Small Cap Value Report (Tue 9 Mar 2021) - RBGP, SNWS, HEAD, SAG, DFS, MMH

9th Mar '21 by Paul Scott

59 comments 12091 reads

Good morning, it's Paul & Jack here with the SCVR for Tuesday.

Timing - today's report is now finished.

Agenda -

Comments from last night's Mello Monday, re Rbg Holdings (LON:RBGP) (I hold) and Smiths News (LON:SNWS) (I hold)

Headlam (LON:HEAD) (I hold) - Final results for FT 12/2020 - good H2 recovery, and shares still look good value

Science (LON:SAG) - Audited results for FY 12/2020 - looks an interesting company, trading well

Dfs Furniture (LON:DFS) - interims to 31 Dec 2020 - trading really well, but balance sheet still terrible! Positive read-across forScs (LON:SCS) (I hold)

Marshall Motor Holdings (LON:MMH) - Full year results (this section written by Jack)

Mello Monday

Last night was excellent, with some interesting presentations. The CEO of Rbg Holdings (LON:RBGP) (I hold) said something that stuck in my mind. Namely that the M&A division was now completing deals which had been done entirely online - i.e. selling businesses where the buyers & sellers had never met! It's now all done through Zoom or Teams, email, phone, etc. This reinforces to me how things have permanently changed in the last year. It's dawning on many of us, that it's actually so much more efficient to have meetings online, instead of taking a whole day to travel in & out of London. Having said that, I really miss the de-briefings at the Lord Aberconway, after meetings at Finncap, so whilst Zooms are great, I can't wait to participate in actual meetings again - just perhaps not as many as previously.

Smiths News (LON:SNWS)

(I hold)

My stock pick in the BASH session at Mello Monday last night, was the turnaround at Smiths News (LON:SNWS) (I hold). Click here for the presentation slides I referred to, which give details on the main points. I have a 1-2 year timeframe on the turnaround here. I reported on it here in last week's SCVR, with an in line trading update, and a remarkably low PER of about 3.

Note that the StockRank is strong, at 90. I think the net debt could halve in the next year, from strong free cashflow, plus the deferred disposal consideration re Tuffnells and a possible pension surplus payout. If that happens, then it should transform investor perception of the…

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CamRaid

9th Mar '21

Likewise, I would welcome Paul's thoughts on Eenergy (LON:EAAS)

It looks like a really positive update to me. Building a subscription based income model with the ability to access funding when required.

abtan

Hi Herbie

I'm not bothered about dividends either to be honest.

In fact if I do look at the yield it's more as a possible indication that a share is undervalued and the share price will rise to correct itself and bring that yield down.

My point on wanting a small dividend to confirm cash is being generated was, of course, more directed to smaller companies, not the Apples and Microsofts of this world.

Though of course, it's not always a good indicator - I believe Patisserie Valerie paid dividends.

Cheers

lukegallienne

If Fonix Mobile (LON:FNX) can grow to $250bn, which I believe was roughly the size of Microsoft when they started paying dividends in the early 2000's, I will let them off. My issue specifically relates to small UK companies with returns of capital above 20% committing to paying out 50%+ of their earnings. (I do very much agree with abtan that a small dividend is helpful in indicating real income)

fred9566

Paul - I watched Mello Monday last night and boy were you the star of the show!!!

Rusty2

Yes I understand your point. But in young growth companies, I would not expect a dividend. Boohoo (LON:BOO) does not pay one. Even ASOS (LON:ASC) does not pay one. It maybe safer but does not make sense to me in some situations, I would rather they paid off debt first if applicable, or invest the money in growing the business.

Paul Scott

Very kind fred, but I have huge respect for Leon & Alan, who are full of insights, so it was a great pleasure to be on the panel with them!

Hi Chris!

I've run out of time & energy for today, sorry about that.

I don't know Eenergy (LON:EAAS) but have just had a very quick look at its interims to 31 Dec 2020. The highlights look interesting - very strong revenue growth, both organic & acquisitions. Achieved just above breakeven, improved from a £1m loss H1 LY.

Floated on AIM in Jan 2020. I've not come across it before. Interesting idea, to provide LED lighting upgrades to schools, at no up-front cost to the customer. I can see why that would appeal to schools with tight budgets.

Guidance - breakeven result for FY 6/2021 - not madly impressive for a market cap that's now about £45m after today's 8% rise.

Balance sheet looks weak, once intangibles are written off.

I see it has a buy & build M&A strategy, so the key issue for me is what the track record of management is? Do they have previous M&A experience, and how did they perform in previous ventures?

It looks a little too speculative for me, but that's on the quickest of reviews.

Good luck with it!

Regards, Paul.

Gromley

This is a company with a an ROCE of over 200%! Why on earth would we as investors want dividend income from them, certainly at that level.

I know little about Fonix Mobile (LON:FNX) , but more generally I think this is a very common misconception about RoCE.

Do you really believe that they could 'Employ' a further £10m (say) of Capital and as a direct result achieve an extra 'Return' of £20m pa ?

If you do believe this you also ask yourself why the original owners offered you a chance to share in their magic money tree by listing the shares less than 6 months ago.

I should stress that I am NOT inferring that there is anything wrong with Fonix Mobile (LON:FNX) - it may well prove to be great investment, but you need much better reasons than apparent and historic 200% RoCE.

EDIT

To look at this from the other side of the fence; the fact that they propose to pay out 75% of profits as dividend tells you quite clearly that they do not believe that they can make meaningful returns from deploying extra capital.

This does not mean, however, that they cannot grow - there are other paths to growth than shovelling more bank notes in to the furnace.

Hi 23jez,

... how investors like us can safely invest in cryptos...

That's a contradiction in terms I'm afraid;

It's not investment, it's speculation
It's not safe, and
Blockchains are not crypto-currencies.

I don't give advice, but the Bank of England and the FCA do, and they've warned people to only gamble with money you can afford to lose (e.g. never, ever borrow money to gamble on these things).

https://www.bankofengland.co.u...

https://www.theguardian.com/bu...

Also, doing some reading up on previous financial manias, will demonstrate very clearly to you that this is just the latest in many centuries of financial manias, which always end the same way - boom and bust.

Please be careful whatever you decide.

Great points Gromley, and others. A business like Fonix Mobile (LON:FNX) or say Best Of The Best (LON:BOTB) (I hold) doesn't actually need to deploy any capital at all, to grow. So they can pay out earnings as divis, and grow, because they're using almost nothing in fixed assets.

Is it more about their expertise in winning new contracts (FNX) or spending their digital marketing budget wisely (BOTB)? That seems more important these days, than conventional logic on what return can be generated from spending £x on building a factory.

I know ROCE is important, but for me it's not something I've found it fruitful to chase after, or screen for. It's obvious when you find a business that is growing because it has a great product that sells itself. Also look at companies that outsource the production, e.g. Fevertree Drinks (LON:FEVR) - that skews the ROCE figures greatly, because a lot of the CE is off balance sheet.

Interesting topic to bounce ideas around, I don't have the answers.

Actually, I should add that I generally hate being on any kind of show. It's incredibly stressful, and takes so much time to prepare. Doing that on top of the usual day's time-pressured work is a PITA, and you're not paid for it either. When people say, it will help you raise your profile, I want to tell them where to stick it, and sometimes do.

Mello (David) and PIWorld (Tamzin) are different though. They're mates, and are doing great stuff for our community, which I'm happy to support. So I cannot say no to either. Hence if I'm on Mello, it's because everyone else has said no, and there's an empty seat that needs filling at a late stage, not because I'm trying to push myself forward. Quite the opposite, I've usually tried very hard to avoid it. It's quite enough having to field all the onslaught of things from elsewhere, let alone do another thing in the evening.

But having made the decision to do it, I try to give it my best shot.

Anyone else who is scared to public speaking - my advice is, just get on with it! Do it, but prepare something interesting and well-researched to say, then you can run on autopilot if the anxiety does overcome you on the day. The worst thing to do, is get up and do some public speaking without preparation, as it will look poor quality, or just boring & repetitive.

I like talking about shares, but there's always hours of preparation behind it, otherwise why get up and speak?

How lovely, thanks shanklin!

We do our best, trying to produce some thought-provoking & different commentary & opinions on topical issues & company updates.

It's just opinions at the end of the day, so we'll be right about some things, and wrong about others. What I love about markets, is the constant uncertainty, and huge complexity, such that every day we're wondering how to make sense of such a vast amount of data and views. I love it, it's a never-ending puzzle! If we can make a bit of money along the way, then that's quite helpful too.

Best wishes, Paul.

Caper4

10th Mar '21

Racal was the very first stock I bought in the mid 60’s. Unfortunately sold about ten years later to put down deposit on my first house. Should just have kept the Racal position and rented :)

Roger Baron

Thanks for the Science Update Paul. Bought a few of these at 85p a few years ago when they were Sagentia - when my daughter was doing a Uni placement there. Glad I didn't sell when she finished her year there!

23jez

Thank you for that. I always try to be careful.

Personally I like to invest in companies which produce something tangible. I have made most money from oil, particularly during the Arab-Israeli wars, and computer chips. I sold Buford Capital when I ceased to fully understand their Business Model.

I have read all of Daniel Yergin's and most of Nassim N Taleb's and Micheal Lewis's books and many more.

I bought some Augmentum Fintech shares a few years ago on the basis they were supported by Hargreaves Lansdown who are by no means stupid. Currently up 7%. on my investment this is my only exposure.

My query related to to recent reports that some large companies are accepting payment in bitcoin. Given the current disillusionment with conventional banks what are the chances of it becoming an alternative currency.

I am sorry I did not make myself clear but open questions tend to elicit the most interesting responses. For the avoidance of doubt I was asking for information not advice.

23Jez

Thanks Paul.

11th Mar '21

Science (LON:SAG) (no position)

I can't get my head around the remarkable change in cash generation.

Underlying cash generation (by my own method of stripping out working capital movements, acquisitions, dividends, etc...) in 2018 and 2019 were c£4m and c£2.5m respectively.

In 2020 it was c£10m

Why such a marked increase?

I had 2 thoughts on this:

there was a lack of mention of government support in 2020, except for the repayment of £0.1m of furlough payments. Did they not take advantage of any sort of deferrals, eg VAT deferral?
Did tax losses from the Frontier acquisition affect this? I must admit to being confused by the narrative, which I'm copying here for reference.

I must be missing something. Can the company really have increased it's cash generation by £7.5m (£2.5m ---> £10m) in just 1 year?

Thoughts would be appreciated.

I must be missing something. Can the company [ Science (LON:SAG) ] really have increased it's cash generation by £7.5m (£2.5m ---> £10m) in just 1 year?

Isn't this just classical operational gearing abtan? I appreciate I'm looking at profit rather than cash-flow (you'd hope they are somehow related).

They did £16.4m more revenue in 2020 at a broadly consistent 40% GM so that's £6.5m additional Gross Profit.

At the same time they brought overheads down by nearly £1m (4%) .

So that is pretty much in the zone of the £7.5m cashflow improvement you mention.

I'm not sure there is anything more complicated than that?

Science (LON:SAG)

Hi Gromley

Thanks for taking the time respond.

I did think about the impact of Frontier Smart Technologies solution and looked into it, but I still couldn't grasp the trajectory of the improvement.

It's effectively moved from:

2018 Full Year loss of c$3m;
2019 H1 loss of $3.5m;
Post 2019 acquisition (ie last 3 months of FY19) loss of $5.7m (albeit this loss is heavily influenced by restructuring costs);
And finally a $2.1m profit in 2020 under full ownership of Science (LON:SAG)

That's quite a turnaround and to be honest I'm sort of in disbelief that it's real.

It's why I started looking at the tax losses carried forward with the acquisition (see my earlier post).

Were $1.6m tax losses carried forward, or $21.4m?

With the latter they claim it's a trading loss, but then they start equating it to deferred tax assets, which implies to me that it is a tax loss.

I'm no tax expert, but if anyone can explain it would be most appreciated, although I imagine I'm just making a mountain out of a mole hill.

Cheers again

I should have said in my initial comment that I know next to nothing about Science (LON:SAG) .

But it still strikes me that even if the step change occurs in the £FST acquisition; it still looks to be the case that the big change is in Gross Profit (Revenue less Cost of Goods Sold) so I *think* the tax losses are a red herring.

Sorry - I probably went off on a tangent.

Small Cap Value Report (Tue 9 Mar 2021) - RBGP, SNWS, HEAD, SAG, DFS, MMH

Mello Monday

Smiths News (LON:SNWS)

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Paul Scott

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