Small Cap Value Report (Tues 11 Aug 2020) - ZTF, HAT, CDM, AMO, SOLI

11th Aug '20 by Jack Brumby

59 comments 9932 reads

Morning, it's Jack here.

Humans are funny aren’t they? I was reading last night about how ex-McDonald’s CEO Steve Easterbrook is being sued over alleged workplace relationships. It got me thinking about corporate governance. Even the biggest and most polished companies can get caught up in human mischief.

For years I paid lip service to corporate governance but it took a while to cotton on to its true importance. One day I made an investment in a small cap with an inexperienced and small corporate team. Communication with shareholders was non-existent and RNS statements were unreliable. Pretty quickly I began to worry that my investment might be misplaced - in time those fears were justified. Lesson learned.

It’s one of those hard to screen for, qualitative aspects of investment, but it is a very real consideration. Not all companies are focused on shareholder value.

Some companies that do seem genuinely concerned with this point include Games Workshop and Judges Scientific. There are more but those are the two that immediately spring to mind.

Some of the things I’ve started to look out for in spotting that type of company include:

Founder-owners or long term management with significant shareholdings,
Cash-generative companies with strong balance sheets,
Management commentary that is considered and distinctive (too many statements feel phoned in or boilerplate), and
A lack of equity dilution over time.

These help but they’re not foolproof. Given that it’s hard to screen for, I’m curious to hear any other suggestions of companies with good shareholder alignment. And what do you look for to identify those companies? Anyway, nearly 7am.

Zotefoams (LON:ZTF)

Share price: 357p (before market opens)

No. shares: 49m

Market cap: £173.58m

Zotefoams (LON:ZTF) is a foam and insulation specialist. It was highly rated in the past but shares have come off a little:

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I’m not familiar with the story here. My guess is this is due to some missed growth targets and a lack of cash generation.

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If you head over to the group’s cash flow statement you can see it has had to raise debt and equity in the past two years.

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Note the dividend payments too. I’m not a fan of companies that insist on paying dividends while funding operations externally, but ZTF…

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barnetpeter

11th Aug '20

Talking about quality of services offered by a company.....I give you the banks. Barclay card wrote to me yesterday to reduce my credit card limit from £6,500 to just £300. No warning. Already reduced before they wrote to me. Ignored their own terms and conditions so far as I can see. Nothing on the card; I cleared the balance in June when a zero interest balance transfer ended. Apparently in making this decision they "carefully checked how many missed payments I have" (not once on any account) and my credit score (excellent).

An article in the press from late last week suggests this is just the start. With furlough and support schemes ending in a few weeks time and unemployment expected to soar by the end of the year, the banks are looking to cut risk dramatically. Of course I can understand that but the "blunderbuss" approach and the suggestion that it is the individual customer that has caused this issue is very irritating. But of course being honest in a pandemic would result in a lot of criticism.

newstart

Jack was disappointed in your Open Orphan comments yesterday as they were so far off the mark. You seem to base your comments on historic Stockopedia figures and have failed to research the transformation that has taken place since the start of the year with the acquisition of Hvivo. Open Orphan is now profitable and has cash of at least £15m. It is benefitting from COVID but it is not dependent on it. In current times it is probably one of the safer stocks on Aim . Add in the wide card of its phase 3 universal flu vaccine, there seems to be plenty of upside as well. As you can see you seemed to have missed the positives and done an injustice to Open Orphan

abtan

No position in Plus500 (LON:PLUS) but I like to keep an eye out.

The below are revenue gains/losses from Customer Trading positions published at various occasions in and at the end of H1:

Q1: $82m GAIN
8th June trading update (i.e 3 weeks until end of H1): $146.5m LOSS in Q2 alone, YTD LOSS is therefore $64.5m
H1: $5.6m GAIN (i.e a GAIN of $70.1m in the last 3 weeks of H1)

Those are some ridiculously wide swings in such a short period of time.

And to be honest, I don't quite believe the company when they say the period ended with only 1% of revenues derived from customer trading.

Happy to remain on the sidelines.

Casino_Winner

Yes i agree, i had Ig Group (LON:IGG) and my stop got hit. It was so frustrating as the statement i thought looked very good.

GrahamF

Charles

Just wanted to clarify that I don’t know for sure that cost is an issue for Versarien (LON:VRS) but it is a reason that many technically promising products don’t gain traction. What we do know is that producing graphene in quantity is not at all easy and Versarien only produce a small amount, so it is reasonable to suppose that it will be expensive.

cafcash49

Thanks for the follow up Graham and I think it is highly likely your supposition is correct.

Wow , it is hot today.

turbo

You mention "fund managers who concentrate on quality and for whom shareholder alignment is very important" - any pointers how to identify these managers (with so many out there)?

iwright7

....I use an indirect method by monitoring the purchases of fund managers who concentrate on quality and for whom shareholder alignment is very important. As it happens these fund managers also have a very long term outlook. I am sure you know who I mean but for those who don't, this includes Keith Ashworth-Lord, Nick Train and Terry Smith.

I use a very similar method to alert myself to quality companies. All 3 of these fund managers have one major advantage over us small investors - They all have ready access to company management that we small investors don't. In addition to getting more of an inside track on company progress, all 3 managers have a better than average track record of assessing/investing in capable senior management and disregarding the dross.

Man of Steel

In reference to Barclaycard, if you've cleared your balance, had a zero rate deal, never missed a payment and have an excellent credit score you're probably not a very profitable customer for them! :)

Take it as a compliment and move your business elsewhere - there are some good reward and cashback credit cards out there.

Gromley

I agree there is not much new in the Walker Greenbank (LON:WGB) statement today (in fact I wasn't expecting one given how late the AGM was).

There is however one thing that puzzles me.

Total Brand sales, before licensing, discounts and rebates, in the half year were down 28% in reportable currency at £31.3 million (down 28% in constant currency) compared with the first half last year.

I can't recall them using the words I have bolded previously.

licensing is easy to understand as they report this a separate line item anyway. But I cannot understand whether the reference to "discounts & rebates" means that this is a different measure than they have previously reported?

Last years H1 Brand revenue (excluding licensing was £43.1m so with the tiniest bit of rounding £31.3 is -28% vs that. So it does look like this is the same measure they have always given.

Which is then even more puzzling.

Over recent announcements they have given quite a lot of visibility of how revenues have progressed during the crisis, mostly recently in the AGM statement the same metric was -31% for 25 weeks (-15% for the last 4 weeks). Now we have -28% for 26 weeks,

It is overly simplistic to assume every week has the same weighting, but we do that it would imply that week 26 was +70% year on year. If that were they would surely say so?

Ahah - re-reading the paragraph on finishing the half year strongly I realise they said

The final fulfilment of a significant hotel contract order was delivered at the half year end, adding to UK Brand product sales, particularly of the Anthology brand.

I surmise then that contract must have been worth c. £1.5m

I was trying to divine whether we could determine anything about the underling demand and whether it was up from the most recent -15% YoY but lumpy contract like that means that we cannot tell.

I still take some encouragement from "the improving trend continuing month on month". The broker note that Paul referred to a few weeks ago (forecasting a small loss) implied revenues remaining @ -30% for the FY. I was more optimistic than that expecting around break-even to a small profit, I'm more inclined now to thing it will be a profit.

I still hold.

rmillaree

Walker Greenbank (LON:WGB)

But I cannot understand whether the reference to "discounts & rebates" means that this is a different measure than they have previously reported?

Its pretty unhelpful when the wording changes without any explanation for the change - compared to the exact same statement last year. i guess you would need to push the company on this matter to find the answer.

It seems plausible they may simply not know these totals yet so are using a different metric as that is all that is available. Ie without factoring in rebates and discounts. seems most liley explanation to me.

Perhaps its the same metric and they have not previously used the same wording (unlikley i would have thought)

There could be some change in accounting standards that would expalin why the metric is now not what it was.

i guess the worst option is that they are chosing a different metric solely due to the old metric being worse !

I would presume any lfl quoted totals are consistent though whetever the answer to the question.

I still take some encouragement from "the improving trend continuing month on month".

I think one would should expect the trend to continue to improve if there is a time lag in everything flowing through the system when they resume normal operations (i am presuming this is the case) - so it could be only improving due to the prior period not exactly being as up and running as this period. also the prior 4 weeks at 15% behind normal doesnt seem that brilliant a starting point but may be due to lag in opening. In summary its hard to get much of a handle whether the trend is good for the right reasons or its to be expected simply due to more stuff being good to ship than the prior month.

Just a shame they cant be a***d to give us a profit estimate now for year end - nearly 9 full months into year is pretty late to get anything from the horses mouth.

stockrockets

Thanks Jack, a really informative report as always!

QARPY

and what would be the problem if some revenue comes from costumer trading? most of the costumers are pure gamblers and £Plus is the best casino for them in the UK, Germany and Spain. Room to grow in other countries.

What do competitors do regarding Costumer gain/losses? They are insured i believe, against losses. But do they keep gains?

Plus500 (LON:PLUS)

Hi R--G

Revenues swinging by a magnitude of +$70m in 3 weeks, or -$150m in 2 months means that there is no trend to follow or analysis that one could do to determine how the company will perform in the future.

An extended period where Customers are Trading positively (and therefore Plus is losing money) would clearly not be good for the company. Sure they could cut off their customers (they have done in the past) but that would piss them off and make things worse. When I was doing more detailed work on the company a few years back it already had a very high churn rate and I have no doubt that this hasn't changed.

As an aside the company has lied so much in the past I don't, and will never, trust them whilst management essentially remain unchanged. And not mistakes, blatant lying - such as how much money they made or lost from customer trading.

Competitors:

I believe £CMC have started adopting the same policy as Plus but to a much lower extent. Ig Group (LON:IGG) do not gain or lose on Customer Trading.

Feel free to check out their respective reports in case you feel I have misunderstood anything.

thanks abtan

too bad that analysts cannot forecast the company, shareprice will therefore be driven by trading statements and interim/annual reports and if these show good results then i cannot complain (I hold).

Churn rate has reduced a lot, it was mentioned in the H1 report issued today.

I was not aware of the blatant lying, i will look into that, thanks. i hope the lying is confined to Customer trading performance and not to other metrics. they said today their cash balance is now more than half a billion dollar! ($587.8m) imagine if that is a lie!

Tomwebster25

why is this voted down, new start is absolutely right

I know nothing about Open Orphan (LON:ORPH) and to be honest I had skipped over that section of Jack's Monday report. I have read it now, and I don't think it was overly negative. In fact to be fair Jack said :

Even great companies can have very risky financial profiles early on so you might always hit upon the real deal in this space.

My personal rider to that sentence would be "but the odds are against you".

newstart makes a decent stab at explaining why the future is different from the past, but the fact is that most "story stocks", which is what ORPH looks like to me, have very compelling stories about the golden future that lies in front of them.

However the vast majority of them crash and burn or wither into obscurity.

Some of the very biggest winners on the market come from this stable of story stocks, but if you invest in all of them you will lose substantially. I think to win in this space you have to be lucky, or have some MASSIVE insight into what the winners will be (and probably have more than your fair share of luck).

To be honest I think Jack's conclusion was significantly more balanced than mine would have been.

I think the down-votes predominantly are caused by the tone of newstart's perhaps influenced by the similar reactions that occur whenever Paul mentions OptiBiotix Health (LON:OPTI)

With a different tone and a little more detail on why (s)he takes a different view of Open Orphan (LON:ORPH) newstart's post would have been well received. In most cases I think the community here welcomes contrary views and vigorous discussions. So I hope newstart won't be discouraged from continuing to offer up views.

Tommy H

13th Aug '20

I had bought and sold and bought and sold Ig Group (LON:IGG)

I had been originally planning to buy back in at £7.50 but then read the @Micheal Taylor article and held off, so was then pat on the back and well done son when it was £7.35 and then obviously kicking myself and you are a numpty...

Anyway with reference to the @MT thing, it looked like an institution exiting in a large volume caused the spike down...commiserations

I continue to watch and will buy again as I agree with @ex Graham Neary they are the class act in the field it would seem?

Bluesky Ventura

14th Aug '20

Hi Tommy,

The biggest driver for growth is new customer acquisition. The current turmoil has driven lots of growth. I've model valuation based on the most recent report. (see graph below).

Still looks undervalued.

DYOR

BSV

jonno

Just listened to the £AMO presentation on 'Meet the Company' website. The company as far as I can tell is operating in a growth area, helped to a degree by the pandemic. However I do have some niggling misgivings, such as:

The small shareholdings of directors. As far as I can tell, Donald McGarva, Group CEO holds around 550,000 shares, that apart the only other Board shareholder appears to be Mark Carlisle, CFO who is shown on the Halifax website as holding just shy of 9000 shares. Please correct me if other Stocko members have other information.

The gap between adjusted and statutory basic earnings and operating profit. This was the topic of one of the questions posted at the end of the presentation and I admit that I found Mark Carlisle's answer somewhat woolly. In short he said that the gap is anticipated to 'be better' at the prelims.

Finally there have been a few recent RNS announcements which although have no financial implications for the company do not inspire confidence. One relating to a technical breach of the Companies Act 2006 which has required the company to convene a General meeting on 4th September and the other relating to the premature release of details of the proposed General meeting.

My misgivings may off course be wrong, but I have decided to watch from the side lines for the time being and have recently sold my holding at a small profit.

Others may disagree with the above and all constructive thoughts and observations are welcome.

Small Cap Value Report (Tues 11 Aug 2020) - ZTF, HAT, CDM, AMO, SOLI

Zotefoams (LON:ZTF)

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Jack Brumby

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