Small Cap Value Report (Wed 15 Mar 2023) - BMY, HYVE, KCT, CAU, KWG

15th Mar '23 by Paul Scott

58 comments 8184 reads

Good morning from Paul & Graham!

Budget Day today 12:30 - I’ll watch it on TV and quickly type up the main points here. A reminder that we don't do politics here - just facts & figures of interest to investors.

My notes from the Chancellor’s speech

(not comprehensive, I’ve just noted the biggest points, hopefully accurately)

For investors the most important points by far are re pensions -

Tax-free allowance for what we can put into our pension pots goes up from £40k to £60k p.a.

Pensions Lifetime Allowance, which caps the size of pension schemes has been abolished altogether! (currently c.£1m. It was rumoured to be going up to £1.8m). This makes our SIPPs very much more attractive, and could be good for equity markets. The reason it’s been done is to stop incentivising more experienced workers to leave the labour market with early retirement (especially senior doctors). Although will the next Labour Govt reverse this change I wonder? Note that the maximum tax-free lump sum will remain at £268k.

Corporation Tax - 19% rate didn’t generate enough investment. So sticking with the increase to 25%, but introducing 100% capital allowances (for 3 years, then hopefully permanent) for IT, plant & machinery spending. Worth £9bn p.a. to businesses that invest. Most generous capital allowance of any European country (large country, he might have said?). Sounds good for shares in capital-intensive sectors.

Enhanced allowances for life sciences, and creative sectors (TV/film mentioned as largest in Europe & expanding)

Other points -

OBR says the UK will not now enter a technical recession this year (did he mean 22/23 fiscal year, or 2023 calendar year? Will have to check the OBR forecasts directly)

OBR forecasting inflation will fall from 10.7% (Q4 2022), to just 2.9% by end 2023.

Energy price cap of £2,500 (typical usage) will be extended for another 3 months for households, saving £160 extra.

Prepayments meters for utilities - prices will be reduced to match direct debits. Pause on enforced installations.

Pubs - alcohol freeze for draught beers, etc. “Our beer may be warm, but the duty is frozen” - very droll!

Fuel duty again frozen, including continuation of 5p previous cut.

Combined, these measures knock 0.75% off inflation.

Govt debt - 92.4% of GDP next year. Then goes up a bit,…

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Boon

15th Mar '23

For those still far from retirement age, remember... if its so easy to scrap it, it can also be easy to reinstate sometime in the future :)

abtan

Bloomsbury Publishing (LON:BMY) (I hold)

Hi Paul

In response to a few of your questions:

---

"how much of the group’s profit comes from the Harry Potter books?"

I've worked this out using company-published information @17% of total revenues in FY22 (£39m of the £230m.) This has been on a downward trend since 2018 when it was 25% of total revenue.

----

"what deal is J K Rowling on, i.e. could she jump ship to another publisher?"

She already uses another publisher for her Cormoran Strike series (which is ultimately owned by Lagardere SA (EPA:MMB) ) As far as I know Bloomsbury only have the Print rights for the Harry Potter series.

"note the huge receivables number of £115m, which is too high...[is] the receivables book is insured...what credit control measures are used to prevent bad debts from customers?"

The 2 biggies in the receivables balance are:

£32m for Royalty Advances, which is fine - I personally want to see this continue to increase each year.
£72m Net Trade Receivables.
The company stated the following in their last interim report:
"Trade receivables principally comprise amounts receivable from the sale of books due from distributors. The majority of trade debtors are secured by credit insurance and in certain territories by third party distributors."

I thought today's update was excellent. Revenue for FY23 was up far more than I was expecting given that Sarah J Mass (SJM) didn't release any new books in the year.

For reference SJM has been the star author for the company in the last few years, and I've calculated that her books contributed c.15% of sales in FY22 (£35m out of the £230m), ie just less than the Harry Potter books in the same year.

SJM's next book is due in FY24 I believe.

On a similar note it was interesting to see mention of Samantha Shannon, another Fantasy author. Could she be the next big star for Bloomsbury? Maybe she is already. I must admit that I'd never heard of her before today.

I see that her latest book was published in February 2023 i.e. just before the company's Year End and it's currently on the NYT best sellers list:

https://www.nytimes.com/books/...

Playing devil's advocate, it does look as though organic sales were relatively flat YOY. Also, I have a feeling that there are increased costs somewhere, as I would have expected slightly higher profits for the revenue achieved.

Having said that I remain a very happy holder.

Rusty2

Credit Suisse AG (SWX:CSGN) has been suspended.

sharw

Paul - thanks for your budget notes. One extra point - at 12 44 he says "We will also maintain the starting rate for savings and ISA subscription limits"...

Good news for many here as there had been rumours of a cap on the total lifetime amount that could be subscribed to an ISA.

Paul Scott

Hi abtan,

Fantastic, thank you for answering my questions on Bloomsbury Publishing (LON:BMY) !

Best wishes, Paul.

IG group (LON:IGG)

Tasty Trade Acquisition

I actually think the TastyTrade (TT) acquisition has turned out rather well so far, possibly more by luck than anything else.

It looks as though TT will generate interest income of c£50m this year (they've achieved c£33m so far.)

In addition I'm expecting £120m of TT trading revenues (they've achieved £90m so far and revenue were flat YOY for Q3 so there seems to be some stability.)

PBT for TT before the acquisition was c40%, but I'll assume it's now 30% for prudence
= £120 * 30%
= £36m

That gives me total PBT for TT alone of £50m + £36m = £86m, which isn't bad for a company purchased for $1b = £830m at today's FX.

Today's Q3 Update

I thought the Q3 numbers published today were quite weak, but clearly management know something we don't as they're still expecting to meet expectations for the year, which is less than 3 months from now. This implies a +12% increase in operating income in Q4 vs last year.

On a full year basis it looks like net trading revenue will only be down c2% from £966m to £957m, which doesn't seem bad at all given the strong comparatives from last year and generally bearish conditions this year.

Interest income has been a welcome positive. By my estimates that's an additional £78m of income in FY23 that just wasn't there in FY22.

Finally, and though it wasn't mentioned today, there should be an additional £10m from company cash interest too.

There wasn't anything in today's update that made me want to sell my holding at the current valuation.

The Scribe

I think its because of continued uncertainty in the banking sector. Credit Suisse AG (SWX:CSGN) specifically.

Paul - Thank you for your headline comments vis a vis the Budget above. Steady as she goes I guess, is the mantra from vanilla Jeremy. No Rabbits out of hats like Kwasi.

The suspension has been lifted and shares are only down 15% now.

shanklin100

Hi abtan (and Paul)

Thank you, I learnt a few more things about Bloomsbury Publishing (LON:BMY) from your post.

Its interesting IMHO that Adult Trade (as Bloomsbury Publishing (LON:BMY) call it) and Special Interest currently seem to add almost no value to the business other than covering the associated overheads. All the action is in Children's Trade and the Non-Consumer division.

Not surprisingly, most of the acquisitions of recent years have focused on building the highly profitable Non-Consumer division where they often buy local content at seemingly high multiples and then globalise access to it, I suspect extremely profitably.

Unfortunately I sold 25% about a year ago. Have no intention of selling any more.

Bigtim

Different approach now it seems:

LTA scrapped no limit on growth

60k AA so can put away more money with tax relief

But

Maximum Tax Free Lump sum (PCLS) is frozen at 25% of the old LTA.

So, in future they'll just walk down the maximum PCLS. It's £268k now (couple of things can increase it a little), moving it down will mean more pension benefits are subject to income taxes.

rmillaree

Personally i have never understood the will to pander to the mega rich ref pensions - being frank i would be deliriously happy to have tax efficient potential of £1 mill pot in the future , i wouldnt want the state to fund any more - whilst we are stealing from then future generation to fund this. Really is excess greed of the rich (and entitled) . Ok so no one wants doctors retiring early if we are short staffed - this is lunacy policy of not training more doctors not a reason for giving away perks to millionaires we cant afford.

Hopefully if all these entitled peeps do retire then everyone else can upscale and hopefully replacements who will likely have less generous pensions will be happy to take their places.

One would almost think mp's and their well off relatives will be greatly benefiting from these changes.

Supreme (LON:SUP)

Robert - good point. "Upfront" is used only in the headline and maybe not the best word to use because in the substantative paragraph it says "on completion". If you buy a house that means when the house becomes legally your posession. In the same way here it means when LVP becomes the legal owner of the IP - basically the brand names and formulae therefore. The second deal (probably both were conditional on the other) is that Supreme retains the sole manufacturing right to those brands.

To understand all this you need to look back at the purchase. We were not given any figures at the time because it was a prepack out of administration but the report was later lodged with Companies House. From that we learn Supreme paid £2.6m for:

So even throwing in the costs of the transaction and the redundancy of 57 of the 61 staff transferred the receipt of the payment for the IP makes it a very good deal.

Beyond that you have to look at the phrase "De-risks both European distribution and expansion, while simplifying Supreme's costs to serve to one customer, LVP"

Supreme originally was wary of moving into other countries with vape because of all the different regulations. Cuts Ice, however, sold mainly into Europe. Its biggest brand 'Red Astaire' accounted for 60% of sales (even more now Supreme has trimmed the range) and it is the best known brand in France. Supreme had hoped to piggy back other brands like 88vape on the back of this into Europe but this deal lets LVP do this for it.

For the background listen to Sandy Chadha talking about the acquisition last August at the interim presentation in November - start 29m 10s in:

Very interesting development at Dianomi (LON:DNM) today. Both the CTO and the COO resigned. Both are cofounders with sizeable stakes (c10%).

Statement had positive noises, thanking them. But this is a sudden departure. Neither of them are being replaced, their roles will be assumed by internal people (but not promoted to that title and to the board?)

Any thoughts from others following Dianomi?

KevinS1

Thanks Planetx. Unfortunately I am not as good investor as you and struggle to sort the wheat from the chaff at times, so am beggining to start to put more to work in IT's and let others manage the risks.

Still happy to dabble in some shares, but understanding ones limitations is a good thing.

Interestingly Richard Staveley wasn't too keen on saying what he felt were the "best" investments he had, but I shall enjoy researching to see if I can find any gems.

16th Mar '23

Hi Boon,

Yes I was rather perplexed by the announcement that Dianomi (LON:DNM) seems to have sacked its CTO & COO, and isn't replacing them.

Dianomi is on my watchlist. I don't know what to make of the board changes, so decided not to comment on it. It introduces uncertainty, and if a company is throwing out its Directors, then it tends to make me assume that it can't be trading well. So I see this as negative.

Regards, Paul.

Robert W

Thanks so two separate deals effectively. From the balance sheet above it looks like Supreme paid just over £1 million for the IP (£899,999 plus £149,999) and will now receive £3.97 million cash in respect of that IP. So everything else being equal, Supreme is worth almost £3 million more than it was last week. And better still that is tangible cash rather intangible IP. That' s a pretty good deal!

Dianomi (LON:DNM) is also on my watchlist, as I work in digital advertising, so am familiar with its products/services. It doesn't excite me about its products - from what I know, it is similar to several other content advertising networks available.

But what intrigues me is that a company this small, has some very big websites/publishers on its customer list. In an industry where scale matters (due to auction dynamics for programmatic ad inventory), I'm puzzled why they have been able to carve a successful niche. Still trying to figure that one out, but if I do understand their secret sauce one day, then I can see this being a classic multi-bagger and scaling. As a typical digital marketplace does when successful.

FWIW fresh blood might be needed. I see that they've plodded along and still tiny, despite the CTO and COO trying their hardest for so long. Maybe CEO needs to go too, eventually?

25th Apr '23

For any with an interest here, I noticed that Sarah J Mass' 'A Court of Thorn and Roses', first published in 2015, has been in the Amazon USA Top 20 sold books list for the last 17 weeks.

What? and Wow!

https://www.amazon.com/charts/...

john2

I believe a lot of American book sales are driven by TikTok reviews these days. Maybe that accounts for the success of A Court of Thorn and Roses.

Small Cap Value Report (Wed 15 Mar 2023) - BMY, HYVE, KCT, CAU, KWG

My notes from the Chancellor’s speech

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Paul Scott

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