Small Cap Value Report (Wed 11 May 2022) - BOTB, DTY, HSW, VTU, TENG, ANX, CTO

11th May '22 by Paul Scott

29 comments 8818 reads

Good morning, it's Paul & Jack here with our usual daily review of company news. We've done some shorter sections, to cover more companies, see the agenda below. Today's report is now finished.

Agenda -

Paul's Section:

Best Of The Best (LON:BOTB) (I hold) - a reassuring update for FY 4/2022, with revenues as expected, and profits "slightly ahead" of expectations. With trading now apparently stabilised, after a large drop in previous expectations, the PER of 10 is looking good value again.

Vertu Motors (LON:VTU) (I hold) - stellar results for FY 2/2022, from this well-managed chain of car dealers. The bonanza, fuelled by high used car prices, is continuing. Valuation is strikingly cheap, even if future earnings drop right down again. The balance sheet is chock full of freehold property, and shares trade at about a 20% discount to NTAV - this doesn't make any sense to me. Strikingly cheap.

Quickies (no sections below in main article) -

Ten Lifestyle (LON:TENG) - £50m market cap (up 1% to 60p today) - I’ve had a quick skim of the interim results from this corporate concierge service provider. It’s still loss-making, and the weak balance sheet (negative NTAV) doesn’t provide much comfort. The company is hoping for improved business as travel resumes. It’s made losses every year, quite heavy in some years, since listing in 2017, so for me the business model is unproven - not an attractive investment proposition, especially when we’re in a bear market. So not one for me. [No section below]

Anexo (LON:ANX) - £150m market cap (up 3% today to 126p at 12:22) - this is a credit car hire (re accidents) and other claims business (e.g. dieselgate claims). Fabulous profits reported today for FY 12/2021, very low PER. But there's a catch - the profits are not turning into cash, in fact cashflow was negative, because all the profits are going into increased receivables. Receivables are a staggering £188m, on £118m revenues. This looks a lot like Quindell, for those of you who remember how that booked huge profits, but ran out of cash because it couldn't collect in its payments. Accident Exchange was another one further back, that also sank under the weight of non-payment of receivables. Bank debt is also high. I wouldn't go anywhere near this share for these reasons. It's on my…

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Revs8

11th May '22

I was expecting to see a significant move in the SP on the back of these excellent results for Vertu Motors (LON:VTU) Surprised to see that its less than 10% and falling at the time of writing. Just shows the degree of negative sentiment in the market at present. Every rise is seen as a selling opportunity. Good news is tempered by warnings about future costs/sales and the cost of living. We need a change in the direction of the inflation rate to change the mood.

Helvellyn

Vertu Motors (LON:VTU) numbers, although very good, were not that much of a surprise and any reference to future inflation/supply chain/consumer weakness will currently be taken as bearish .

US inflation numbers out @ 1.30pm (our time) , commentators are thinking there may be a chance of a fall in the rate, which is probably why markets are up this morning.

PS . I have looked at Vertu Motors (LON:VTU) a couple of times and the numbers etc are good but as a long term investment what is the picture for car dealers going forward ? EV's, manufacturers bringing the whole sales and servicing procedure in house a la Tesla , my conclusion was that there was too much uncertainty.

Glen Keedy

Great results from Vertu Motors (LON:VTU) I believe car prices will be higher for longer than the market thinks so still more good news to come. One issue for me is that the company has bought back almost 10 million shares and will continue to do so in the coming year. I would prefer an annual dividend as a percentage of profit or a special dividend. This would make this AIM company more attractive to IHT investors and maybe result in a higher share price over a longer time. Buying back shares also reduces liquidity which for me is an important issue in times of market stress. It seems to be the trendy use for excess cash at the moment. Any one else fancy a divi over share buyback?

Effortless Cool

Hi Glen,

With Vertu Motors (LON:VTU) net tangible assets at 67p per share at present, I am all for share buybacks to the maximum extent they can afford. It is when a company buys back shares when they are relatively expensive that it becomes a problem, but that is far from the case here.

mojomogoz

I think Vertu Motors (LON:VTU) is somewhere between fair value and expensive as current earnings are a sugar rush due to macro conditions rather than the reward for good management and capital allocation (I question both). This is a stale view a little from me as I owned several years ago buying on spikes down to the 40p area and selling for modest profit into the higher 40s as I came to the conclusion they were a bad capital allocation business.

They talk a great game but they fail to deliver IMO. In recent years they moved to buying expensive premium franchises (I think for after sales and the higher margin used car biz) away from their buy cheap and build. Its really a massive shift in strategy they've not really clearly acknowledged.

They are vulnerable to normalisation of used car prices with volume maybe still impaired and any cost or reg pressures around aftersales (I think there's a chance of investigations into aftersales care market - often a shoddy service with very high margins).

Looking at their results its notable that gross margin stayed pretty constant despite the large bump in revenues due to pricing. I find this a disappointment given the scale of the revenue bump (40% YoY) - why no leverage in here?

Then looking at operating expense it rose by 30% YoY. Its a little hidden in the figures but c.10% of that is called 'non core' as it relates to acquisition and disposal costs...that's a bit cheeky definition though as buying and closing operations a repeat activity. You may ask what happens if they standstill and don't acquire? That's a good question and I don't have a neat answer but my guess is that wont be good and isn't really viable. Refresh is an ongoing cost. Add in that I suspect there has been very low marque brand related costs in last couple of years due to covid issues and it looks like costs will go up in coming years (...undoubtedly much marque repositioning to come...and the premium brands they've been buying into have high marque costs and always want to refresh/dazzle and that cost goes to vertu)...

...BUT govt related reliefs to the business rolling off account for slight less than 10% of YoY cost increase...so adjusted its more like a 20% increase in expense YoY -> looks good relative to revenue bump. Nevertheless I believe there's a lot of smoothing to come there and expenses go up whilst profits and revenues face some pressure.

There also looks to be a bump in aftersales revenue that might be driven by catch up work (repairs etc - note when you go for your annual under plan service they suggest a whole load of repairs that are non essential usually...maybe they stopped that during covid?).

Unless there is a secular change in the car retail market and/or Vertu has had true operational transformation (something they talk about endlessly but never achieve) then the rating should be low given the capital intensity. I don't place value on the special use real estate portfolio. This may be overly conservative of me but I don't see it as easily realisable value...in a life or death situation it might...but the poor operating dynamics and high capital intensity will likely mean emergency funders ain't willing to step in early so the value of the property portfolio will not be felt by shareholders.

Note that trading year to date is driven by new car sales with the rest looking poor. New cars don't make much money so that dynamic could lead to a profit disappointment. I think later in year we get some walking back of revenue and profit expectations. If used car sales normalise in price but volume remains low then it could be nasty.

Anyway, my view may be jaundiced on this. I'm a cynical past holder that came to conclusion it talks a good game but doesn't deliver. Buyer beware etc :)

Bill Blaine’s morning porridge is a good read today.

https://morningporridge.com/bl...

Here is a small excerpt:

“ If you are holding good and great companies you really have little to worry about. Sure, the stock price may decline as the economic picture develops, the great correction of 2022 will continue as a falling tide lowering all boats, but ultimately good companies will bounce back, they will pay dividends and they will resume on trend mean-reverted growth.”

Paul Scott

Hi Mojo,

Re. Vertu Motors (LON:VTU)

Always good to have a well-argued bearish/neutral view, thanks for posting :-)

Regards, Paul.

JASVFS

Thank you for covering Vertu Paul, I agree with your comments about the share price and your brief mention of Cazoo! We'll buy a few more Vertu, I also expect the dividends to rise in line with your thoughts on the payout.

Norfolk'n'Good

Divi every time!!

Thanks...I'm often wrong...this may prove a learning opp for me!

ridavies

Good morning Paul, and thanks for great write up on Vertu Motors (LON:VTU) which seems really undervalued. On your comment on Cinch and white teeth, I seem to remember that I saw that Cinch had bought around a 10% share in one of the big ones like Vertu Motors (LON:VTU) and for the life of me I cant remember which! Do you or any readers have any idea. I also have Pendragon (LON:PDG) and Lookers (LON:LOOK) so may have been one of the three.

Cricketfan

£HSP. A really excellent webinar this morning lasting a full 2 hours. Some brokers and a few PIs at the event with questions both from them and web attendees. Great to find a company explaining just what they do in real detail. Fascinating. I see that the sp has risen 6% today.

Mark

Hargreaves Services (LON:HSP) = Hargreaves Services

Ja075

Ive been a shareholder of this company for sometime . The downside is that they keep doing new share issues and the share price is still below the price of the several fund raises.

raigersfield

The trend and level of Vertu’s returns on equity explain why it has seldom made positive returns over cost of capital for equity shareholders and that is directly reflected in the share price history.

BnB

Alphawave Ip (LON:AWE) - second big director purchase in 2 days. And this one is sizeable at £3m following yesterday’s at £0.6m

Harry Hindsight

My notes - "takeover offer by Constellation Automotive (Cinch, We-buy-anycar) for £MMH.

So looked at Vertu Motors (LON:VTU) as a potential takeover play - but maybe management would be resistant. Good value, healthy and pays a dividend - but the future is unknown. I'll stick with the oilers as you need them to put in the motor even indirectly the Tesla.

Zipmanpeter

After market announcement of relatively large purchase by Norcros (LON:NXR) of bathroom panel maker for x8 EBITDA and an £80Mn enterprise value. Part funded by a £18Mn placing. No doubt more details (but hopefully no skeletons) to follow but the deal looks quite good - highly related to current business, in a rapidly growing segment and a fair price.

Tommy H

I hold Duke Royalty (LON:DUKE) so whilst I am registered with Primary Bid I did not do a top up, annoying would have made a small amount today but who knows the value when it actually hits the share account.

My holding though is in an ISA, so for tax free income, so in reality there is no option to top up... frustrating but will write to management, I am down but still hold happy with the dividend.

I would compare with Supermarket Income Reit (LON:SUPR) where they offer the additional shares to all holders no matter where held so continue to add through the open offers in the ISA.

Tommy

Allerton

12th May '22

Cinch is owned by Constellation Group which bought 19.9% of Lookers

Small Cap Value Report (Wed 11 May 2022) - BOTB, DTY, HSW, VTU, TENG, ANX, CTO

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Paul Scott

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