Small Cap Value Report (Wed 13 Oct 2021) - G4M, ANG, VTU, BRCK

13th Oct '21 by Jack Brumby

66 comments 9287 reads

Good morning, it's Paul & Jack here, with the SCVR for Wednesday.

Agenda -

Paul's section:

Vertu Motors (LON:VTU) (I hold) - stellar H1 profits announced, and another upgrade for FY 02/2022. Car dealers are experiencing a profits bonanza, due to very high used car margins (driven by a shortage of supply). VTU is striking in that it has a particularly strong balance sheet, with NTAV now actually above the share price. Even allowing for profits next year more than halving, this share still looks cheap.

Jack's section:

Gear4music Holdings (LON:G4M) - solid results, perhaps better than the market might have feared in light of widely reported supply chain issues. Trading in line with expectations of FY22 revenue of £156.6m and PBT of £7.3m. Strong levels of inventory ahead of peak trading period. More detailed interims due out in November.

Angling Direct (LON:ANG) - another niche ecommerce operator (although this one is omni-channel and its physical store estate plays a key role). There are ongoing concerns over its pricing power and long term profit potential but trading is positive and ahead of expectations. As with G4M, Europe is proving tricky.

Brickability (LON:BRCK) - Revenue and adjusted EBITDA up strongly at this building materials supplier, which is unsurprising given recent reports regarding heightened demand. Cost pressures too, and driver shortages, so it's a dynamic situation but overall positive.

Explanatory notes -

A quick reminder that we don’t recommend any stocks. We aim to cover 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…

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davidjhill

13th Oct '21

Mobile Streams (LON:MOS) at the micro cap level we discussed a few weeks back at around 0.3p (now 0.64p) They have just released an RNS saying subscriber figures have passed 10,000 in just 2.5 months in Mexico (6 months ahead of plan). Expected revenues in that market are now well ahead of previously announced numbers and being recalibrated. Plus several new markets in advanced stages of launch. Starting to actually look pretty interesting for a change under the new management.

Monty Carlo

On diversification in general there seem to be four approaches:

1. Put your eggs in one basket - watch it very carefully (Warren Buffet)
2. Hold the maximum number of shares you have the time to monitor
3. Hold a concentrated portfolio to maximise divergence from a performance benchmark (i.e. maximise return on stock selection)
4. Take the mathematical approach of seeking to diversify away a large chunk of the stock specific risk.

I would argue Option 1 is for the full time pros who know their companies AND can afford to take a big hit without changing their lifestyle, or for the gambler who enjoys the ride.

Option 2 is for the keen amateur investor with a day job holding positions in a SIPP alongside a company pension, the enthusiastic private investor using an ISA etc alonside other savings.

Option 3 is for fund managers who need to market their fund and demonstrate they are not index huggers. By all means hold these funds (e.g. Fundsmith) but don't put all your money into just one of them! Hold a basket of them and mind the overlaps.

Option 4 is for those private investors who are "all-in" and rely on their portfolios to fund their livelihoods. It is not always possible to spot fraud, the unexpected happens, and the professional fund managers frequently get things embarrassingly wrong too. Diversify to protect yourself because you realise just how ignorant everyone is, and nobody can predict the future. The maths says you can diversify with as few as 20-25 holdings, but in practice you are looking at 50-70 stocks once you take into account sector concentrations and factor correlations. If you include liquidity risk because you hold small & mid-caps then it can be sensible to hold well over 100 positions. I will take some flak for saying this as it isn't fashionable, but in investment being fashionable doesn't work for long.

Of course you can cut corners with ETFs, investment trusts etc, at the expense of paying someone else to diversify for you. They make a lot of sense for overseas markets... just try dealing in Japanese equities or reclaiming withholding tax from some other markets.

In fixed income you have an asymmetry of return (upside is the coupon, downside is 100% wipeout if no recovery post default). Corporate bond portfolios should be 125+ holdings or even higher (HY/junk being slightly different).

It costs very little to diversify, and over-diversification never killed anyone.

Boon

For me the Shoe Zone (LON:SHOE) result is as good as it gets. They've still had cheap stock during the period, and also business rates relief.

Digging through my notes, it looks like increased shipping costs will start to add c£7-10m extra costs a year.

In addition, my estimate is they business rates will run about £7m as well a year. . They have not disclosed, but given they ranted about it last autumn in an RNS, it probably is sizeable.

So taking those together, the PBT might turn to a LBT next year, unless there's huge revenue growth. But they're not expecting a big store portfolio growth nor Los of noise of investing more in online or other channels.

illiswilgig

Airea (LON:AIEA) (I hold) re read across from Victoria (LON:VCP)

I've not read the update from vcp but I did read the James Halstead (LON:JHD) and Headlam (LON:HEAD) which might also bode well for Airea.

These days Airea is a focused carpet tile manufacturer. The problem is that Airea is tiny, at £12m Mcap and it's almost entirely dependent upon UK sales - now it's international sales have nosedived - any supply, energy cost increases or supply shortages could seriously impinge on profit recovery. I expect that's why the share price remains in the doldrums.

Having said that Airea is currently trading on TNAV of 0.69 which doesn't account for the £3.5m investment property on the balance sheet and presuned cash coming in - which makes it quite a value play. The problem with these tiny value plays is that they can remain cheap almost forever.

At the same time its on a modest ttm P/E of 13.2 and EV/EBITDA of 6 despite revenues not yet recovering from lockdowns and the profit would have been a lot higher if the bonkers UK sales growth had not been obscured by the run down in exports. They spent £1m on new equipment and designs during the lockdown. Despite all the concerns it could emerge in top gear. A clear path on recovery in revenue and margins is the outer for the value on this one. Otherwise it remains besieged by worry. And with good reason.

Don't expect any updates - Airea are notoriously economical with their communications.

Noted private investor David Newlands has been increasing his stake recently, now 8 or 9% from memory - and he has a 0.5% rolling spreadbet according to RNS annoucements.

Potential little gem of a business going forwards (takeover?) and sitting on a mountain of cash and assets. I bought some more this morning

cheers

Mark

sg31

Angling Direct, I buy from them quite often. Their shops are not in prime areas, they don't need to be, anglers are happy to visit secondary shopping areas for their needs. Rents I expect are very low.

Staff are excellent, they are helpful but not pushy, they are all good anglers in their own right and happy to explain things in detail.

Online is fast and efficient, prices are good but as mentioned there is no pricing power. I can check prices on line and buy from the cheapest supplier. AD have low/free delivery which gives them a slight edge.

AD do on line videos regularly explaining fishing methods and how various items help. These are well done, popular and help sell product.

Just my 2 penn'orth.

gus 1065

Hi Monty Carlo.

I think that’s a very good summary of the different investment styles. I’m firmly in the fourth group having chosen not to be employed but not drawing a pension so living on portfolio income and capital. I’m also probably at the extreme end of the diversification spectrum having well over 250 individual shareholdings as well as a fair chunk held in ETFs, Investment Trusts and OEICs which I use to give me diversification outside of the U.K. and into other asset classes such as property and commodities. The costs of these pooled investments can be pretty low nowadays, as little as a few basis points per annum for some of the larger and more liquid funds/ETFs, which are little more than rounding errors in the scheme of things. Happy to be unfashionable (you should see my wardrobe) and with this level of diversification able to be reasonably sanguine when a company in the portfolio has the occasional brain f**t. With so many open positions I now find it less stressful trying to keep track of the portfolio than when I had a much smaller concentrated group of larger holdings where one good or bad piece of news could have a marked impact on the whole. Each to their own.

Gus.

Hi davidjhill.

I agree, Mobile Streams (LON:MOS) is showing signs of life. I was in and out of these a few years ago when ex-CEO and principal shareholder Simon Buckingham was at the helm and they always seemed to be on the cusp of one “killer app” that would multi bag the share price overnight. I think Paul S. used to refer to them as his “fizz stock”. Things went very flat for a while with numerous problems in their key Argentinian market and then a failed attempt to make inroads in India. They’ve been issuing shares like confetti for a while to keep going - the share count is up ten fold in the last five years or - so massively dilutive unless you’ve bought more on the way down.

I probably should have bailed out earlier but buried them under the bed and forgot about them and then added a few earlier this year when the green shoots started showing through. Under new management since 2019, the business seems to be building a more solid platform with the expectation/hope of steady, recurring revenues. The partnership with Quanta Media in particular seems to be going well as the new subscriber numbers appear to attest. Still high risk but not without potential.

yep definitely high risk! I bought at 0.25p a while back as it looked like a very low risk option given the market cap at the time. I wasn't a fan of Simon but new management appear to be doing a very good job. I hesitated to even post it on here as they have been such a basket case and only an £18m market cap even now, but the recent subscriber numbers tell me this is now interesting. Subscribers are momentum driven - the more you get the more of a snowball effect it becomes. Exceeding 10,000 in 2.5 months suggests numbers will explode from here. Would like to get a better grip on financials....... Users pay $1 p/w so at 50,000 subscribers (target is 95,000) that's an annual revenue of $2.6m in that market alone. I don't know how much of that goes to Mobile Streams (LON:MOS) which I'd like to understand better. But add in several new geographies and this product alone could be a bit of a company maker, though who knows with mobile streams past history :D

Sadly I made the fatal error of correcting the spelling of "withholding tax" and Stocko have sent my comment to prison. I've since done the family supermarket run and it is still in purdah....

I'm at 178 holdings, including a batch of "shares" that are really fixed income proxies. Admittedly 5-10 or so holdings are waifs & strays where the recovery option value exceeds the dealing cost.

Arrghhh! Don’t you just hate it when that happens. I suspect you can’t be ar**ed to type it all in again which is a shame since it was well worth a read before it disappeared down that great Bic-biro black hole in the sky!

Peter171

I like this coy (Brickability (LON:BRCK) )as it is a good "bucket and spade" operation and a useful bell weather indicator to judge how the construction industry is performing. When the management vibes start to dampen then it will be time to withdraw!

Rusty2

I would report it to the helpdesk. There seems to be a few posts disappearing. I replied to one yesterday that disappeared and has only just come back, however the sequence is lost and if I click on "In reply to xxxx" it only shows an error message.

I did many hours ago.

Nobody home or they have technical issues.

The top automated suggestion is "cancelling my subscription"....

simoan

Would have liked to see them buy back a substantial amount of shares with the cash to lock in higher eps

Personally, I would like to have seen them repay the money they took from HMG as other much less morally bankrupt companies have done. No sign of them doing that though is there?:

Reported operating expenses of £167.7m, increased by £16.1m compared to the six-month period ended 31 August 2019. This increase was partially offset by Government support of £5.6m and as a consequence the increase excluding this support was greater at £21.7m. Dealerships acquired in the period since 1 March 2019 contributed costs, excluding support, totalling £19.8m. Underlying Core Group expenses therefore grew slightly, by £1.9m when compared to H1 FY20.

The Group invested an additional £3.0m in television advertising in the Period as part of the strategy to grow awareness of the Group's three customer facing franchise automotive brands. In addition, variable pay and commission levels exceeded H1 FY20 levels by £4.0m as a result of the record profitability delivered.

So they took the CJRS money while at the same time spending £3m extra on TV advertising and gave the staff £4m in commission. In total, in the TTM period, they have taken over £32m in government money via the CJRS and business tax relief. I realise I'm unusual in these parts in finding this behaviour utterly disgusting and others feel this is totally fine, but sometimes you have to do the right thing rather than what is permitted. Although I probably shouldn't expect anything less from a bunch of used car salesmen.

I also found this comment odd:

Excellence of customer service is also vital to retention, with over 90% of all vehicles seen by the service departments receiving a vehicle health check ("VHC"), with the technician providing a video of the items requiring attention direct to the customer for their approval for any works required. The success of this VHC process is one of the reasons for a rise in the average invoice value to £278 (like-for-like increase of 13.9% compared to H1 FY20) for service and repair work.

So be very careful next time you take your car in for service at a Vertu Motors (LON:VTU) dealership. Even the technicians are video salesmen now!

All the best, Si

BnB

You are not alone. We investors should think like the business owners we are, demanding our companies and their representatives uphold the highest ethical standards. Otherwise we are no more than speculators.

It's good to hear I'm not the only person that feels this behaviour is totally unacceptable, especially when the NHS has been struggling and nurses have had a derisory pay rise after all the stress and hard work of dealing with the pandemic. The £32m Vertu Motors (LON:VTU) have happily banked would go a long way to helping out. Crikey, that's probably enough to build a new health centre in some deprived area!

I have some more time on my hands in the coming months and so I am seriously considering bringing this immoral behaviour to a wider audience via social media. I already have a slam dunk of a Facebook slogan "Vertu has no Virtue" Perhaps I should suggest they use that as the strapline on their TV adverts??

Richard Goodwin

i guess the flip side is that Shoe Zone (LON:SHOE) has a notoriously short average lease length so there are potentially good savings to be made on rents over the next couple of years. I don't know enough to be able to compare the benefit with the business rates disbenefit though.

Tortoise investor

I am interested in how much government support schemes have benefited the company in returning to profitability. The PBT looks a bit too good to be true in the context of the revenue falls and a slightly reduced margin.

sharw

Is this what you are talking about?

https://www.stockopedia.com/co...

andywillz94

You raise a valid issue, Simoan. I am surprised they have not put out a statement as to when it will be repaid or why it will not be.

I have been very bullish on this company however this leaves a sour taste.

Small Cap Value Report (Wed 13 Oct 2021) - G4M, ANG, VTU, BRCK

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Jack Brumby

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