Small Cap Value Report (Tue 9 Aug 2022) - APH, BWY, RPS, HAT, LOAD, ZTF

9th Aug '22 by Paul Scott

43 comments 7934 reads

Good morning from Paul & Graham. Today's report is now finished.

Agenda -

Paul’s Section:

Alliance Pharma (LON:APH) (£511m) (no section below) - many thanks to JCPr for flagging up (in yesterday’s reader comments) a very unusual situation here. The auditor, KPMG, seems to have resigned, and published a vague, but critical-sounding resignation letter, saying its relationship with the company broke down, over a corporate governance concern. Here is KPMG’s brief & vague letter, and APH’s response. These letters are rare, and are not issued lightly. Hence personally I wouldn’t want to be holding this share, as I’d be worrying about what has gone on at the company to prompt KPMG to issue this unusual public criticism. Deloitte is the new auditor, so another big name firm.

Bellway (LON:BWY) (£2.9bn) (no section below) - not a small cap but… I like to read housebuilder updates, for general read-across to the economy as a whole. Things sound fine here. Continued strong demand. Mortgage availability remains good. Low unemployment. Help to buy scheme ends in March 2023, but doesn’t seem a concern. Building cost increases offset by higher selling prices. Ongoing planning challenges (delays). Availability of materials gradually improving, but still some regional shortages. Net cash of £245m (listed housebuilders generally have really strong balance sheets, far better than at the outset of previous recessions). Record output expected in FY 7/2023, but H2 weighted.

My view - I like the housebuilding sector right now - valuations have come down heavily, balance sheets are robust. Interest rates are only expected to rise to c.3-4%, which doesn’t strike me as anywhere near enough to trigger a housing market crash. Higher nominal incomes suggests house prices could remain robust, but nobody knows at this stage.

RPS (LON:RPS) (no section below) - congratulations to shareholders here, with an agreed, cash, takeover bid at 206p announced - a tremendous premium of 76%! Wow, that’s a superb exit price. Interim results are also announced, with trading ahead of expectations, and a good outlook. The bidder is WSP - a large Candian consulting group, which is itself valued highly (Stockopedia shows a forward PER of nearly 25). Therefore paying a 76% premium for RPS takes RPS’s valuation up from a forward PER of 14.5, to 25.5, similar to WSP’s.

I always look at takeover bids, and see if there…

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abtan

9th Aug '22

Crestchic (LON:LOAD) (no position)

Congratulations to all holders today. That's a lovely c20% increase and I regret not buying last month when planetx kindly shared his site visit thoughts with us.

One of the main things that has put me off from buying is that we haven't had any numbers all year and it's already August.

With 2020 and 2021 being unusual years, I'm not really sure how profitable the company will be, or perhaps more importantly, how much free cash will be generated.

I'd be particularly interested in seeing what Operating Costs look like so far this year. Will they increase in line with revenues? Or will they be relatively fixed? Were there any government-support numbers in last year's results? It's hard to tell what is "normal" from only 2 years of data.

---

Crestchic (LON:LOAD) is the #3 player in the market, which makes the growth even more remarkable. I would have thought they might struggle against bigger players (if memory serves me correctly, I think Siemens is #1.)

Another doubt I had was that Nvidia reported this week and stated that their data centre revenue were hit by supply chain issues.

30% of Crestchic's revenues in 2021 came from Data Centres.

I was very close this morning to pressing the Buy button, but I often find that being trigger happy does not always work out for me. Having said that the company does seem very lowly valued and I imagine that I'm overthinking it.

Sadly I think I'm going to wait for the numbers next month when I will undoubtedly regret not buying today.

GLAH

sharw

re £SUP (I hold)

Supreme (LON:SUP)

[Edit - good old Stocko why does £epic work on one line and not another?]

The detail of this morning's announcement is difficult to unravel because it is the trade and assets that are purchased, not the companies themselves, which are subsidiaries of Rocket Science Holdings and no figures are given.

At the end of the day I trust the business acumen of Sandy Chadha to make an earnings enhancing aquisition.

JCPr

I hold both H & T (LON:HAT) & £RFX. Holiday cash is a larger part of Ramsden's business so it is the extent to which that has recovered that I expect to be the biggest factor when their results come out.

Thanks for the comments on Alliance Pharma (LON:APH) Paul. (I hold but not as many as I did yesterday). In the end I decided it was just a small cockroach in the kitchen, as it was just about a £10m provision for a fine, but it was still a cockroach.

diversify-it

Elementis (LON:ELM) - RWS Holdings PLC (LON:RWS) - Spire Heathcare Group (LON:SPI)

seem to me to be prime takeover candidates and are held by Odyssean Investment Trust PLC (LON:OIT) - ELM and RWS have substantial overseas earnings and hidden value and Spire has a large land bank and its largest holder Mediclinic International is being taken over at this time.

Paul Scott

Hi colin1862,

Thanks for that, I'd forgotten mentioning Simon Hedger here re RPS (LON:RPS)

What a result for him, I wonder what else he's got his eye on?!

Regards, Paul.

Hi jonno, thanks for flagging Ricardo (LON:RCDO)

I remember looking at RCDO a while back, and thinking it looked a good business, and reasonably priced. I think there might have been some problem, or restructuring, but can't remember the detail now.

Looking at RCDO's StockReport, it seems very attractively priced (fwd PER 11.4) compared with the 25x PER take-out multiple for RPS. That's assuming RCDO meets/beats expectations though. Ah I've just spotted the TU dated 26 July 2022, which said FY 6/2022 was in line with expectations. Strong order intake, and £340m order book at year end, up 15% on prior year. Net debt coming down.

This looks an excellent spot, thank you! I'll do some more work on this, and might have a little dabble.

Michael Tee

Haha!

FREng

@sharw. When the £epic fails to translate for me, it's usually because I put a full stop after it.

jonno

Your welcome Paul, I intend to add using dividends as my portfolio is fully invested and held within an ISA, which means having to sell to buy. Somewhat restrictive but imposes a degree of discipline.

Good luck

rwh3ue

Can't see RWS being taken over unless Andrew Brode wants to sell. Think he has around 23% of RWS. A sale of his holding probably wouldn't be CGT exempt, and the resulting cash would attract a big IHT bill when he passed it on to his children.

Db47

Why would a company sell it’s trade and assets only ? I don’t understand … ? What aren’t they selling ?

WDWombat

A small point. Peel Hunt provide some basic financial input to ii - now owned by abrdn - which is I think the second largest online platform for private investors in the UK. I occasionally use their research as a checking tool. So not entirely useless to smaller PIs with an ii account.

tom stokes

RWS Holdings (LON:RWS) Bear in mind Andrew is 80 and Barings considered a bid earlier this but did not proceed. The bid was not resisted. AB is the largest shareholder and would have a major influence on any bid.

Bearing in mind various good quality companies are being taken over by North American companies I would not discount a bid. I HOLD.

Rusty2

It is a bit inconsistent, can't see any fullstops. Sometimes putting a , after it makes it work but not always. It does not work with . and ? after it.

Dan B - they are not selling the companies as such. What bits they are keeping I know not as I was not a fly on the wall during negotiations. In particular I have looked at the holding company - ROCKET SCIENCE HOLDINGS LIMITED Company number 10300031 - and it has an interesting share structure. Lloyds Bank via Lloyds Development Capital holds 200,000 shares, Nigel Quine 250,000 and two others 61,111. Nigel Quine resigned from all 3 boards in February. Make of that what you will - we do not know what was going on but those involved in negotiations would.

I think we should concentrate not on that but on what is being brought in to Supreme. Apart from brands at the other end of the price spectrum from the 88Vape budget end there is some leading expertise as spelled out in Edison's Report.

We also need to look at revenue. Supreme's vaping division was £43.6m to 31/3/22. Cuts Ice was £15.7m to 28/2/20 but then it was hit badly by lockdown because it traded mainly through physical vape shops that were closed and so revenue was £11.1m to 2/21. I think they have learned from this and a search for Red Astaire shows it is now in many of the leading online vape shops. Hence I suspect that revenue to 2/22 (not published) will be not just back to 2020 levels but could be heading towards £20m. That sort of volume would be quite an add-on to Supreme's existing.

thanks @sharw yes seems more detail is required and some shenanigans going on at Rocket Science, totally agree though an interesting acquisition allowing Supreme (LON:SUP) to enter the premium end of the market, looks promising

Too late to edit but need to correct myself - the report is from Equity Development, not Edison - embedded link is correct.

Graham Neary

11th Aug '22

You're welcome Martin! G

Hi ridavies, thanks for doing some digging into Greenhammer. I couldn't go into the details because I don't know them myself! It's an intriguing wild card but whether it is really worth anything and will succeed, I have no idea. As you say and as management will admit, it has been in the works for a long time. Best wishes, G.

Small Cap Value Report (Tue 9 Aug 2022) - APH, BWY, RPS, HAT, LOAD, ZTF

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Paul Scott

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