Small Cap Value Report (Wed 20 May 2020) - Macro, PMP, MCB, JDG, BMY, CLL

19th May '20 by Paul Scott

62 comments 8675 reads

Good morning, it's Paul here. No silliness in today's preamble. Just to reassure readers who posted concerned comments yesterday about me naming & shaming a young lady in Bournemouth - relax, as I made up the name!

Please see the header for company announcements I'll be covering today.

Estimated finishing time - today's report should be largely done by 1pm. Edit at 12:57 - Today's report is now finished.

Here are a few interesting news items that have caught my eye, together with my comments;

CNBC reporting that 40% of S&P 500 companies have withdrawn profit guidance for 2020. (Paul: how can market be so buoyant, when so many large companies cannot predict their trading this year? Risk that markets may not be properly factoring in potentially very bad 2020 figures. We need to treat all UK broker forecasts as probably far too optimistic, unless a company has specifically confirmed it is trading in line. In fact, I'm basically ignoring broker forecasts right now, as they're largely defunct - a very unsatisfactory situation. Just because it's difficult to predict, doesn't mean you should stop trying, if that's your job!)

Walmart reported strong sales, but it's incurring higher costs, e.g. additional cleaning, and staffing costs. (Paul: so even businesses that are trading well during the crisis, could see a squeeze on profits)

Chancellor of Exchequer has made ill-advised comments in a committee hearing - does he not realise these are televised? He described the UK as facing, "a severe recession, the likes of which we haven't seen". (Paul: if that's what our top finance man in Govt thinks, then we should be very worried, and cautious, in my view)

Air travel - proposals being mooted for "air bridges" - i.e. reciprocal arrangements with other countries which are seeing low covid levels. (Paul: could be why Dart (LON:DTG) shares shot up yesterday?). Also, the UK 14-day quarantine period being introduced apparently will not have an exemption for France. I've no idea why it has taken so long to introduce this measure, when it was needed a couple of months ago.

Vaccine - news from $MRNS about its success in early stage covid vaccine trials, which is reckoned to have triggered the Dow's 900 point rise yesterday, is apparently not so exciting after all. US markets gave back about a third of yesterday's gains.

CLBILS (Coronavirus Large Business Interruption Loan…

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kgb1953

20th May '20

In 2019 they had a cash flow of a whole £42m and in 2018 a negative £218m. This to sustain a company with £10bn sales and £6bn of assets.

greenhat2

* I forgot to mention potential therapeutic application of Affimer technology against covid Doh !

Doh! I forgot to mention the original oncology purpose that could be huge.

Paul Scott

The UK Govt (possibly supported by Cello Health (LON:CLL) ?!) keeps putting out this advert every few minutes on CNBC's audio feed. It says;

Stay alert. Control the virus. Save lives

This is utterly ridiculous, and if it has to be explained in depth, then it's rubbish. If we must be governed by slogans, let's at least get them right.

I've come up with a much better slogan;

Keep your distance. Protect the vulnerable. Lose some weight

There we go, sorted.

Charlie11

I’m not sure how you arrive at a 45-50% increase in market cap in the next 3 months when trading is forecast by the company to be dire. The numbers to FYE 3/21 are likely to show a significant fall in revenue, further squeezed margins, losses, negative FCF and increase in leverage (again)... and a further 12 months of restructuring which has been going on for c25 years since the mid-1990s problems.

The food is a red herring as the revenues, margins, profits and cash flows do not deliver the requisite ROC - too much capital is needed in the business which is structurally flawed.

Gromley

Re AO World

Given state of UK job market demand for new fridges and washing machines surely lower.

I'm not an expert on this area of retail, but a couple of thoughts :

1. I think it is a mistake to think that everybody is worse off at the moment, a lot of people are still working, others are furloughed and yet others drawing the pension. Whilst opportunities to spend on the hospitality sector etc. are seriously curtailed. Don't get me wrong, I do know that some people are facing real hardship, but overall I suspect there is at least as much spending power out there as there ever was.

2. Maybe it is just me, but I don't think most spending on white goods is discretionary - I don't think there is much of an upgrade cycle for white goods - you use them until they go wrong and then replace them. Maybe the lack of house moves and kitchen upgrades will cause a bit of a slowdown, but not much I would have thought.

In fact when people were panic buying food at the beginning of all of this, I also found they were panic buying freezers!

With bricks and mortar competition shut-down it has got to be a good time for an online retailer like AO.

So I would expect them to be doing really "well" at the moment and they seem to think that much of the move to online will stick (not so sure myself).

However they are still along way from profitability and I would not want to pay a PE ratio of 60x 2021 earnings - especially when they have the habit of over-performing on the top line but underperforming on profit.

I had been short AO. in the past and may have another look when their results are out in mid-July.

wbsan

Re M&S: superb food, affluent customers; food hall usually very busy, most of those customers by my observations tend to be in the 40+ age group, yet look at the clothing on offer - the older shopper is largely forgotten about. My wife, who's quite tall, tries to buy work trousers there when she's in getting food but invariably finds that two pair off the same rail and marked the same size are actually different - quality control?
The Men's offering has improved greatly and it is nice to see them supporting British woollen mills - but why do they mix polyester into everything? Linen jackets with polyester lining seems a contradiction if one is looking for a summer jacket. The affluent customer tends to shy away from man-made fabrics and will pay a bit more for quality - or maybe that is just me. As for those two words that strike terror into many of the men in the Food Hall, "Slim Fit" - need I say any more?

JohnMM1969

re Marks and Spencer (LON:MKS), I always thought that considering their market (for women's clothes) Sosandar (LON:SOS) seemed to be a very obvious purchase?

It's possible. Given that the stock market route hasn't really worked for Sosandar (LON:SOS) so far, and that it might need yet another funding round, then selling it to Next (LON:NXT) or £MKS could make a lot of sense.

SOS management have done a fantastic job compared with other online fashion startups in recent years. The mistake was seriously under-estimating the marketing costs. That said, they've created something valuable, and unique. It could well have value in excess of the current valuation, and probably does. Is it likely to be a 5-10 bagger now though? Probably not.

I don't see as much share price upside now, so have partially lost interest in it. Better fish to fry. We all only have a limited amount of time & energy after all.

OsullivanB

Could he compromise as a market gardener?

arshadte

Thanks Paul for you reply.

It looks like the market likes the news today.

I'm holding for now.

I will review once I see how the venture with Ocado goes in September. If the results are positive then I can see a big upside. Also it's good to know that they have enough money now so should not go bust.

monzo

Interesting after hours update from Dart (LON:DTG) Proposed placing for up to 20% dilution, raising a minimum of £100m to waive banking covenants for the summer but up to £170m. Trading update to end of March reads well but is kind of redundant for the time being. They give three different scenarios for being able to fly again in a phased way

Dart Proposed Placing

PDiddy

Depends On the overall outlook really, I dont see drawing down more debt on the mountains it already has, in a critical situation, a long term positive.

stowmarket500

It doesn’t need the chancellor to make these comments to make everyone realise the situation the world is in. This will be a depression not a recession leading to the collapse of the dollar and a resetting of the financial system. Only plays in town are gold silver and gold/silver mining shares as leverage.

Usual stuff - speculation dressed up as undeniable fact. Really! D minus - must try harder!

I've sent the above to my excellent MP, Tobias Ellwood, together with a suggestion that he furloughs Dominic Cummings, who has clearly peaked, and needs a good long rest. I've suggested he is reassigned to other duties.

Howard Marx

21st May '20

Paul

I enjoy your commentaries & your retail focus.

But this now is redundant.

Now that the High Street, Pubs, Hospitality are mostly bust, why not study the Healthcare companies?

Testing is here to stay.

mark1308

Quite - if M&S have so many older customers , what the hell is this Slim fit all about !!!

If its to attract the younger hip / skinny ! shopper then pigs will fly before any youngest goes to sop at M&S.

Sop or shop !

dealtn

https://corporate.marksandspencer.com/documents/reports-results-and-publications/annual-reports/annual-report-2018.pdf

Not according to the annual report!

Small Cap Value Report (Wed 20 May 2020) - macro, PMP, MCB, JDG, BMY, CLL

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Paul Scott

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