Small Cap Value Report (Wed 10 Feb 2021) - WATR, SDI, AVG

10th Feb '21 by Paul Scott

92 comments 10984 reads

Good morning! It’s Paul here with the SCVR for Wednesday.

If you want to discuss the removal of the thumbs down feature, please don't do it here! There's a specific thread here [link now fixed] for this issue, where you can hear the logic for why it was done, and express your opinion, if you must.

Timing - today's report is now finished.

Agenda -

To start with, here’s something left over from yesterday -

Water Intelligence (LON:WATR) - 2020 Trading Update

Today's results & trading updates -

Sdi (LON:SDI) - a superb trading update on the back of strong orders

Avingtrans (LON:AVG) - a quick review of its interim results to 30 Nov 2020.

Water Intelligence (LON:WATR)

500p - mkt cap £86m

Water Intelligence plc (AIM: WATR.L) (the "Group" or "Water Intelligence"), a leading multinational provider of precision, minimally-invasive leak detection and remediation solutions for both potable and non-potable water is pleased to provide its unaudited Trading Update for full year 2020.

Performance has been excellent -

Statutory profits before tax grew very strongly by 78% to $4.2 million, which exceeded market expectations.

Last year, adjusted profits were $1.0m higher than statutory profits. So there’s a query as to why the trading update today mentions statutory profit, not the more normal adjusted profit? Ah here we are, adjusted profit is mentioned further down -

Water Intelligence profits before tax adjusted for non-core costs*, non-cash amortisation expense and share-based payments grew 49% to $5.1 million (2019: $3.4 million)
* Non-core costs include one-time items such as legal expenses on transactions

Revenue for 2020 up a healthy 17% over 2019, to $37.9m (2019: $32.4m). Remember that this understates the level of end customer activity, because some of WATR’s business is via franchisees. Does the franchise model actually work? I’m not sure about that, because WATR regularly buys back franchises, to operate itself. Suggesting that it’s not easy to make franchises work.

Green Economy Mark - this sounds interesting, it’s not something I’ve heard of before. This is awarded by the London Stock Exchange, for companies which derive at least 50% of their revenues from environmental solutions. More information is here. This makes the shares suitable for ESG investors - an increasingly important part of the market. I’m…

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Cleeve

10th Feb '21

Pauls comments about spread betting are bang on the money however the one thing I would like to highlight is when buying small caps you can often find it closing only, which means as an example you can’t buy DEV 0r AAA and I think ALSR on spreadex

Phuntt

On question 2, Paul has commented before on his history with SpreadEx - he has been dealing with them for years and they have an excellent relationship.

If it’s any help, I only started spreadbetting about 11 months ago. I did some research and tried out six platforms and currently have 3 accounts which I use depending on what I’m doing:

SpreadCo - by far the best spreads I’ve found, the platform is dated but it works and is fairly dependable, very limited in markets offered (only really large cap/ US - no AIM or small caps at all) and occasionally limits on amounts possible to buy/ sell.
SpreadEx - can trade most things, always slightly better spreads than IG/ worse than spreadCo, great telephone service so can trade inside the spread if needed, ok platform (prefer spreadCo’s but it’s fine)

IG - can trade most things, probably the worst spreads, absolutely love their platform so find myself trading there more than I should for ease of use, no problem with quantity but platform has suffered some outages/ restrictions over past few weeks due to GameStop in US which has angered some customers (hasn’t affected my trading personally).

I’d love other opinions on this subject - Paul’s answer was great and detailed - anyone else got a view on platform choice?

SlickMongoose

Or Judges is overvalued, of course.

mojomogoz

Sdi (LON:SDI)

Just to be consist with prior scepticism....if you hold then I'd sell now!

I know I'm wrong so far...but one day SDI will be <10x current earnings and in a bit of a trap on how to progress as they wont have enough premium to make the magic acquisition process work.

Extrapolating the current revenue and profit progression is high risk. How does the sum of the parts handle that....and what if the recent bonanza orders in cameras prove a bit peaky.

So, my scepticism has been wrong...congratulations to the bull who booed me before...

...do you still feel lucky punks?

There is a big difference with speculating on tiny movements on the currency/ commodity markets and using spreadbetting with minimal gearing as Paul described to hold shares in a company. The former is basically gambling, the latter is investing in a tax efficient manner

Paul Scott

Hi millbank71,

I don't have any views or insights on your other questions, apart from this one:

2. I assume that you use spreadex for a reason?

Yes, mainly that I've been a client there for many years, and they helped me get through & recover from a disastrous time in 2008-9. Hence I feel honour-bound to do nearly all my business with them ever since, so that they make some money back from the hit I accidentally caused to their balance sheet back in the financial crisis.

Also, because of our long relationship, they tend to give me a bit of leeway, and let me manage my own positions down gradually, if the market goes against me, rather than cutting my positions with no consultation, as larger SB companies do. I rarely stick to my own rules on gearing!

Also, Spreadex specialise in small caps. So I can put on SB positions on lots of shares, with very small market caps. They let you have underlying position sizes of about £40k on 18% margin (if you're a professional client), and 40% margin above that, on £40-100K. Beyond that it's 75% margin. I like this system. With a diversified account, of say 30-40 shares, it means that no single one can do too much damage if it goes wrong. And if you really want to go in big, then putting up 75% margin means price fluctuations don't matter.

The dealers are very helpful at Spreadex. I use an intermediary broker, but previously have found the Spreadex guys really good, and they're happy to work orders to get an improved price, so never deal online in small caps, ring them up for a better price. Plus you can even do placings,etc, through a Spread Bet account.

NB. Please don't even consider a SB account unless you're already accomplished & disciplined at shares. Otherwise you'll be a lamb to the slaughter. I've heard so many disaster stories, and of course my own story is pretty dramatic. If I didn't have such a positive outlook on life, I would have very definitely been 6 feet under after my previous experiences in 2008-9. It took 4 years to begin to recover emotionally, and 8 years to even partially recover financially.

So please do be careful!

As The Psychology of Money (great book!) says - don't lose money you do need, to make money you don't need!

Regards, Paul.

The idea that they need to be trading on a high multiple of earnings to make acquisitions is simply wrong. Most of their acquisitions are debt financed.

There's no magic here, just a business that has expertise in identifying and acquiring small scientific equipment companies at reasonable multiples, thus being able to generate a consistently high return on capital. There's no reason for the acquisitions to slow down unless they run out of companies, and by all accounts there's plenty out there. Add on a reasonable amount of organic growth and not much debt and they're going to trade at a high multiple of earnings.

It's possible that the recent camera orders are one-offs that won't repeat, and in a couple of years forecasts come down. I think that by the time we get there, they'll have bought a few more businesses, some of the subsidiaries that have seen slowdowns due to COVID (e.g. those supplying the aerospace industry) will have recovered, and so there will be other things to take its place . However, personally I don't think life science research is going anywhere in the medium term and these high tech cameras will continue to be in demand.

rhomboid1

Evening Mojo

I’m guessing that they’re likely to continue to deliver ....because they’ve done so for the last 5 years I’ve held them

Also I’ve never seen a more substantial upgrade by a company of the year *after* the current one...which they’re also upgrading en passant

It’s definitely looking good value..as is UPGS..I think you like them more than you care to admit

Haha! I think-worry I should like them but I’m too stupid to do it!!

Maybe I’m just going to have to learn slowly and then capitulate painfully.

TBH my prejudices (aversion to straight roll-up with no significant operational benefits just the financial uplift) stop me from looking closer so I may just be ignorant. I need something more than the financial motor and I don’t get it. I believe a motor greater than financial makes sure the conglomerate has the engine to pull itself out of tough times when they come.

I may just be wrong. I do have a couple of things where roll-up is part of attraction but the acquirer owns the motor too

602455788a9ac0C8CAF24-04EB-4F9E-B4C1-7A5

which half wit reported this post....we need contrary opinions more than sycophants

I am surprised that your gearing is so low - I believe the spread betting companies still offer at least 5 times gearing.

Well... {drums fingers} ... I can't honestly say that I always adhere to my own rules! ;-)

But it's really important to have some rules in place. Breaking the rules in a roaring bull market like we have now, is very lucrative. But I had terrible years in 2018 & 2019 for example, when my big positions went wrong, and the gearing multiplied the losses very badly. Thankfully got back to basics, and recovered since, but you really can do devastating damage to your portfolio very quickly, in a geared scenario, when a bit of bad luck combines with a nasty market downturn.

Just be careful everyone! It's at times like this, that I think people can inadvertently lay the foundations for a big drop in performance. This market feels very toppy in places to me.

Chill out, HQ will check things, and ignore it if it's spurious.

Evening Paul

I guess I’m just annoyed that there is tendency to groupthink on any bulletin board...& we need contrarian voices & people who don’t understand that diminish the value of those contributions

Albertos

Well said R.

Even if I sometimes wonder about M.

ambrosia

Agreeded, i've got an alert to buy Saga if it dips below 248

Boon

Wondering if its only a matter of time before regulators turn their eye again to Ig Group (LON:IGG) both in the UK and now in the US with tastytrade and put some tighter restrictions on retail punters. The regulation may be wrong and short sighted, as gamblers will just find another outlet to gamble, but we all know governments can make stupid mistakes at times.

One broker (Stifel?) on On The Beach (LON:OTB) just issued today, slashing EPS forecast for FY Sep21 down to zero. Was about 5p consensus before today. Expectation is a more muted summer season.

This is of course just one broker forecast and on company. But wondering if we'll see a raft of earnings downgrades over the next few days across Jet2, Easyjet, Ryanair, Saga, etc as the prospect increases of a lacklustre summer holiday season.

In a curious way or disappointed way ;)

I’m getting refitted Panglossian soon so maybe I’ll get flagged for boosting soon. Anyway, I don’t mind be picked on :)

I’m probably just wrong on £SDI. A lot of smart people like it. SDI’s CEO even seemed to direct a rebuke my way for being sceptical at last update (maybe it was to someone else higher profile).

Perhaps I’ll look again. I am willing to change my mind...after all, my old team called me Bi-Paula partly as I would change my mind from one investment committee meeting to the next. They found me hard work as I had personal policy of being all for or all against something...we were going to commit our or client’s money so I felt being unsure wasn’t an option. But boy did some people get angry with me...

Nah - just feel you court controversy sometimes - but I like that.

Small Cap Value Report (Wed 10 Feb 2021) - WATR, SDI, AVG

Water Intelligence (LON:WATR)

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Paul Scott

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