to see a decline in demand for subsea tech.

Dodds98

The land market being overheated due to delays on planning applications, inflation on material and banks nervous about lending due to uncertainty over job security. Apart from that....

Tommy H

Thank you

peterthegreat

Thanks for your comment nettle. Yes it would be interesting if Paul wants to make any comment on Gleeson as the company is distinctive because of the niche you mention and I believe it also has a relatively low exposure to the cladding related liabilities which Paul highlights in his article.

Marcus Deva

Hi Nettle. Paul in fact briefly covered M.J.Glesson on his webimar with Paul Hill of Vox Markets a week ago. Try this link. https://videos.voxmarkets.co.u...

mammyoko

Didn't get in anywhere near the lows but thank you, anyway, planetx for drawing my attention to Crestchic (LON:LOAD) . Your conviction inspired me to take a close look and I made it my first conviction trade of the year so very happy with the outcome so far

WDWombat

I have a general question not connected to UK small caps. Does anyone know of any managed (basket) currency funds? This could be active or passive but should concentrate on non GBP currency investments, possibly through short-dated bonds.

Cricketfan

£AT

I think AT got a favourable mention in Judith MacKenzie's slot on last night's Mello. Sorry but I don't have any detail until I watch the recording.

matylda

Paul - I do hope BUMP has not hurt you too much today if you still hold some - ATB

Bouden54

Don't want to recommend anything in particular, bere will be loads of OEICS that invest in global bonds - try those in the Global Bond sector. They often come in currency hedged and unhedged versions - obviously check you get an unhedged version if you want non GBP exposure. Also worth checking the duration of the fund - if you want something fairly steady, more like cash then probably no more than 3-4 years duration. Longer duration funds tend to be very volatile. This information can usually be found on fund factsheets - I would check out a few and go with one that you like the look of, with a decent track record and experienced fund manager.

planetx

Michael

I’ll let you know when I have some news

Paul Scott

Hi matylda,

Given the incredibly low market cap (too small for the SCVRs now), I thought the trading update from Seraphine (LON:BUMP) was actually quite reasonable, I was fearing worse.

There was a distressed seller, suppressing the share price, but Christopher Mills took it out at 10p recently. There could be other institutions selling, this is a worry with recent IPOs, as they tend to have inadequate liquidity, because the IPOs were done by placing big lumps of shares with institutions. And now those institutions could need cash, to meet redemptions.

Anyway, I think it's crazily undervalued now, so doubled my position size this morning. As always, time will tell if this was a good, or bad move.

Regards, Paul.

KevinS1

Hi,

I have a fair amount of commodity exposure in my PF with Sylvania Platinum (LON:SLP) Jubilee Metals (LON:JLP) a copper ETF and Ecora Resources (LON:ECOR)

I recently added to the Sylvania Platinum (LON:SLP) on some of the down days, but in the end decided I didn't want to become too overexposed in any single stock so also bought into Blackrock World Mining Trust (LON:BRWM) with the view that I'd let them do some of the work, to work out which resources to get into at what time - it also provides a near 5% dividend as well and is a great allrounder.

My one regret is having got back into some gold stocks again about 6 months ago - I keep falling into the trap of listening to people saying "everyone should have some gold in their PF as an inflation hedge" - I normally ignore it, but decided this time it might have some weight. It's not looking good currently, but I suspect we are starting to see a turn in the gold stocks - you just need to be careful to know what to get into; miners, prospectors or a sector fund.

9th Nov '22

Fair comments - I didn't notice the Harwood investment, that's usually a decent medium term indicator - Good Luck with it Paul

LittonOwl

You can still buy the Aviva / GA prefs with iWeb, though corporate bonds are a different matter.

Equity Development

11th Nov '22

Marks Electrical (LON:MRK) - we hosted an investor presentation from Marks Electrical Group plc, the fast-growing online electrical retailer, following publication of their Interim Results: https://www.equitydevelopment....

Mark Smithson (founder & Chief Executive Officer), and Josh Egan (Chief Financial Officer) ran investors through their strong top-line performance, ongoing market share gains, a detailed overview of financials and a strategic update including the growing installation offering. The team also discussed the outlook and answered investor questions.

The full video has been divided into chapters (see below):
0:00:16 Key highlights
0:03:48 Financial overview
0:10:00 Strategic update: customer proposition
0:24:48 Strategic update: brand awareness
0:29:52 Strategic update: operational capacity
0:36:57 Strategic update: financial performance
0:38:24 Summary & Outlook
0:41:24 Questions & Answers

Small Cap Value Report (Tue 8 Nov 2022) - AGFX, PSN, ARB, MRK, HFG, ZOO, WHR

Agenda

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Paul Scott

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