Small Cap Value Report (Wed 13 Mar 2024) - SDRY, SHOE, BBY, MMAG, CPX, IXI, GYM, KWS, VCP

13th Mar by Paul Scott

83 comments 9428 reads

Good morning from Paul & Graham!

Masterclass reminder!

The latest in this series is today at noon - I wrongly assumed it would be this evening, so apologies for not flagging this earlier. The topic is investing strategies. These series of masterclasses are terrific, and I know that a lot of work goes on behind the scenes to prepare them, so I shall be trying to multi-task from 12:00, writing more sections here whilst listening in to the masterclass!

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 (usually) between £10m and £1bn. We usually 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.

What does our colour-coding mean? Will it guarantee instant, easy riches? Sadly not! Share prices move up or down for many reasons, and can often detach from the company fundamentals. So we're not making any predictions about what share prices will do.

Green (thumbs up) - means in our opinion, a company is well-financed (so low risk of dilution/insolvency), is trading well, and has a reasonably good outlook, with the shares reasonably priced. OR it's such deep value that we see a good chance of a turnaround, and think that the share price might have overshot on the downside.

Amber - means we don't have a strong view either way, and can see some positives, and some negatives. Often companies like this are good, but expensive.

Red (thumbs down) - means we see significant, or serious problems, so anyone looking at the share needs to be aware…

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jonno

13th Mar

Volex (LON:VLX) and Avingtrans (LON:AVG) are my two largest holdings in what is a relatively concentrated portfolio of 27 UK small caps.

Volex (LON:VLX): from Feb 9 to today's close, the shares have given up 13%. It would appear that Mr Market takes the view that the company is likely to be impacted by the dreaded destocking and will not achieve market expectations. I have no insight into trading but I would suggest that the current share price and resulting investment metrics go some way discounting the impact should such an outcome materialise. My view is that robust demand for cabling in data centres and to a lesser extent medical equipment is likely to offset a softening in electric vehicles and power cords for white goods, PCs etc.

Avingtrans (LON:AVG) I added to my holding on recent share price weakness and was pleased to see that the shares rose today in excess of 6%. I suspect that there is no specific reason for this, although the possibility of a disposal of one of the engineering businesses did come to mind. Again this is just musing on my behalf.

Fortunately good share price performance from the likes of Bloomsbury Publishing (LON:BMY) Galliford Try Holdings (LON:GFRD) and Sigmaroc (LON:SRC) has offset the recent softness in Volex (LON:VLX) and Avingtrans (LON:AVG)

The above post helps me to clarify my thoughts, although observations and views are welcome.

James Fitzpatrick

are you concerned about the rising net debt levels for volex?

yiannos1

You have some very interesting selections there especially iShares MSCI Mexico ETF (LON:0JF4).

Argentina looks promising as well.

Banco Bilbao Vizcaya Argentaria SA (NYQ:BBVA) is extremely cheap even after a 60% rise in the last two months (I hold).

planetx

Jonno

With you on Avingtrans , I doubled down hard when it briefly hit the 330s.

This was on the basis I was a happpy buyer at 420 so why would I not be super happy at 330 .

I’m even more concentrated than you and Avingtrans alongside Georgia capital and Bloomsbury are the three I’m super comfortable with 10/10 on my confidence chart

Hargreaves next 9/10

Equals and Filtronic down to 7:10 would like a bit of news .

These 6 account for 70% of my investments (Filtronic was only a half holding till it went and doubled !)

Actually clipped a few Filtronic today as I needed to pay for the replanting of a load of trees after the weevils ate the ones we planted last year .

Bloody weevils .

sharw

"Destocking" is a word that really irritates me as it is now used as a cover for so much. Originally in the first two years of the pandemic supplies, particularly from China, were so erratic, not just from origin but with places like Tilbury clogged up, that it was sensible to increase stock if you could to deal with fluctuations. Then when freight transport moved back towards normal there was destocking and balance sheets looked better with less working capital tied up in stock. But now? - with the Houthis attacking a main trade route, sending a lot round the Cape of Good Hope, the original reason has gone. A company should only be destocking now if it looks likely that it will not be selling as much as it anticipated.

You mention Volex (LON:VLX) (I hold) and this is where Mr. Market has really got it wrong if it thinks this company has been hit by destocking. It has been riding the wave of "nearshoring" that has been taking place by increasing operations in places like Turkey and Mexico, and often talks about it - e.g. in the 2023 annual report one of the bullet points for delivering excellent performance on medical revenues is "Momentum expected to be sustained over the medium term with near-shoring benefit".

Murrays

Volex - Downing Strategic Micro Cap Investment Trust has reduced its holding of shares from 9.7% to 8.35% over the month of Feb as it begins its slow wind down. It wsa 10.06% end of November. Probably doesn't help the share price as well.

LeicesterPete

Warpaint London (LON:W7L) price rose on good volume too. A wonderfully scalable business, lots of growth opportunity and co-owner managed. I added last week after top slicing a couple of times myself. EPS forecasts keep rising too.

Paul Scott

Hi Kouremenous,

Re Boohoo (LON:BOO) a few years ago, you said -

"Many argued at the time in this forum (shout out to Mojo) that as an investment it was an accident waiting to happen which proved to be the case."

That's true, but my point is that the bears here on BOO a few years ago all got the reasons completely wrong, which makes them lucky, not correct!

BOO went wrong for reasons that I don't recall anybody here spotting - erosion of margins from Shein being the main one. All the other reasons people were bearish turned out to be complete red herrings - eg corporate governance, poor standards in UK factories, etc.

I recall posting many times, showing that BOO was on a PER of 20x, and had sector-leading margins, and revenue/profit graphs that were 45o upward sloping from left to right. So it wasn't overpriced at all, the valuation was attractive, and the bull case made complete sense at the time a couple of years ago.

What also went wrong is that many people (including me) assumed the growth in 2021 was structural, when actually it was a pandemic online sales boom when people had nothing else to spend their money on. Sounds so obvious now, but of course none of the companies themselves said this.

It's important to draw the right conclusions from share ideas that go badly wrong. What went wrong with BOO, and the whole sector, is that Shein killed it. Nobody here saw that coming.

What it's taught me in particular, is that I don't know enough about the fashion sector any more, as my retail experience is now 25+ years out of date. Everything has changed, and brands come and go much faster than in the past, and the Chinese direct to consumer issue really, really worries me. Hence why I'm just not interested in buying any shares in this sector any more. Asos could easily end up bust, and BOO is likely to survive, but I don't think it will ever regain previous profit margins. Many smaller me-too competitors have disappeared.

We could be about to see the impact of Chinese competition in electric cars, with apparently 21 new brands about to hit UK & European markets. I noticed one Ora I think it's called, with a goofy looking, but cheap, EV are sponsoring a big ITV show. Could be a nice fillip for ITV and other advertising sector companies, as they make money from China destroying European industry over the next few years.

Regards, Paul.

slopsjon

"The governor of the Bank of England says the UK jobs market is near full employment.

The country is experiencing an "unusual" pattern of falling inflation without significant unemployment, Andrew Bailey said, adding: "This is tentatively good news."

Usually, higher interest rates result in companies cutting jobs because borrowing and investing become more expensive."

Volex (LON:VLX) and Avingtrans (LON:AVG)

Many thanks for the feedback.

Some good points regarding Volex (LON:VLX) with reference to near-shoring, Mexico being a case in point to serve the American market and Downing Strategic Micro-Cap Investment Trust (LON:DSM) slowly selling down its position as it winds down.

Apologies to 'sharw' for the irritation caused by the use of the dreaded 'd' word!

As for Avingtrans (LON:AVG) my views I believe are fairly well known and I am more than happy to side with planetX. On which point I thought that I ran a fairly concentrated portfolio with my top 6 holdings accounting for 40% or thereabouts, but planetX takes the prize by some margin.

I am off course biased so hopefully my views on both are correct.

Mark

14th Mar

I would say a lot of the stories are around the company are sensational journalism at best especially from the and Financial Times that just seemed to correspond with the shorting attacks.

All the explanations given by the company in defence sounded perfectly reasonable to me.https://www.londonstockexchang... The bones were that "inadequate accounting records associated with no more than £400,000 of customer receipts." This was referring to a very small private company purchase. As i am led to believe many private companies have poor accounts and are not suitable for PLC audit and need a fair bit of bashing into shape.

I am just trying to get a bit of perspective here but the auditor Grant Thornton can be excused for being a bit twitchy after the fine work of auditing Patisserie Vallerie.

Don't get me wrong VCP is struggling with an immense amount of debt and I disagree with the share buy back which I hope is more a threat to shorters. But they are doing a good few things right.

Debt issued in bonds not up until 2026 was a clever move.

Very good consolidation of uk manufacturers of carpet/underlay and the Balta Group NV(Belgium factory sold off and now manufactured from existing plant in uk) that now integrates with their own purpose built distribution centre and transport.

Wholesale and online distribution in America has opened up a good market for Spanish and Italian ceramic businesses.

doctor dave

Avingtrans (LON:AVG) on brief inspection looks unappealing. EPS estimated shrink to 6p with share price 400p. What's the special feature that has you impressed?

intuitive6191

RE BOOHOO

I would agree with Kouremeneous, the investment case for Boohoo had been damaged long before the arrival of Shein.

If anyone wishes to determine this for themselves all they need to do is click on the Boohoo stock report and look at the historical discussions. The arguments against are well reasoned but tended to be dwarfed by the exuberance of holders.

I personally thought that the very heavy director selling in 2019 was a good cue for holders to exit. This would have been a logical (not lucky) bear reason to sell.

Investors posting a bearish view on Stockopedia tend to be polite and respectful to holders. They make the bear point and then leave the argument. It is easy to overlook their contribution but it does not make it less relevant.

Kouremenous

Hi Paul,

The psychology of investment decisions fascinates me - what really drives us to buy, hold or sell a stock at a particular time. I think most of us like to think that we are our rational and our ability to analyse companies, crunch the numbers etc will optimise returns.

Conversely, I feel my most significant realisation on my investment 'journey' was when I realised how irrational I actually was, and understand (some of the time!) how I would oscillate between fear and greed when making decisions (both equally bad in my experience).

You believe the Boo bears were "lucky, not correct" as their reasoning was wrong. I completely disagree with that view. 2 opposing views is what makes a market after all :-)

If in doubt, lets consultant the Oracle (Warren Buffett 1995);

"We're trying to find a business with a wide and long-lasting moat around it, surround -- protecting a terrific economic castle with an honest lord in charge of the castle."

IMO BooHoo failed on both these counts.

Their low margin model; making cheap, poor quality clothes in the UK, selling them over the internet and shipping them around the world was fundamentally floored - where's the moat?

UK production costs are higher - so the threat from a competitor in China, Vietnam etc was always there. All the 'red herrings' as you describe them around corporate governance, poor standards in UK factories, poor US distribution facilities etc. were Red flags.

Boo were making these short cuts in a desperate attempt to sustain a higher cost floored business model.

As for "an honest lord in charge of the castle" - does that sound like Mahmud Kamani? My personal favourite was a £200m share raise to buy PLT from his son in May 2020 for £269.8m - no conflict or vested interest there surely? ;-)

On a personal level I called this right, and and I don't believe I was lucky, as there were numerous red flags long before Shein really kicked in. Just for balance I came completely unstuck / irrational at a similar time with Reach (LON:RCH. Having bought at the lows in 2020, it 6 bagged and then I gave a huge chunk of the profits back irrationally believing the UK google story (I recall that at the time you were, correctly, a bear on Reach)

What an idiot! :-)

The EPS decline is due to the funding of the nascent medical division comprising Adaptix (portable 3D X-ray scanner) and Magnetica (portable helium free MRI scanner). Both have significant potential. The Adaptix 3D X-ray device has FDA approval and is in the process of being marketed. The Magnetica MRI Scanner is to be submitted for FDA approval later this year

There is a very good interview on Vox Markets with management discussing the recent H1 results; link below.

Q&A with Avingtrans CEO, Steve McQuillan & CFO Stephen King - Vox Markets

15th Mar

Very well explained the fall of Boohoo (LON:BOO) . Obviously nothing to do with what Paul is saying. Just an overpriced bad business!

All the best

Very valid points in your post on Boohoo (LON:BOO)

Many many logical points at the time nothing to do with Shein. Unfortunately the holders did not want to accept them.

Sad to read though that even now they don’t!

Boon

16th Mar

The question now is whether there is a pathway for Boohoo (LON:BOO) , and also by extension ASOS (LON:ASC) the other big online fashion retailer.... whether they can both find a way back a stable share of the market and sustained profits.

I wrote a longer article on my Substack, but the TD;LR version of it is that I think they are too challenged on four fronts, to be able to find a pathway:

Macro trend of consumers buying less "physical goods", especially less New vs Used in fashion
The success of the Chinese disruptors, and their marketing/price-investment firepower
At plausible recovery EBITDA margins, the share prices currently are still overpriced
No potential future catalyst to change the current dynamics is on the horizon that I can see

I think had a think of what the successful online players are doing well - and think it is down to having a good Brand, and selling higher quality products. Think the likes of Next (LON:NXT) and maybe Marks and Spencer (LON:MKS) and Sosandar (LON:SOS) .

You then look at Matches Fashion, which Frasers gave up after a few short months; because it doesn't have a strong Brand.

Sosandar is interesting, if only because if they pull off and create a strong Brand (with high awareness and consideration) then it can be an online "winner" and flourish. However, this is an unknown as Sosandar doesn't talk much about its Brand marketing investments, or marketing investments in general. At least not in the last HY reports.

20th May

It's scary isn't it. The Bank of England doesn't seem to understand basic stuff - that inflation is falling because of supply shocks now washing through as they annualise. They seem to think their decisions on interest rates are somehow fine-tuning the economy and causing these effects. It's totally delusional. Interest rates have to rise to slow down overheating economies, not ones that are flat-lining as we've had for ages now.

Hi Laurie,

To be fair, we've been highly sceptical about Victoria (LON:VCP) here for a long while, due to excessive debt, huge adjustments to the accounts, awful bal sheet.

I wish people would read all our articles carefully, and look for the detail & nuance. We don't make simplistic judgements, we cover all angles I think.

Thanks, Paul.

Small Cap Value Report (Wed 13 Mar 2024) - SDRY, SHOE, BBY, MMAG, CPX, IXI, GYM, KWS, VCP

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Paul Scott

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