Small Cap Value Report (Wed 18 May 2022) - SAG, KLR, REDD, BWNG, POLX

18th May '22 by Paul Scott

45 comments 8083 reads

Good morning, it's Paul & Jack here with you today. I'm (Paul) conscious that there's a big backlog from yesterday's results, so will try to make inroads into that. Today's report is now finished.

Agenda -

Paul's Section:

Science (LON:SAG) - impressed us last year, with a series of upgrades. It issues another positive update today, with H1 20% ahead of last year's impressive H1. Looks good value to me, although with so much macro uncertainty, nobody knows what might happen. Dollar strength is helping.

Redde Northgate (LON:REDD) - one of our favourite value shares, so I'll continue reporting on it, despite the growth in market cap. It's a very nice update today. There are some risks, but this share remains a SCVR favourite, with a low PER, robust outlook, divis over 5%, and strong net asset backing too.

N Brown (LON:BWNG) - I explain in the reader comments section why I've dropped coverage of BWNG. Basically because I'm worried about its large/complex legal action. But mainly due to the collapse of similar business model Studio Retail - selling stuff online, to generate business for a high risk/high cost consumer lending business. After a close shave with STU, I wouldn't go near any similar business ever again. That said, if you're prepared to accept the risks, then today's trading update does come across well. [No section below]

Polarean Imaging (LON:POLX) - a quick look at this blue sky medical company, to see if it has enough cash to reach regulatory approval? It seems funded into 2023, but risk:reward now looks a lot worse, given that if regulatory approval is denied for a second time, then another future fundraising could be very difficult.

Jack's section:

Keller (LON:KLR) - mixed results so far but management expects full year results to be in line with a customary H2 weighting. The group is low margin though, and it faces pressures in a number of markets, so I’m ruling myself out. But there’s a good dividend track record and the yield is nearly 5% (covered more than 2x), potentially something to consider for income investors.

Mello Chiswick update - it’s next week!

I know how hard David Stredder & the Mello team have been working behind the scenes, it’s been incredibly difficult for them to persuade companies and fund managers to…

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Paul Scott

18th May '22

Hi COYS61,

Yes, Premier Foods (LON:PFD) is above our upper limit now, and we've got such a long list of backlog small cap companies to look at, I doubt we'll find time to cover PFD. But by all means post some more thoughts on it, and it might get me interested!

Regards, Paul.

illiswilgig

Science (LON:SAG) (I hold)

Thanks for the excellent overview Paul. I've been building a longterm stake in SAG for a couple of years now - I'd like to have bought more recently, but so many bargains and so little money to spend right now,

Good point on the cash position and trade creditors - might explain why they have been so keen to raise cash and take on the loan facility. I seem to remember that SAG's food and chemicals consultancy (their acquisition of the old Leatherhead food research centre) is a largely regulatory business with a lot of lab testing - from memory I think that long term customers tend to book and pay for lab time in advance - rather than miss their slot for mandatory testing. On a quick look I can't find any evidence for this (other than the mention of passing through regulatory payments in the US- but the cash for this is separately accounted not revenue) in the last accounts and don't have the time to go further back right now. - Anyway thats a long winded way of saying I don't think there is a high risk of this sudden;y unwinding completely - it's probably the business model - but never say never and thanks for the warning.

The TP Group takeover fascinates me. SAG has form on this. Not so much hostile but certinaly aggressive where it disagrees with shareholders opinions of value. Though that perception probably differs depending upon where you are looking from? Looks like TP Group is shaping up the same way.

f I remember rightly SAG bought in the open market at around 6 to 6.5p the level of their indicative offer. TP Group board refused to open the books and SAG had to walk away under the 'put up or shut up' 28 day rule which prevents buying above 30% or a lower offer within 6months (rather simplified). I do suspect that walking away might have been a part of the plan all along. suckered in the TP Group board and it's certainly turned over a lot of stones and exposed what was under them to the light.

SAG have not been quiet - they continued buying upto 28% at which point they had enough shares in concert with some of the large institutional holders to force the issue and requisition an EGM. That they stopped buying at this point - indicates that they did not want to buy more than they had to force the EGM. The old board totally underestimated SAG and walked or were fired. The SAG executive chairman and a SAG NED are now the executive chairman and director at TPGroup along with the original FD on a short leash and the CEO brought in to turn around TPGroup by the old board has now stepped down to become an NED - which indicates that this phase of his job is done and the SAG directors are keen to work with those who can deliver value..

Less of a failure than a work in progress I think. They are doing the same work that they would have had to do once TP Group had been acquired - might have been a bigger mess on their books at 100% of the company? It's conceivable that this is still going to plan as TP Group gets straightened out as an associate at 28% without being consolidated - kind of depends what the end game is I suppose.

Current state of play at TPGroup looks like a kitchen sink job, flogging off loss-making businesses and non-core businesses. Taking writedowns on old projects. I think it will be a shame if the European space and defence consultancy Sapienza goes - but needs must I suppose. The core will most likely turn out to be the UK software and consultancy businesses and the marine manufacturing business.

What happens then? I can't pretend to know what they plan - but I do think that they have a plan. I would not bet against SAG getting whats left (and what they want) for well below the 6.5p they originally paid - and I believe that they have done this before. Continuing to run it as a 28% associate company might work - but it looks like a holding position to me and won't really deliver the best outcome for SAG which would be to integrate the consultancy and software businesses. Acquiring will depend upon what value is left after the kitchen sink - and how quickly the institutions want to exit - or receive SAG shares?

In the meantime TP Group is short of cash and the short term future has been assured by a stand-by facility from.......yes you guessed it SAG (edit - just seen Roger's detail on this, sorry I missed it whilst I was writing this)

In the last accounts SAG wrote down their their original 12.7m to £10.3m then converted it to an associate once the SAG directors took over the board - and further wrote it down to around 9.3m if I remember rightly. Wuth TP Group trading around 2.5p right now SAG would have to right down another 4 or 5m. Which is not too large as to cause a problem? and will set them up well for the future? Whatever that turns out to be?

Should be an interesting next few months.

cheers

Mark

Indie

Thanks, Jack, for the Keller (LON:KLR) write up - glad to know the mixed impressions weren't hiding anything that greater experience than mine would find. I hold, and will continue to do so as I think that there is a need for their expertise. It's not a strong conviction, though, and your comments about low margins are useful. Fingers crossed that the challenges recede.

chrisgb

Thanks for highlighting this share. I agree it is an attractive price for a business with a lot of potential. I used to hold (usually for me, I sold at the right time) and what made me sell was that it seemed to have 3 businesses - Challenge studies, hVIVO and VENN - and I didn't see a lot of synergy between them. I like to see small companies more focused. I see they have a new CEO and they seem to be concentrating on Challenge studies. Could be time to buy back in, but I am wondering whether to wait for the 2021 results.

FREng

Paul,

If you have time, I'd welcome your views on the interims yesterday from Shoe Zone (LON:SHOE) as there may be read across to other low-price retailers in the current inflationary environment (Card Factory (LON:CARD) and Works co uk (LON:WRKS) for example). The figures looked pretty good to me and to other commentators in yesterday's SCVR but the market was unimpressed.

55555

Redde Northgate (LON:REDD) looking forward the key thig that concerns me about this share is that they made the decision to swap to Contract Hire for their fleet of vans. So any profit (or loss) on van sales going forwards will go to the leasing company. With used values being sky high at the moment, what percentage of their current profits are from the disposal of their owned fleet. I just think, once they have offloaded their fleet profits will drop considerably.

Boon

Looking through my portfolio, some interesting non GBP plays could be:

Rio Tinto (LON:RIO)

Spectra Systems (LON:SPSY)

Intercede (LON:IGP)

Where predominantly the revenues are in non-GBP. And in the case of Intercede, the costs are GBP so the full benefit of a weak pound will come through.

Camtab

Hear hear!!

Tortoise investor

As well as the value on offer here, another potential share price catalyst for Redde Northgate (LON:REDD) is in their last update they said they were interested in mergers and acquisitions. Last year there were also rumours in the Daily Mail that a company had shown interest in Redde Northgate (LON:REDD) as a potential takeover - maybe interest will resurface at the current share price levels?

The company helpfully publishes analyst consensus figures on their website, which are available here: https://reddenorthgate.co.uk/i...

This page was last updated in March when they noted the mean consensus for FY23 is 46.8p underlying EPS putting these shares on a lowly 8x price-earnings.

timarr

I've been looking at the situation with River and Mercantile (LON:RIV) and wondering if I'm missing anything.

They're due to return £2.20 to shareholders when Schroders complete the purchase of the solutions business. The rump of the business will then be acquired by Assetco (LON:ASTO) in an all share deal - 0.07392 AssetCo shares for 1 RIV share.

At the current AssetCo price that equates to £3.18 per RIV share compared to the current price of £2.59.

Obviously there's execution risk, but this is all expected to happen in the next month or so and a discount of 25% seems quite high for what looks like relatively low risk. Basically buy a RIV share for £2.59, get £2.20 back in a month or so and receive 0.07392 of an AssetCo share for 39p, as opposed to paying 99p in the market right now.

Unless I'm missing something?

Similar thing with RQIH where there's a 175p bid on the table and the shares are trading at 125p. More risk there of the buyer walking away, though, I think.

TheFloatingInvestor

Totally agree, no apology needed..ever.

Advice is just that, its my money and my risk alone.

Nothingventured

I sold a few months ago worrying that the potential for a US recession would be seriously bad news for a supplier of capital goods to the building industry.

Its a great company I hope to repurchase at some point.

ls2g08

I am also a Somero Enterprises (LON:SOM) shareholder. The one counterpoint would be that the company is still buying back shares. I believe that if they had seen a downturn in their business they would have paused the buyback. Admittedly this is assuming they have the ability and the nouse to do so!

Bluesky Ventura

Relieved N Brown (LON:BWNG) is not a conviction hold for you.

regards,

BSV

Mean reversion!

carmensfella

Mello 2022 in Chiswick next Tuesday..... I have 17 FREE TICKETS to our Mello2022 Trusts and Funds event! We have great speakers & 23 Fund managers presenting

cmpeckham

The market seems to think you're missing something, but I can't see what it is. I think there's money to be made there, but it's always worth estimating the potential downside. How would things look if the deal fell through? Fwiw, I think a fair price for River and Mercantile (LON:RIV) without the bid would be 200-250p, call it 225. But in the aftermath of the deal collapsing in the current environment, I can see the market price going to the 52w lows of 150p. If it did that though, that would present an opportunity to pick up a bargain, so it wouldn't be all bad news (e.g. a buyer now could use that opportunity to average their buy price to 225p, giving them a solid, albeit unplanned investment). So that's my guess at the downside. Put that together with odds of the deal completing at >=80% and I would agree with your assessment.

But in the aftermath of the deal collapsing in the current environment, I can see the market price going to the 52w lows of 150p

Granted, but the Schroders bid for the solutions business is done and dusted:

https://www.londonstockexchang...

So that was £230 million in the bank in February while the market cap of River and Mercantile (LON:RIV) right now is £222 million ...

David Dias

Please comment about Shoe Zone (LON:SHOE) results and return of dividends

2ShedSam

20th May '22

This response has tickled me :)

Small Cap Value Report (Wed 18 May 2022) - SAG, KLR, REDD, BWNG, POLX

Mello Chiswick update - it’s next week!

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Paul Scott

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