Small Cap Value Report (Wed 22 July 2020) - WIN, TSTL, CALL, DISH, SGC, QXT, BLTG

22nd Jul '20 by Paul Scott

78 comments 9470 reads

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

Today's report is now finished.

Wincanton (LON:WIN)

Share price: 187p (up 9% today, at 11:42)
No. shares: 124.5m
Market cap: £232.8m

AGM Trading Update

Wincanton plc ("Wincanton" or the "Group"), the largest British third-party logistics company...

This update today sounds excellent. Key points;

Underlying profit before tax for FY 03/2021 significantly ahead of current market forecasts, and not less than £30m. That's assuming no resurgence in covid. Various contract wins (Waitrose & Morrisons) & renewals are mentioned.

Improved demand across most of the business.

Liquidity/debt -

Cash collection and liquidity management remain strong and current net debt remains significantly below the prior year position, primarily due to the deferral of payments.

As I keep saying, companies must disclose how much tax they have deferred, otherwise cash/debt figures are meaningless & misleading. In this case at least the company admits that the reduction is net debt is mostly due to tax deferral, although I would have preferred to see the numbers in a table clearly separating out the short-term benefit from deferrals. Remember these deferred payments have to be paid up by end March 2021. Here is the Govt guidance on VAT deferrals.

My opinion - this seems a good company, clearly experts in logistics. I explained here why the balance sheet is such a mess. The pension fund in particular is an ongoing, and very large, cash drain. That rules it out for me, but for people who don't worry about balance sheets, then there's nothing to stop the shares going up. With a very good update today, this share looks like it's going higher in the short term. At some point I think it will need to do an equity fundraise to fix that balance sheet.

Whilst a beat against expectations is good, it seems that forecasts were reduced far too much, given that a lot of its business is defensive stuff like supermarkets. The darker blue line below is the current FY 03/2021:

Tristel (LON:TSTL)

Share price: 410p (down 12% at 08:26)
No. shares: 45.3m
Market cap: £185.7m

Trading Update

Tristel plc (AIM: TSTL), the manufacturer of infection prevention products, provides a trading update for the year ended 30 June 2020.

A reader posted…

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nettle

22nd Jul '20

Dear Paul

Excuse my ignorance, but I'm very confused about the important issue of Pension Deficits. Clearly it is worth checking before making any investment.

You write of Wincanton that "The pension fund in particular is an ongoing, and very large, cash drain." But when i go to the balance sheet on the Stockopedia page it gives "the Total Funded Status" as a seemingly healthy £94 million. Stocko tell me that "the Total Funded Status" column is synonymous with Pension Deficit. But this does not seem to match with what you have written. Can you explain?

And is there a very simple and robust way of checking Pension Deficits via Stockopedia? And if i'm too late for Paul, if anyone else can help me, i would be grateful.

rmillaree

Wincanton (LON:WIN)
And is there a very simple and robust way of checking Pension Deficits via Stockopedia?

I would always recommend going to the year end latest accounts - you should be able to find these easily via the news section sometimes the published annual report may contain extra useful info omitted from the year end accounts (download from company website).

First comment i came upon is as follows (ye 31/3/20)

Financial position

The Group's balance sheet has been strengthened over recent years, with a reduction in net debt and the pension deficit. Net debt at the year end reduced to £10.1m (2019: £19.3m) and the pension moved into a substantial surplus on an IAS 19 basis at 31 March 2020 (£94.4m surplus compared to a prior year net pension deficit of £7.1m), although this surplus will reduce as financial markets settle down.

This may sound like realy good news - but the fact the amounts can change by a random £100 mill in 12 months kind of underlines the danger here it could esily swing the other way twice as much !

It sounds like they know there is a defecit practicably spekaing as they say the following.

If they need to pay £18 mill a year (i do not know how long so extra research needed!) that underlines the potential risks involved - you could end up with equity being worthless if medium term cash generated may all end up being taken by the pension they have wrapped around their neck. Note i know no details so more research needed to work out the full detail and its the full detail that you need to know - size of the pension asset invested and liabilities being probably number one of importance - the bigger the size of the scheme the more risk .

The cash contribution to fund the pension deficit on a technical provisions basis of £17.8m comprises £18.5m of annual deficit contributions, less £0.7m of administrative expenses incurred by the Company. Contributions for the year ended 31 March 2021 were scheduled to be £18.2m, being the annual deficit contribution of £18.9m less the administrative costs incurred directly by the Company but, in response to the COVID-19 situation, agreement has been reached with the Scheme Trustee to defer £6.1m of these contributions into the following financial year, subject to the level of cash dividends paid in the year.

Man of Steel

The challenge with the Woodford fund would seem to be that he was running a PE/VC portfolio approach in a traditional fund structure. The PE/VC model works best when a set amount of capital is invested across a portfolio of illiquid companies, recognising that some will fail and that others will spectacularly succeed, overall giving a good rate of return. The capital cannot be easily withdrawn once invested - it is committed, which gives the fund manager 10+ yrs to execute on the investment strategy.

A traditional fund structure allows investors to buy in and out of a fund on an on-going basis. This simply doesn't work with a PE/VC model that invests in smaller, illiquid stocks.

Whether the investments being made were good or not can be debated, but in a normal PE/VC fund this is normally judged at the end of the fund life (typically 10 years). Investors racing to exit the fund meant that Woodford never had the chance to prove his investment thesis. Perhaps a different fund structure that committed capital might have been a better vehicle for his investment strategy.

UK_Investor_8888

I may not be loss making (currently -1.31% BE @ 56.82p).

In penance for my Central Asia Metals (LON:CAML) and EVRAZ (LON:EVR) holdings, my Stagecoach (LON:SGC) has green credentials.

This is one of the advantages we have as private investors - we can move relatively easily in and out of small, illiquid stocks. Much more difficult for large funds to do this.

rizler007

Regarding Novacyt Sa (LON:NCYT)

People might find this article interesting... https://www.qmul.ac.uk/media/n...

WarrantStar

IN REPLY TO NETTLE I use the "gross gearing + pension" which is shown on the stock report on the right about 2/3 of the way down.

Many thanks for this. A lovely easy way to do a quick check. Previously entirely missed my me!

Many thanks. Most interesting. It shows that someone like me should be wary of most published figures!

JohnEustace

I think in Cloudcall (LON:CALL) 's defence that their product will take a bit of IT integration work to get it talking to the client's core CRM system, so I can understand potential customers not wanting or being able to take on that risk while having to transition overnight to remote working. Businesses just wanted comms solutions that they could download and get working immediately.

But that does imply that Cloudcall will only be able to gain business when things are more back to normal and their potential customers are back in their offices and in a position to think efficiency rather than survival.

See the company has now released an RNS about this....

davidjhill

Cloudcall (LON:CALL) Overall theme was positive for me. Last month was biggest on record for new sign ups so clearly moving back in the right direction again after initial covid disruption. In the US revenues only dipped 15% and are coming back quickly versus UK which plummeted 50% (due to furlough schemes) initially but has since rebound 20%+ and continuing.

Quite a relaxed/informal meeting as is usual style and target of $50m pa revenue brought up a few times. The new CRO (chief revenue officer) has actually built and sold 2 telco type businesses before having reached that kind of number. He is from, and based, in the US and seems pretty switched on and confident in the product and conversion which is good to see.

Lots of talk from new CTO on becoming a data company (loads of collected data they can translate and help customers take advantage of using AI : interesting but clearly jam tomorrow). Will be integrated into Teams very soon which is more immediately positive I'd say.

I asked the question about listing in US. CEO said gets asked this a lot. 40% of shareholder base is US and the CRO clearly would like this to happen as well. However, disappointingly the rhetoric was about focusing on what they are doing and growing revenues, "but never say never". I really feel he is missing a trick. I reckon the US would value this business at 3-4* the current price and that would allow them to make a step change in growth in my view. The market simply doesn't value this type of tech business here in the UK and (in my own view) overvalues it in the US, but that is where the game is and management should spend some time on that, especially as much of their business and opportunity is Stateside as well as 40% of their shareholders. This was a tick in the negative column for me alas.

Gan (LON:GAN) did this to fantastic effect recently. Meant to buy some, didn't....kicking myself :)

djack

As an aside what are people's thought on £AO announcement today? https://www.bbc.co.uk/news/business-53470022

AO World (LON:AO.)
As an aside what are people's thought on £AO announcement today?

Would i be correct in saying the shareprice needs to be over treble the current level before employees get a penny?. I hope this isn's a distraction technique so that they can then fob staff of with below par payrises. It's not exactly a company that has been setting the world alight when it comes to maing any real profits from what it does.

As an altenative to having nothing though in that regard i would say its a great step forward compared to being offered nothing.

As a shareholder (in general i don't hold shares here) i don't mind schemes like this in theory if the hurdle starts high enough as this one seems to do if it only starts paying out when shareprice has trebled (is that the case?)

Timoteo

Could you find time to comment in tomorrow’s column on the Countryside Properties Retail Offer announced today. I’m a (slightly confused!) shareholder.

Thornabian

Surely it will push employees to buy more shares to push it up and investors will follow to ride the wave. The bonus is worth 1 and a half year's salary for the employees so it isn't a small bonus.

Will be good for AO to fund expansion if that happens.

Interesting idea and will be interesting to see how it plays out.

kgb1953

I meant your investment - though perhaps you have made a gain. If so apologies.

intuitive6191

This deserves a thumbs up as the neatest description of what Woodford was trying to achieve. His idea was reasonable – but the vehicle was inappropriate and not communicated properly to investors.

Yes – I would agree with other posters that the portfolio was sold off far too cheaply. There was money to be made in liquidating the portfolio

Wilbraham

One thing to remember about pension deficits is that trustees of a closed DB plan will tend to have a long-term objective of off-loading their liabilities totally, over perhaps 10-20 years. Typically via bulk annuity contracts (for smaller funds) or through a complex array of interest rate, inflation risk and longevity hedging instruments overlaid on bond investments (for sophisticated funds). Either of these 'end-game' positions will be priced on appreciably more cautious assumptions than the IAS19 valuation or the on-going triennial funding valuation. Whether the trustees can achieve this position will depend partly on whether they manage to achieve sufficient investment profits in the interim from their current (mis-matched) investment strategy, whether the employer can be persuaded to chuck a bit more money at the problem (especially in 'good' times) and other factors.

It all gets complicated! A useful (perhaps cautious) rule of thumb might be to assume that the current level of deficit recovery contributions will be maintained for at least as long as indicated in the notes to the accounts. Because, when the end of the recovery plan nears, it's easy for the trustees to argue (sometimes with support from the Regulator) that the employer is accustomed to this level of annual contribution so let's continue this for a few more years while we attempt to get closer to a buy-out position.

I had the great misfortune to meet the smooth-talking Zak Mir almost 15 years ago. He was instrumental in persuading me to sign up for an 'advisory CFD trading service' operated by Blue Index. He was touted as the TA 'brains' of the operation. Each morning he'd look in his tea leaves and pronounce on the direction of half a dozen trades. The team of brokers then phoned round their 'clients' persuading them to place a hugely over-geared CFD trade on that recommendation. Most were closed out at their stop loss (2% of the underlying, I recall) and very few ran to a profit.

By the time I ended the arrangement I was already £30k down in 4 months and too embarrassed even to claim the CGT tax loss! There were multiple flaws in the process. Just one: how did the firm decide which clients were called first with the day's latest hot tip? BI itself of course trousered their healthy commission on losing as well as winning trades!

Blue Index was forced to close by the FCA a few years later. I haven't followed the story but thought some reprimands were issued. Maybe I could have claimed compensation but I preferred to treat it as an education through the school of hard knocks.

Would I trust Mr Mir now? No, though I accept leopards can change their spots and it sounds like his current role carries less potential for harm.

Small Cap Value Report (Wed 22 July 2020) - WIN, TSTL, CALL, DISH, SGC, QXT, BLTG

Wincanton (LON:WIN)

Tristel (LON:TSTL)

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Paul Scott

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