Small Cap Value Report (Wed 20 Feb 2019) - PCF, FLYB, MCB, GHH, ALY, SBRY

20th Feb '19 by Graham Neary

30 comments 11100 reads

Good morning!

Today we have news from:

PCF (LON:PCF)
Flybe (LON:FLYB)
McBride (LON:MCB)
Gooch & Housego (LON:GHH)
Laura Ashley Holdings (LON:ALY)
J Sainsbury (LON:SBRY)

PCF (LON:PCF)

Share price: 31p (-14%)
No. of shares: 214 million
Market cap: £66 million (pre-Placing)

Proposed Placing to Raise Minimum of £10 million

(Please note that at the time of publication, I have a long position in PCF.)

This online bank and lender announces that it is raising funds at 30p. I have mixed views.

Current Trading & Outlook

The announcement includes a trading update which confirms that progress is in line with expectations.

By December 2018, PCF had grown its lending portfolio to £250 million, with the help of an acquisition.

It is targeting new business originations of £250 million in the current financial year, and is ahead of target to reach a total lending portfolio of £350 million and return on equity (ROE) of 12.5%.

It continues to target a portfolio of £750 million and ROE of 15% by September 2022.

Placing

This size of the Placing is fine: £10 million. Depending on costs, this could increases the book equity of the business by c. 22% (NAV was £42.6 million at September 2018).

While I'm less excited by the company's acquisition strategy than I am by its organic growth prospects, I don't mind if it raises fresh funds to accelerate growth. That was always likely, to enable it to get to the £750 million portfolio target.

It's just slightly disappointing that Somers (the 65% shareholder) didn't want to put money in at a higher level.

NAV per share was c. 20p as of September 2018, so Somers is paying a 50% premium to that.

The share price, on the other hand, was at an 80% premium to NAV p.s. as of last night.

The practical consequence in terms of dilution is that 33.3 million new shares will be issued for a £10 million placing, instead of 27.8 million. The total share count will be 247.5 million, instead of 242 million.

When you look at it this way, the difference in NAV…

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Herald Inv Trust PLC

The potential scale of those players makes it difficult to value. We were surprised by how strong both shares were, but in IQE's case there was massive private client buying. Not only did that enable us to sell shares too expensively, but it concerned us that a new phenomenon became more evident - that of private client buying influenced by internet chat boards. This buying was not across the board but very stock specific. But private investor demand of this nature, combined with the disappearance of the institutional investor, had made us cautious for the market overall.

Everyone is entitled to their opinion but to me it sounds like the person who made this comment has their head firmly shoved up their you know whatsy.

Whats the difference between an individual buying a large wad of shares and a fund such as theirs buying a similar amount - either way the share price reaction is likely to be the same albeit perhaps an individual may not have the same ability to structure purchases in as efficient manner as them.

It takes the whole to make a market so why are YOU concerned about one individual partaking in the old boys/girls/others club.

Surely the market will always correct for things like this - all i can think is that this person is basically calling the individual involved some sort of mad lose cannon - strewth. Are they basically saying individuals shouldn't be allowed to do what they do?

I wander what the comments would have been had the later trading news been better and the shareprice gone in the other direction - probably no comment whatsoever.

all IMHO - in some respects i admire the nerve of the writer to put their views down in black and white even if i think the comments are a ridiculous stereotyping of some sort.

Also lol at the bit about internet bulletin boards being a "new phenomenon" - kind makes feel like i am 35 again.

Vader

20th Feb '19

I would second a look into the profit warning from Gooch & Housego (LON:GHH). Unexpected considering their previous updates.

Carcosa

£PCF RNS release today; A placing/offer at 30p to raise £10m, and an open offer at the same price to raise up to £0.75m. The share price this morning was 36p.

Within the RNS is in effect a trading statement:

"The Board is pleased to report that current trading is in line with management expectations. As at 31 December 2018, the lending portfolio had grown to £250 million and retail deposits stood at £203 million held across approximately 4,600 customer accounts. PCFG is targeting new business originations of £250 million in the year to 30 September 2019. Following strong portfolio growth supported by new business initiatives and the acquisition of Azule, the Group is ahead of schedule to meet its initial portfolio target of £350 million and a return on equity of 12.5 per cent. by 2020. The Directors are confident in the Company's business model and strategy as it continues to target a lending portfolio of £750 million and return of equity of 15 per cent. by 30 September 2022."

Which confirms that business is ahead of schedule; even since the last prelims for September 2018.

Portfolio Value at Sept 2018: 219.0 m
Targeting 250m in 2018/2019
250+219 = 469m

Target was 450m for 2020 but will exceed that by Sept 2019 if their plans succeed.

So why the placing discount?

Whilst an equity raise was always on the cards, looking at the share price action over the last few days I'd be inclined to believe today's RNS was already known about. Furthermore, given the performance of the company there was justification IMO for a placing to be done at a premium!

Not a happy shareholder, and will be fighting for the scraps in the open offer. :-(

gsbmba99

Full year results from Herald Investment Trust (LON:HRI) . Katie Potts' commentary is always worth reading. She has concerns over the efficiency of small cap capital markets.

On Bango (LON:BGO) and IQE (LON:IQE) : "The potential scale of those players [Google and Amazon] makes it [Bango] difficult to value. We were surprised by how strong both shares were, but in IQE's case there was massive private client buying. Not only did that enable us to sell shares too expensively, but it concerned us that a new phenomenon became more evident - that of private client buying influenced by internet chat boards. This buying was not across the board but very stock specific. But private investor demand of this nature, combined with the disappearance of the institutional investor, had made us cautious for the market overall."

On Versarien (LON:VRS) : "The company has a graphene product, and an energetic entrepreneurial management team, but again private clients have elevated the price to a level that we could not resist selling."

"We remain committed to AIM but have purposefully reduced the weighting in the portfolio from a high of 44% of the Company's net assets at the end of 2017 to 35% at the end of 2018. The attraction is that there are some dynamic companies, and new ones continue to appear, but our caution emanates from the withdrawal of so many institutional investors."

Trident

Re Gooch & Housego (LON:GHH)

There has been much speculation that China is teetering on the edge of trading difficulties due to the tariff impositions by the US. Hence their urgency in agreeing terms with the US. Car exports to China have slumped, and now a material warning from Gooch & Housego (LON:GHH) showing that they are putting off investment on specialist manufacturing equipment.

Yesterday Didi, the Uber of China, announced 15% staff reductions. That's the sort of news the Chinese Govt doesn't want to be part of an economic wave. The problem with China is that there is so much misallocation of investment resources due to State interference/guidance, that some of those chickens may come home to roost if their internal credit system starts to unwind.

Many job schemes are artificially pumped up. They launched a sort of Boris bike initiative in the major cities, using several different companies. The major Cities are now littered with too many bikes, with one company under pressure to return small monetary deposits, but failing to do so. Economic fraud seems to be rampant, with quite a few Chinese falling for get rich quick or Ponzi type schemes that have gone down a black hole.

Admittedly there is more personal wealth due to the Chinese habit of saving like stink, but you do wonder if the growth rates driven by trade with the US over the last 10 ten years have papered over the cracks of State driven policies.

kuronagi

I would have liked to see comments on Enteq (NTQ) which released a very strong trading update this morning.

Graham Neary

Glaws & Carcosa - PCF is now covered. Hopefully I say something useful for you! G

Ramridge

Re. PCF (LON:PCF) I can't see any reason for such a deep discount. It's been on my radar for a while, so I have taken the opportunity to take a long position.

Hi Graham - PCF (LON:PCF)
£PCF By my calculations and based on a current 31p share price, the market cap to book value ratio has come down a lot.
I think this is due to the BV going up by £10m, but Market Cap is slightly down (247.5m shares now * 31p =) £76.7m .
So as I write, Market Cap/ Book Value = 76.7/ 52.6 = 1.46 ; possibly a bit more if underwriting costs are taken into account. Yesterday the same ratio was 1.80 .

Happy to be corrected.

danielbird193

I missed that point and it's fairly fundamental! Thanks for that.

Hi mammyoko, yes I'm giving Gooch & Housego (LON:GHH) a look. Cheers. G

janebolacha

McBride (LON:MCB) actually has a fair bit of dependence on moves in the price of crude oil, in that the active foaming agent in its liquid detergents is derived from petrochemicals. They are constantly on a tricky tightrope of covering their costs forward on supply prices and on forex while also satisfying the perhaps predatory supermarket chains not wanting to take that risk on themselves. It needs both buying nous and making the right commercial forecasts and decisions. The wording they use, " We continue to expect the overall raw material pricing outlook to show improvements in the second half, but not to the extent anticipated in early January" seems to indicate that this time they may have got it wrong.

Lloyd Garvey

I see that Simon Thompson of the Investors Chronicle has Written a positive review of PCF (LON:PCF) this morning. Rating them a buy

Aislabie

Apart from the question of whether the discount is too high what is PCF (LON:PCF) (I hold) doing issuing a price sensitive announcement during trading hours. I have some respect for this company and hope that this is a one off aberration.
I hope they can commit to not doing this again

Hi Ramridge, yes, the 1.8x and 1.5x book value multiples I cited are based on pre-Placing NAV and pre-Placing no. of shares. G

rmillaree

£HRI

timarr

rmilleree

I really can't understand your interpretation of Katie Potts' commentary. She's been doing this for many, many years. She's very perceptive, and without her the UK tech sector would be much the poorer. She once single-handedly bailed out ARM when they couldn't pay their wages one month.

My reading of what she's saying is not about one individual but about the phenomena of bulletin board posters herding to drive the price of the stock in the companies she mentions beyond rational valuations. And that does matter, because private investor buying of this kind is fickle and tends to cause whipsawing in the price.

Associated with this - and perhaps the main concern - is the disappearance of institutional investors who tend to act as stablisers on the price. Shareholder registers of companies of the opportunity and quality of Bango (LON:BGO) and IQE (LON:IQE) would normally be dominated by institutions who wouldn't be rapidly trading in and out, rather than private shareholders. And institutions tend to be more rational in their valuations, rather than simply following the excited / disappointed / confused crowd.

From Herald's point of view this is an issue, because although they'll take profits when they think prices have risen beyond rational levels they're generally a long term supportive shareholder. And for smaller companies like this having long term stable shareholders is important as when things go bad - as it will tend to at this type of company from time to time - they're the people the management turn to: as ARM can testify.

GrahamF

Fair points Timarr.

However, with IQE (LON:IQE) at least there was a firm institutional investor in the form of T Rowe Price and the last round of fundraising they did was selling to institutional investors was it not? Was it not perhaps the short attack on the company that caused panic and retail investors to get very nervous? And was it also perhaps the notion (perhaps partly right and partly wrong) that the company was overly dependent on Apple that meant any negative rumour about Apple caused extra volatility?

But perhaps the point she is making is true overall and IQE (LON:IQE) not the best example. The trust has holdings in something like 285 stocks so perhaps she’s just meaning the comment in a very general sense and chose an example with many other factors at play that make it not a great example.

But what do you think? Do you take the quantity of bulletin board chatter as a warning sign to stay away?

Hi Graham

I'd strongly recommend reading the full manager's report. Herald is the UK's #1 investor in quoted small tech companies - if that's the sector you're interested in, what Herald does is always relevant. She doesn't get everything right, bet she's cross about selling out of Earthport (LON:EPO) - even though I never understood why they bought in the first place ...

https://www.investegate.co.uk/...

It includes a few snippets on the nature of the current market for companies like IQE:

As a user I am a convert to the belief that facial recognition will be more widely adopted, but the overall phone price must lower, and it will do so as component prices such as DRAM fall. As an investor focussed on smaller companies in the supply chain of large companies such as Apple, it is evident that it is brutally tough in requiring the supply chain to build capacity in excess of any potential demand, and then subsequently has the whip hand on pricing.

My bold - to make the point for those who don't read the original that this comment is not about Apple specifically, but about the structure of the market: regardless of who the ultimate customer is this is a very tough place to make money.

As for bulletin board chatter - well, it depends on who's chatting. But in the extreme you tend to get herding - people following others without doing much research (lots of cutting and pasting is usually evident, but not much actual thought) - and confirmation bias - anyone posting a contrary view tends to get flamed. At least on Stocko the flaming is usually pretty intelligent, mind ... :)

We all tend to talk our own book, but when I see lots of people repeatedly pushing a bull case and not offering or listening to any bear narratives I would naturally tend to get out if the share price is following the same pattern.

I've saved more money by picking up on intelligently argued bear cases here than by finding new stocks. I can find new stocks easily, it's figuring out when to sell that's the challenge. For instance, posters here have drawn my attention to weaknesses in Stanley Gibbons (LON:SGI) and Dignity (LON:DTY) and saved me very large sums.

But in the end all debate should be welcomed as long as posters don't personalise the arguments. We're all here for the same thing, in the end.

Albertos

PCF (LON:PCF)

Not sure about ST's advice here to buy at 32p - given the lazy discounted placings which seem to be done these days (chunk ending up with non long term holders) - there's a definitive possibility this will be driven down to 30p in the near term.

Why not wait?

Phil

Jetman100

If any Investor's chronicles journalist has written a positive note about any stock, then for me it is a probable SELL

Small Cap Value Report (Wed 20 Feb 2019) - PCF, FLYB, MCB, GHH, ALY, SBRY

PCF (LON:PCF)

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Graham Neary

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Herald Inv Trust PLC

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