Small Cap Value Report (Wed 1 April 2020) - NXR, AIR, CGS, RNWH, TST

1st Apr '20 by Paul Scott

59 comments 8634 reads

Good morning, it's Paul here with the SCVR for Weds.

Estimated timings - I'm a bit more with it today, so should be able to meet the 1pm official finish time. Today's report is now finished. My apologies for the unreliable timings this week.

Looks like we're in for another rocky day, with futures down heavily overnight. My view (subject to change on a daily basis) remains that I'm sceptical about the strong recent rally. As company updates are making clear on a daily basis, many (most?) shares are currently impossible to value, because we don't have any earnings visibility. For that reason I cannot see any reason to buy the market generally at the moment. Individual shares can make more sense, if companies have recurring revenues & strong balance sheets. But in other cases, why take the risk?

Norcros (LON:NXR)

Share price: 125p (pre-market open)
No. shares: 80.6m
Market cap: £100.8m

Trading update

In light of the rapidly changing developments regarding COVID-19 (Coronavirus) since our last announcement on 20 February 2020, Norcros, a market leading supplier of high quality and innovative bathroom and kitchen products is today providing a further update on the potential impact on its performance for the year to 31 March 2020¹ and the measures it is taking to manage the associated risks.

Trading has slowed down in March 2020, meaning that it will now miss the full year numbers.

China supply chain now operating at "close to normal" levels.

Demand shortfall is now the bigger issue.

South Africa - trading has ceased due to Govt edict. 26 March to 16 April.

UK - customer closures mean trading is "now minimal". Norcros has therefore suspended its main UK assembly & manufacturing operations.

Guidance for FY 03/2020 is reduced, but bear in mind coronavirus only impacted the last few weeks of this period, so it's not terribly relevant;

We now expect our underlying operating profit² for the year to 31 March 2020¹ to be approximately £31m compared to the previous consensus forecast of £35m. All of this reduction is attributable to the COVID-19 situation, is considered both temporary and exceptional, and follows a period of robust trading including market share gains.

This is probably the most important part of the announcement, saying that (relying on bank facilities) it can withstand an extended shutdown;

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Wimbledonsprinter

1st Apr '20

Even with the shares trading at 25% of NAV, I think the current share price of Newriver Reit (LON:NRR) “only” implies a 45% fall in values from the Sept 19 valuation. The properties were valued at £1,255m in Sept. With around £510m of debt and an equity value of £182, this gives a current “enterprise value” of £692m. So roughly 55% of the £1,255 gross property assets as of September. NAV only tells part of the story. Also to get comfortable, I would wonder what the refinancing timetable and covenants look like.

FREng

Thanks Tim. That's really helpful. Record (LON:REC) looks attractive to me.

Those would be the coupons (yield) at the issue price (£100).

john652

Hi, bfogarty,

Thats the weight of the holding ( % at the end) in the fund, you can see it here:
https://www.hl.co.uk/shares/shares-search-results/s/shires-income-ordinary-50p-shares

sharw

That is a good point. For those who are not aware in June Keith A-L said that the size of the Buffettology fund had reached a level where microcaps (defined as less than £100m MCap) were now too small to have much effect on the fund and would be discontinued. The three 'microcaps' held at that time were Air Partner (LON:AIR) , Driver (LON:DRV) and Revolution Bars (LON:RBG) . The holding in Driver was completely sold in December and that in Revolution Bars was reduced from 19.69% to 13.15% last week.

bfogarty

merci :

Glorenfeld

These are all great points, thanks.

Thanks - it was the 4.73 % and the 3.88 % i was referring to - thnaks FR

Thanks - you could well be right.

Martin5760

Restaurant (LON:RTN) - that is the same director who bought 90k shares at £1.10 last month along with other director buys at similar prices....

John

Thanks for coming back i did assume it was a representation of a portfolio - just didnt know the conversation was about shire - tks for reverting and appreciate clarification

jwebster

Newriver Reit (LON:NRR)

Cheap!

A quick look at their last set of results - half year results to 30 September 2019

NRR have drawn down 523m in debt

From the funding section:
“Balance sheet fully unsecured and out assets are unencumbered
LTV covenant would require a 36% reduction in LTV
Interest Cover covenant would require a 47% reduction in net property income”

For the half year NRR generated 71.2m in revenue incurred 24.3m in property expenses thus earning 46.9m in net property income. So a 47% reduction in net property income calculates as 22m.

Risk is how variable are their property expenses. If there is no reduction in property expenses, then to drop 22m means a 31% reduction in top line revenue. The pubs alone accounted for 24.3m in top line revenue so if all this was lost, and there is no reverse operational gearing on costs, the covenant is breached.

Net finance costs were 10.8m and they have 23.9m in cash so they do have sit out cash if the debt holders don’t stir.

It’s a tricky one, given the bad news on income for a full quarter hasn’t come out yet. If they can’t control property expenses, there is a vulnerability.

pma

Edit

timarr

Watkin Jones (LON:WJG) who a few of us hold put out an update at 14.00 today:

https://www.londonstockexchang...

Pretty much as expected, they're closed for business, have lots of liquidity but are cancelling the interim dividend. All of next year's developments and 80% of 2022's are forward sold - although under current circumstances there's always a chance that some of the counterparties may back out.

However, they look robust against all but the end of the world with cashflow and earnings visibility for two years.

On a non small cap note Auto Trader (LON:AUTO) raised nearly £200 million in a placing today. They're in pretty good shape anyway but cars are the first thing to get hit in a recession so they've wisely taken the view that they'll get their fund raising in first. Generally in this type of situations it's the companies that react first that cope best.

With car dealerships closed they're making advertising on the site free in April. With nowhere else to go the dealers are piling in. Long term you'd have to think they'll be a winner, but it's probably going to take a while.

dscollard

for those who value the viewpoints of the likes of Howard Marks (the real one), Paul Tudor Jones , David Tepper ..worth a read

https://www.forbes.com/sites/antoinegara/2020/04/01/billionaire-howard-marks-pitches-a-defensive-investing-outlook/#534bbc371324

From Marks

In the Global Financial Crisis, I worried about a downward cascade of financial news, and about the implications for the economy of serial bankruptcies among financial institutions. But everyday life was unchanged from what it had been, and there was no obvious threat to life and limb.

“Today the range of negative outcomes seems much wider, as described above. Social isolation, disease and death, economic contraction, enormous reliance on government action, and uncertainty about the long-term effects are all with us, and the main questions surround how far they will go.”

Thus he’s still preaching defense and patience, and readying a list of businesses to buy at what could be lower prices.

xcity

The wheel has no memory

Maybe it shouldn't, but it actually does

Rusty2

Anthony Bolton takes a different view and has started buying again.

smatthews1

2nd Apr '20

I think my first concern is regarding how much demand will be retained for the types of aircraft they hold. I would expect there will be alot of airlines going into administration, and I had come to the conclusion that because their options for the ATR aircraft were so valuable they would be snapped up quite quickly.

As the ATR aircraft tend to be regional operators, I wonder if these will continue to operate regionally without disrupting the various levels of lockdowns imposed by crossing countries. This is only my speculation, nothing to back this up I am afraid.

We are very early days and it's hard to put an timeline on this and how much asset value can be retained the longer this crisis drags on. It's postive to see they had numerous party's interested beforehand though.

Paul Scott

4th Apr '20

Hi Tim,

Paul, in your derisking have you scaled back on RBG too?

I've not changed any of my long term positions (in my SIPP).

In my trading account, I massively increased my Rev Bars position (over 6-fold) as the share price fell, but have more recently got cold feet about my total exposure if it goes bust. Hence I've cut about half this week. Overall then, it's still a big position, but survivable if it goes bust.

I'm looking at everything, and working out how much it would hurt if it goes bust. It's so sad to be looking at fundamentally good companies, and thinking that this crisis could destroy those businesses & all those jobs too.

In overall portfolio terms, I've had a disastrous time with my small, speculative longs (serves me right maybe!). But as reported here in February, my strategy has been to fully hedge my longs with big shorts on indices & travel companies. That's worked out well overall, so I live to fight another day.

Going forwards, I'm re-thinking the whole risk:reward calculations.

Best wishes, Paul.

Hi IG,

Sorry I didn't get round to looking at this. Doubt I would have any insights on this type of business anyway.

Regards, Paul.

Small Cap Value Report (Wed 1 April 2020) - NXR, AIR, CGS, RNWH, TST

Norcros (LON:NXR)

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Paul Scott

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