Small Cap Value Report (Tue 8 Sept 2020) - SCS, SRC, TEG, LUCE, ALU, FLO, GMR, MBH

8th Sep '20 by Paul Scott

56 comments 10232 reads

Good morning, it's Paul here. I'm back, after a long weekend in Warsaw.

It was a pleasure to read Jack's SCVRs on Fri & Mon. I'm just a bit worried that he's set such a high bar for me to live up to now!

Estimated timings - there are loads of company results out this morning, I've jotted down 11 companies already. The trouble is, most of them are things that don't interest me at all - i.e. where I see little prospects for them to be decent investments, based on lacklustre track records. So I'll start with the most interesting company results, and then switch into quick review mode for the others. I've got nothing else on today, so will keep going until I expire.
Update at 15:40 - sorry, got side-tracked. I'm back on the case, should be done by 6pm.

Update at 17:25 - today's report is now finished.

Today's agenda is;

Scs (LON:SCS) - positive trading update

Sigmaroc (LON:SRC) - just flagging up an investor webinar

Ten Entertainment (LON:TEG) - trading update buried in an RNS about new CEO

Luceco (LON:LUCE) - Interim results

Alumasc (LON:ALU) - Results

Flowtech Fluidpower (LON:FLO) - Half year results

Gaming Realms (LON:GMR) - Interim results

Michelmersh Brick Holdings (LON:MBH) - Half year results

Reminder - if you're going to post a comment, asking me to look at something, then there's a much higher likelihood of me doing so, if you tell me why the announcement & the company looks interesting. A few key points might get me interested, and want to put in the work. Remember that I'm a professional investor, not a hack! So I'm happy to research things that might make us all some money.

Scs (LON:SCS)

Share price: 173p (up 10% at 08:27)
No. shares: 38.0m
Market cap: £65.7m

(I'm long)

Trading Update

ScS, one of the UK's largest retailers of upholstered furniture and floorings, today issues the following trading update ahead of announcing its preliminary results on 29 September 2020.

ScS has an unusual year end, of 52 weeks ended 25 July 2020. It accounts on a weekly, rather than monthly basis. I tried that once, and it does't work very well, because the…

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Silver Moon

8th Sep '20

That Ra International (LON:RAI) has dropped considerably during this morning does not surprise me since the two major shareholders stand to gain most from their tweaks of this and that and investors have been looking more closely at some things that matter to their investment.

rmillaree

RA International (LON:RAI)

I have to agree 100% with your sentiment, i guess the company would need to be pushed on their plans ref these shares and future "option type rewards" - if it is 5 mill shares total then that would be less than 3% dilution overall - if we estimate that they are given away and thats covering a period of 3 years then thats less than 1% dilution per year. Obviously management would need to be quizzed to see what they say about future plans - we really are at their behest with such a small free float in that they could probably do anything they wanted within reason.

If nothing else i suspect the share buybacks have enabled those that want to exit the building a chance to do so at
a 2 year high in shareprice - so we can't really complain later if we don't like it - we can at leats get out at a decent price. I have been tempted to sell up on this punt purchase having bought when the price was in the mid 30's but the order book is going well and the numbers seem to mostly be fine so i am still here for the time being. They seem to be making reasonable margins so there does seem to be good potential for this share to really go places as long as they execute well operationally speaking and the main shareholders don't shaft the minors !

Caper4

Agreed

kgb1953

I would be a bit careful. The leasehold houses issue has not yet been resolved - long article in the DT at the weekend - and there is a much bigger one coming from leasehold flats. So I'm steering away from those house builders involved in that sector. I prefer Berkeley Group (LON:BKG) which looks sound and also Mj Gleeson (LON:GLE) where I cant fathom why the price keeps dropping.

UK_Investor_8888

A disastrous day for International Personal Finance (LON:IPF) shareholders.

"London, Sept 8 (Reuters) - Doorstep lender International
Personal Finance said on Tuesday there is a "material
uncertainty" around its ability to continue as a going concern
after posting a loss and given the upcoming maturity of a
eurobond.
The UK-listed firm, which operates primarily in Central and
Eastern Europe and Mexico, posted a pretax loss of 53.3 million
pounds ($70.05 million) in the first half of 2020 after COVID-19
hampered its ability to collect loan repayments and forced it to
significantly tighten its lending criteria.
The company said its collections have now improved and it is
implementing a strategy to rebuild its business.
However, it has near-term funding issues with a 397 million
euro ($469.13 million) eurobond due to mature in April 2021 and
a need to renegotiate the terms of some of its loans.
"The need to refinance the 2021 Eurobond and obtain covenant
amendments create a material uncertainty surrounding going
concern," the company said.
It added that the board is confident the company will be
able to refinance the bond, and that they have a reasonable
expectation the group will be able to continue trading for the
foreseeable future."

It was mischievous of Reuters to focus on this honest statement when there were positives also contained in the trading update.

IPF has swung from 75p yesterday afternoon to 60p (ouch).

To their credit, it says The Leadership have suspended their bonuses. Dividend remains suspended.

IPF says they hope/desire for 2021 figures/profitability to return back to 2019 levels pre bug.

IPF says it is right-sizing and has neutralised their trading profit with impairment charges from restructuring.

davidjhill

I'm not so sure on the leasehold. It was pretty comprehensively addressed at the time. Most reputable builders recompensed owners or helped them to buy out freeholds etc and provisioned against it. This has only come up again because the CMA have decided to investigate but effectively a long time after the event. I doubt exposures are anything much greater than already provisioned. This appears to be political posturing for me. An attempt to show teeth.

Leasehold flats have always been sold this way, nothing new there and I doubt this will come back on the housebuilders. Share of freehold in apartments is complicated as all owners need to form committee, vote and appoint/fire managers. Most owners don't want the hassle and so leave the leasehold, some buy it out. That would be very complicated to unpick and it would force owners buying flats to run their own communal schemes etc. I doubt the Government want more obstacles in the path of apartment ownership as the housing shortage is bad enough as it is. I do think ultimately it will be a much bigger problem for the companies holding the leases for ground rents though. I suspect what will end up happening is that leaseholder rights will be beefed up and ground rents restricted and buyout of freehold where a community wants it made much easier. That won't bite the house builder earnings though and they have much much stronger arguments for the rational of leasehold in apartments than they did for houses, so I'd be very surprised if this element of leasehold came up as a historic compensation claim.

Star8

Re Alumasc LON:ALU (Disclosure - I have a holding going back several years) I think it is a bit unfair to say that it " has historically paid a high dividend at the expense of investing for growth."

Having read all the Annual and Half Year reports over the last 4 + years it is clear IMHO that the company has not had the investment opportunities available at the right price. The company has instead operated a coherent program in consolidating its sites, producing £m of annual savings as well and developing new products and furthermore has been disposing of underperforming assets and operations. Its Pension deficit was a problem and is now far less so.

The Chairman owns 12% of the shares so his ambitions seem congruent with shareholders.

I cannot see any evidence that the high dividend constrained growth in any way.

While the company is unlikely to shoot out the lights, it does seem a well managed and solid performer albeit reliant upon the construction industry.

robinleggate

I see the forecasts for 2021 have just about halved over the last few months.

Logical David

Many thanks Paul for clearing up what you require from investors in order for you to investigate companies further. I was beginning to wonder if we had to wait until the word 'Placeholder' appeared in the SCVR title for requests.

Thank you for the writeup on Luceco (LON:LUCE) (I hold), I was going to request you look at the company (but you beat it to me) because although it's revenue is down, profit is up, EPS is up and it is paying an interim dividend as well as reinstating the suspended dividend from earlier this year. It is reassuring to know that you too think it is a great company to hold going forwards.

Also, a big thank you for bringing Ten Entertainment (LON:TEG) to my attention. My filtering system highlighted this share last year. Although it was, and still is, a high quality company, it was fully valued last year and so I didn't buy any shares in the company. However, now that Ten Entertainment (LON:TEG) has reopened most of it's locations, the fact that the share price is down around 66% from its 52 week High and the fact that Ten Entertainment (LON:TEG) has today moved above it's 50 Day MA for the first time since March, I have decided to buy a few shares today. I also like the 7.6% dividend due next year.

Keep up the excellent work Paul.

Nicowilson

David I see your comparison of house v flat as spot on. Thank you. And I agree that many flat owners don't want the additional work of freehold management.

Paul Scott

Sorry, I don't look at financials usually, especially not doorstep lending type businesses, which repulse me. There's an interesting reader comment about it above.

Interesting, thanks. I was also wondering whether housebuilders could be worth looking at. The downside seems to be Help To Buy ending (thus selling prices likely to fall & geared impact on profits), plus fears of unemployment when furlough ends.

Re furlough, I think we might sadly see a lot more temporary unemployment, but people on minimum wage hospitality & retail sector jobs wouldn't be buying houses anyway, whether employed or unemployed. The stock marker recovery could mean the bank of Mum & Dad, or Granny & Grandpa, could have a lot more dosh to help with deposits. And mortgage rates remain super-low.

I'd be interested in reader views on Mccarthy & Stone (LON:MCS) . I recently took an opening long position, as I feel its providing a safe environment for older people, could be a strong selling point as people do anything to avoid ending up in a care home.

Regards, Paul.

How nice, thank you! :-)

Maybe but Im not so sanguine. I can see class actions coming. I'll just say that one of the four wrote leases that included a covenant that they would complete the property according to the regulations. Leaves them open for suing.

I owned it once and it was a dreadful investment. Again its leasehold / service charge / ground rents issues associated with the flats. Have a look at the web site leaseholdknowledge.com

Paul, can I please pick your brains because I have never owned a share where the dividend has been suspended (back around March 2020), and then for the dividend to be reinstated some 6 months later. It won't affect me because I bought my shares in Luceco (LON:LUCE) back in August 2019. However, I am sure there are some investors who will have recently bought their shares in Luceco over the past few months.

My question is:

To qualify for the normal interim dividend announced today, the shares have to be purchased before the 17th September. However, to qualify for the "additional interim payment of 1.7p in lieu of the suspended 2019 final dividend", do the shares also have to be owned before the 17th September or does an investor have had to have been on the share register prior to the date (ie., be on the share register back around March) when the dividend was due to be been originally paid around 6 months ago??

Martin5760

Another huge effort Paul. Great analysis - now sit back and have a beer

Gromley

Hi Paul,

I can't give any direct insight into McCarthy & Stone (LON:MCS) as I have not looked at them for a good few years.

I do though think that there are merits in considering investing in businesses serving the current generation of the retired. (It strikes me that those retiring 15+ years hence are largely going to be potless - with apologies to out younger readers - but saving for your retirement seems to me to have become a virtually impossible task!)

However, I am not sure that I can agree that "people do anything to avoid ending up in a care home."

My elderly mother has often brought up the topic of care homes over the last 3 or 4 years (I think I am supposed to suggest something, but it is such a thorny subject that I have no idea what course of action she wants me to support!)

Lately though a few themes have come to the fore as things she would like :

1. Household maintenance - someone to fix those little (sometimes bigger) that go wrong around the house. eg leaky radiator, replacement windows.

She has the resources to pay for any of these things, but lacks the confidence/judgement to decide which need to be addressed and to negotiate with tradesmen to ensure the required work is done without any "rip-offs".

From this perspective I think she wants to be a tenant rather than house owner - or maybe at a push to live in "warden controlled" accommodation.

2. Meals provided - not a massive driver at the moment, but my mother no longer does any real cooking. She prepares everything for herself, but main meals are almost entirely provided by the likes of Parsley Box. On-site catering would definitely be a positive and might also play into the next priority.

3. Social Activities provided.

Prior to lockdown my mother benefited from.

A once a week visit to a day centre with lots of activities laid on.
A once a week visit from a "carer" (home-help back in the day) to get a few chores done, go out shopping and have a chat.
A once a week visit to a local retail outlet, where she would sit in a cafe with friends and may do some window (or real) shopping.
A couple of once a month activities provided by her pension scheme and some charities.
Once or twice a year week long stays at a centre provided by her pension scheme.

All of these would (I think) still be available whatever accommodation she was living in. She did though used to bemoan that a friend of hers who had moved into a care home had no social activities provided - "she was just on her own all day, I would not want to be in that situation". I did try to explain that this was in reality no different to her current situation, but that did not chime. It is clear that if she went into some form of "supported accommodation" she would expect a social secretary.

To get back on topic, what I would want to understand before concluding that McCarthy & Stone (LON:MCS) operate in some sort of sweet spot, is whether they tick any of the boxes on this Wishlist or whether they are just applying pensioner friendly marketing guff to the house sales business.

My mother still lives in the 2 up 2 down (plus rear extension) that I grew up in with my late brother. It is larger than she needs, but not massively so - I am not sure therefore what would be the driver for her to buy an M&S (not that one) retirement home, unless it offers some additional value add.

TheArb

9th Sep '20

"This results in a 3.2 pence per share payment on 23 October 2020 to shareholders on the register on 18 September 2020. It includes a 1.5p interim payment for 2020 and an additional 1.7p payment in lieu of the suspended final payment for 2019."

That's pretty clear isn't it?

Relax Paul. International Personal Finance (LON:IPF) is reaching the parts of the market that The State / Social Services do not. Its a service to its users, not meant to be exploitative.

A further update from me:

Shorts against International Personal Finance (LON:IPF) have risen to 1.2%. (Something Stocko seems to not show.)

https://shorttracker.co.uk/company/GB00B1YKG049/

This may be the beginning of a Short Seller Attack.

There's two possible scenarios explicitly stated in yesterday's report.

A: If the Euro Bond holders don't renew by April 2021, the business will need either restructuring or Administration.

or

B: The company right sizes, refinances, continues, probably breaks in to good ROCE in 2021/2022. Other Lenders folding helps IPF by reducing competitor activity.

Short vultures are circling already.

Small Cap Value Report (Tue 8 Sept 2020) - SCS, SRC, TEG, LUCE, ALU, FLO, GMR, MBH

Scs (LON:SCS)

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Paul Scott

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