Small Cap Value Report (Wed 13 July 2022) - ECEL, WINK

Good morning! It's just Paul today, Graham's busy.

I'm running a bit late, sorry about that, the first section should be up by 10am.

Agenda - 

Paul's Section:

Eurocell (LON:ECEL) - a surprisingly upbeat, in line with expectations update from this seller of building products. It looks a nice value share, with sound finances, a low PER, and lovely 6% dividend yield. Worth considering as a long-term investment, depending on your macro view of course.

M Winkworth (LON:WINK) - a micro cap estate agents. It's not clear why its shares are listed. Too small to interest me, and not good value either.  Although H1 performance seems good, and is in line with expectations. No sign of a housing market downturn yet.

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Explanatory notes -

A quick reminder that we don’t recommend any stocks. We aim to review 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 are analysing the company fundamentals, not trying to predict market sentiment.

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), and make your own investment decisions. 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.

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Paul’s Section:

Eurocell (LON:ECEL)

175p (up 2% at 09:30)

Market cap £196m

Trading Update

Eurocell plc, the market leading, vertically integrated UK manufacturer, recycler and distributor of innovative window, door and roofline PVC products, provides the following update for the six months ended 30 June 2022.

Company’s summary -

Good First Half and Trading in Line with Expectations

A decent update today, the key bit says -

… we continue to trade in line with expectations.

Given that forecasts look quite ambitious, and have been going up, I’m pleasantly surprised that the company continues to trade well.

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Other points in today’s update -

Revenues up 13% vs H1 LY, and up an impressive 40% vs pre-pandemic.

Inflation -

We continue to take effective action to offset input cost inflation, with a dynamic approach to selling price increases and surcharges. Price therefore remains a key driver of sales growth, but we believe resin costs have now plateaued.

Gaining market share, and extending product ranges.

Operating efficiencies are improving.

Net bank debt has gone up £4m in H1, to £15m - that's fine, as it's less than 1 year's profit, so quite modest debt, and there's a big overall surplus in working capital, so using a bit of debt is OK.

Higher inflation has increased working capital substantially (hence net debt rising).

Valuation - as you can see, the forward PER is modest, and there’s a cracking dividend yield, also good asset backing, with a healthy Price:Tangible Book of 2.19 (the lower, the better) -

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Balance sheet - NTAV last reported at 12/2021 was £87m. The balance sheet looks robust, so I don’t have any concerns about dilution or solvency risk.

A strong balance sheet also means it can afford to keep paying big dividends, which are about twice covered by earnings.

My opinion - this looks really good to me - a steadily profitable company, as you can see from the graphs below (with the expected pandemic blip).

The valuation looks attractive, because I suppose markets are anticipating a downturn in business, although there’s no sign of that downturn so far.

I think investors need to be reminded that we’re not just buying this year’s earnings. We tend to fixate on PERs, but actually we’re buying all the future earnings, which tend to recover from recessions.

Therefore, I feel that being able to buy a well-financed, low PER share, with a 6% dividend yield, twice covered, look attractive on a long-term basis.

Obviously it’s anybody’s guess what happens shorter term, so I’ve no idea what the short term share price is likely to do.

This is one to add to my list of possible buys.

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There’s a good StockRank too -

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M Winkworth (LON:WINK)

183p (flat today)

Market cap £23m

Trading Update

Micro cap franchised estate agents.

Today’s H1 update sounds reassuring, with a good performance in H1 vs pre-pandemic. Last year’s comparative was exceptional, due to buyers rushing to meet the stamp duty deadline, so it's down vs that exceptional period.

Lettings income is doing well - worth remembering that even when the property market slows, estate agents with a lettings division, tend to continue doing well, with rents rising.

Overall performance seems decent, and it’s good to see specific profit guidance provided -

While the UK economic outlook and confidence in the housing market remain in question, the Directors are pleased with the Company's performance in H1 2022 and expect that full year pre-tax profits will be in line with the market forecast of £2.1m, marking a substantial increase on the outcome for 2019.

My opinion - a market cap of £23m seems punchy for a business that’s only making £2m pre-tax profits. Stockopedia has the forward PER as 13.6, which doesn’t appeal to me, I would want it at about half that price to start to get interested, in current tough markets.

Why pick something this tiny? If I wanted exposure to estate agents, I’d prefer something larger & hence more liquid.

My sector pick would be Belvoir (LON:BLV) which has impressed with a strong track record of growth, and looks reasonably priced at the moment on a PER of about 12, for a very defensive business, that should benefit from higher inflation, as rents rise. So I cannot understand why Winkworth is on a higher rating? Maybe it's the generous 6.3% dividend yield, although note that is only just covered by earnings.

Winkworth shares have been a safe haven in the current storm -

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