Small Cap Value Report (Tues 10 Aug 2021) - SUS, ZTF, BKS

10th Aug '21 by Jack Brumby

52 comments 8253 reads

Morning all, Jack here with Tuesday's SCVR.

Explanatory notes -

A quick reminder that we don’t recommend any stocks. We aim to cover 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 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) - don't blame us if you buy something that doesn't work out. 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.

Agenda -

Jack's section:

S&u (LON:SUS) - positive outlook from this family-owned finance company that seems ably run for the long term.

Zotefoams (LON:ZTF) - the company has spent a lot of money building up its operations and the products, apparently, are world-leading so now is the time for management to execute and prove to the market that a growth multiple is deserved. Some cost pressures are set against a positive near term outlook.

Beeks Financial Cloud (LON:BKS) - brief in line update from this provider of low latency solutions for financial markets. The group is in investment mode, with negative free cash flows, so the question is whether this investment is being spent wisely to build a larger and more profitable business down the line.

Jack’s section

S&u (LON:SUS)

Share price: 2,820p (pre-open)

Shares in issue: 12,145,260

Market cap: £342.5m

(I hold)

S&U is a holding company for two subsidiaries: Advantage Finance and Aspen Bridging. The former is a non-prime used car finance established in 1999 and the latter focuses on loans for the short term residential and refurbishment markets. Aspen was only launched in 2017 and has yet to reach meaningful scale, but management is optimistic of its future contribution to the group.

Fittingly, the post that first brought this onto my radar is called ‘Credit Where Credit is Due’…

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Boon

10th Aug '21

Yeah, just a pull back at Sosandar (LON:SOS) as investors at 20p are sitting on 60%+ gains so I can see the temptation to take some profits.

Also small caps tend to drift in between updates on trading when there is no newsflow and buyers gets distracted by something else.

Personally I have a decent size holding here, and am thinking of topping up at these levels. I am running a conservative portfolio though with lots of cash as I think a wider market correction is on the cards, but Sosandar is a strong conviction holding for me, regardless of what the market does.

mammyoko

Re TP (LON:TPG) - price was 8p end Jan 2020 and hit 8.25p in June 2020 so would think that Science (LON:SAG) will have to pay at least 7.5p to win this unless they have a cunning plan as they did with Frontier Smart Technologies (LON:FST). So plenty of potential upside. Unlike Frontier Smart Technologies (LON:FST) where incompetent management were desperate to cling onto their positions and if Science (LON:SAG) had walked away the share price would have collapsed, I think that is less likely here with new management at TP (LON:TPG) and the possibility of executing an in-house turnaround. So I would think that Science (LON:SAG) had better pay up because the threat of walking away is less persuasive for institutional holders.

timarr

think it highly unlikely Science (LON:SAG) win this at a little over 5p. I would certainly vote against and I suspect many others will too

Well, it's definitely in play. For a small company Tp (LON:TPG) has a lot of big institutions on board. If they're supportive then that gives protection - but if they're not then this is a done deal.

Interestingly Canaccord and Ruffer, who between them hold 19% of TPG, are also major shareholders in Science (LON:SAG). As their stakes in SAG are worth way more than those in TPG they'll probably back any reasonable offer which would give SAG 30% to start with.

Much would then depend on M&G who hold 19% and this looks like a legacy stake - it's mainly held in the Recovery Fund which is worth £1.5 billion so the £6 million or so that TPG represents is irrelevant to them.

From here, I reckon if SAG play their cards right they'll have every chance of winning a bid without paying much of a premium whatever the board or private shareholders want.

timarr

davidjhill

In play, yes but just because Canaccord and Ruffer have a decent stake in Science (LON:SAG) doesn't mean they will back a bid at any price. Nor M&G who are obligated to get a best price for fundholders. The new CEO really only has to persuade one of them to remain supportive and the bid gets no traction at all or put the different components up for sale separately to create greater value. Plus Science (LON:SAG) isn't going to buy it unless it can achieve greater than 75% and that's no slam dunk either, irrespective of those 3 institutions.

Yes, very good points re ownership of TP (LON:TPG) . I have always assumed that Canaccord hold on behalf of others so maybe their holding isn't as committed as Ruffers' might be? As you say, it's immaterial to M&G but they are highly material to the outcome. I would have thought a good strategy is to hold both Science (LON:SAG) and TP (LON:TPG) at around this 5p level on the basis that if it gets taken out at a lowball price then that ought to be good for the Science (LON:SAG) SP. They appear to have executed the turnaround at Frontier Smart Technologies (LON:FST) spectacularly with a similarly neglected basket case.

yeah but Metro Bank (LON:MTRO) bank I get. This is an investment company where a big chunk of the asset value is in a listed stock and the unlisted stuff is in good growth utility type businesses. 0.5 NAV is unusual even in listed PE vehicles investing in much riskier early stage businesses.

Nor M&G who are obligated to get a best price for fundholders.

I didn't know that. Where does that rule come from?

gus 1065

Hi timarr.

That is a good analysis of how the chips appear to stack up with the main shareholders of Tp (LON:TPG) . I agree these look to be pretty weakly held holdings so I can see them being readily available at a decent price - how else could they expect to shift large, illiquid holdings in a serially underperforming company?

Reading the Science (LON:SAG) release from this morning they don’t seem to be pulling any punches.

https://www.stockopedia.com/sh...

To paraphrase, „we’ve approached you several times of late and you’ve ignored us, your recent performance sucks, you’ve just sacked senior management who were incompetent and your latest accounts admit concerns about whether your company is a viable going concern. Meanwhile, we, at Science (LON:SAG) have been going great guns“. This isn’t a warm and fuzzy friendly overture it’s the first salvo of a potential hostile bid and Science (LON:SAG) has its tanks squarely on the Tp (LON:TPG) lawn. Whether they bid 6p or 8p, ultimately it’s small change given the relative size of the two companies.

Gus.

Basically as an AM you have to achieve best execution and treat unit holders fairly. In the event of a takeover attempt you therefore have to be able to demonstrate due diligence that there was not a better alternative on the table else they could be liable to unit holders of the fund. Now, in this case that's unlikely as it is a small holding in context of the fund and isn't really going to create any meaningful move in the fund NAV, but nonetheless the mechanics of that DD should be embedded in the investment process and therefore get applied irrespective.

Again, none of that means they couldn't accept a low ball bid and create a rationale, but if there is a credible alternative I'd be surprised if they did that.

One thing we don't know is whether the replacement of the old CEO was institutional led. If it was and the new CEO was blessed by them then that would raise the price at which they would let it go.

I've certainly seen some companies get taken out far too cheaply from weak hands and poor board tactics on the part of the target company so I would never rule out that possibility, but my guess is if they are prepared to buy 10% in the open market at 5p they are probably mentally prepared to pay 6p+ for the whole thing. A price of 8p has got to be of interest to the board you'd imagine so somewhere in-between 6 & 8p might find an amicable deal, particularly if it is done in stock so Tp (LON:TPG) holders share some of the upside.

This isn’t a warm and fuzzy friendly overture it’s the first salvo of a potential hostile bid and Science (LON:SAG) has its tanks squarely on the Tp (LON:TPG) lawn. Whether they bid 6p or 8p, ultimately it’s small change given the relative size of the two companies.

I was just looking at how SAG's bid for Frontier Development panned out. Vicious is what comes to mind.

They started by taking a low ball stake, then bought more in the market at a far higher price to take them over 25% of the equity. They then went hostile to take just 50% + 1 share at the takeover price and following the bid going unconditional orchestrated a buyback at a lower price before folding Frontier into the main business.

I would be very surprised if TPG escape with their independence, they should probably negotiate for the best price. But I also wouldn't be surprised if SAG are buying in the market now. Once they're over 25% they can effectively block a counter bidder.

Fascinating.

Momoko Miyamoto

It's gonna be tough buying decent amounts of illiquid H & T (LON:HAT) after the Simon Thompson tip update. Hence the big SP moves this week.

yep - it will be a fascinating M&A situation

Actually one thing we forgot about is who they bought their 10% from. You don't buy that in the open market as there isn't enough liquidity and they haven't built it steadily so we need to see which institution reveals they have sold down in next few days. If it was one of the 3 large institutions that makes their job harder.

They are aggressive bidders though by the looks of things so Tp (LON:TPG) will have to be equally aggressive to remove the tanks from the lawn.

If I were to place a bet blind now - it would be a 7p recommended bid but in shares to placate those who wish to hold. Definitely going to be an interesting situation to watch.

Science (LON:SAG) / Tp (LON:TPG) seems reminiscent (albeit on a much smaller scale) of the Melrose Industries (LON:MRO) approach and ultimately successful hostile takeover of Gkn (LON:GKN) in 2018, even down to the target being a long term under achiever with (from memory) a recently appointed CEO/Chairman (can’t exactly remember which) who probably thought they were taking a final sinecure posting before the pension kicked in and ending up in a bidding war. Revisiting the old Melrose Industries (LON:MRO) thread maps out one possible set of dance moves for the way this one might go …. history may not repeat itself, but sometimes it rhymes.

https://www.stockopedia.com/co...

ExpectingValue

Thank you, Jack, for the shoutout re: S&U!

I thought it was a solid update. Forecast earnings levels are still substantially too low for this year, in my view, and investors are better served looking at the 16% RoE they made historically. The business very much sounds like it is normalising, so that RoE figure should be a credible first blush yardstick for the level to which earnings might rebound in the next couple of years. If you buy that logic, it's on around 11x normalised earnings, which still strikes me as too cheap for a business of this quality.

And now we know ...

On the 9th August 2021, Close Brothers Asset Management sold 79,308,596 shares in TP GROUP PLC ORD GBP0.10. This brought our shareholding to 0.37% of the shares in issue. This is based on the shares in issue figure of 779,178,719 as at 6th August 2021.

https://www.investegate.co.uk/...

ricardow

£JLP Jubilee Metals

Johnmhughes- Personally, I am not worried about this. £JLP like many small mining stocks, often drops a bit when the gold price drops, even though it has numerous other irons (sorry!) in the fire. One would expect a bit of volatility in this sector.
Ricardo

I'd wait a few weeks till the horde moves on and focuses on another ST tip. H & T (LON:HAT) rarely do many updates / announcements so you can always depend on the long quiet stretch between updates for some share price weakness to pick up a few.

Just make sure you don't pick up just before their FCA fine is announced!

johnmhughes

11th Aug '21

Many thanks for responding ricardow.

Rusty2

Tips often cause a spike in the share price, existing holders may bag some profits and the price often falls back to around the tip price, buying after the tip often is at a higher price because market makers mark the prices up. ST tips come along all the time.
I'm surprised tipsters don't have to produce their performance figures.

Bluesky Ventura

Must say Simon Thompson - Investors' Chronicle positive write does wonders for the share price. Just hope we buy the stock before he writes about it.

BSV

Small Cap Value Report (Tues 10 Aug 2021) - SUS, ZTF, BKS

Jack’s section

S&u (LON:SUS)

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Jack Brumby

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