Small Cap Value Report (Wed 29 Jan 2020) - GATC, QXT, EMR, PDG, RNWH, SCS

29th Jan '20 by Paul Scott

75 comments 9165 reads

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

Timings - I should have this finished or nearly finished by 1pm.
EDIT at 12:29 - I've covered most of the more important things for today. I'm taking a lunch break now, will finish off this article by 3pm.
EDIT at 15:46 - today's report is now finished.

More thoughts on China

If you're not interested, just skip this section.

Overnight, the US markets seemed to shrug off worries about the coronavirus. From what I can make out, the attitude seems to be that this crisis will get sorted out, like all previous crises, and it shouldn't affect America. I'm not sure that's sensible. As we're seeing on our TV news, some large Chinese cities are like ghost towns, as people prefer to stay indoors to minimise the risk of becoming infected with a potentially fatal illness - who can blame them?

As I see it, there are two problems for markets. One is potential panic - SARS apparently hit markets by something like 6% to 13%. Although it's difficult to isolate that from other bearish factors going on at the same time - as one reader pointed out, that was the same time as the second Gulf War was building up, which kicked off in Mar 2003. Casting my mind back, I think the build up to the Iraq War was more of a worry for investors than SARS. Also, SARS didn't spread like this new virus is doing now.

Restrictions on travel (especially aviation) in & out of China is bound to affect shares in airlines, cruise ships, etc. Also I note that $SBUX warned last night of an earnings hit from having to temporarily close over half its 4,292 Chinese stores. As the world's second-largest economy, events in China have more impact on the West than when it was a subsistence agricultural economy in the past.

What about supply chains being disrupted? Numerous companies in the UK and USA import parts and finished goods from China. How will production and transportation of those be impacted? How long for? Plus of course, the UK luxury goods are popular in China, so sales of those might fall.

Will markets look through this crisis, and see profit warnings connected with China as being a temporary blip? I'm not sure. In the UK, the market tends to mark down…

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Squashbox

29th Jan '20

Antibiotics used to work against bacteria!!!!

cmpeckham

Simon

Given your comment and the fact that you are at stocko, so presumably you like factor investing, then if you haven't already you should check out the ishares factor funds. For example ishares world multifactor (FSWD) which is a core holding for me.

Edit: with ETFs, as you probably know, it's important to understand how the underlying index is constructed, so in this case:

https://www.msci.com/documents...

LeopoldAlcocks

interesting, quite concentrated ETFs. Thanks for posting.

Some obvious absences in IITU, but i guess because some "tech" companies, such as Netflix and Amazon have been reclassified to other sectors recently

peterthegreat

Thanks for the comments on China Paul. My portfolio is unleveraged and long term so I am happy to sit out any falls in share prices resulting from the impact of Coronavirus. New pathogenic coronaviruses do of course emerge from time to time, but this one seems to be notable for its infectiousness. One thing I have done is to purchase a medium sized holding in Tristel as I think the huge publicity being generated by this outbreak of coronavirus infections may focus health services' attention on the effectiveness of the company's patented chlorine dioxide technology which kills bacteria and viruses more effectively than many traditional approaches. It is used in some of the company's products used for general disinfection in hospitals, though most sales are for decontaminating instruments. The company's opportunity for international expansion is considerable, although the increasing use of disposable medical devices is a negative. The company is also highly rated so not without risk.

ricardow

I had no trouble buying Oakley Capital Investments (LON:OCI) on Selftrade.

Ricardo

Paul Scott

Thanks golfnut, that's really kind! It's my pleasure.

MichaelFBS

Thank you danyou. Good to get some information from somebody with knowledge of the matter rather than the BBC who seem to throw reports together depending on the the dramatic effect they will have.

Bonitabeach

Hi David,

It's great to meet an enthusiastic holder of TREMOR INTERNATIONAL (LON:TRMR)

You may have the advantage of industry knowledge, I hope you do. I do not, but I do know three more things Tremor has in common with XL Media (LON:XLM)
1.) Israeli Directors2.) Software Driven 3.) AIM Listing - a toxic combination in my book.

There is an awful lot more I could write but you have probably already noticed that at 31/12/2013, before it was floated, trade debtors stood at 57 days sales - not brilliant but acceptable. By 31/12/2018 trade debtors had grown to 94 days sales, and at 30 June 2019 stood at 139 days sales. I am sure there is a perfectly rational explanation.

I wish you luck with your investment.

It's nice to see some good economic news for a change.

The flash PMI for the UK points strongly to an improvement in conditions post the election.

Hopefully that bounce will not be derailed by recent events.

DWit199

Virtually everybody with severe pneumonia who is seen in the UK by a doctor today will be treated with an antibiotic. There are no reported cases of corona virus in the UK so the fact that the "suspected" cases are responding to antibiotic treatment is not surprising as they probably don't have corona virus.

Atomic Investor

As a pharmacist i can confirm antibiotics only work against bacterial infections not viral. However they are often prescribed to cure secondary infections. Also the nhs occasionally allows the prescribing of antivirals (Tamiflu) in out breaks eg 2009 swine flu. Perhaps they meant antivirals.

ken mitchell

FREng

Happy to be put right if flu is less deadly.

BBC news just now said around 650,000 deaths annually from flu.

One concern not yet getting coverage is the possibility that China is covering up the true Coronovirus death rate. It seems a bit odd if death rate as low as reported that Chinese towns and cities are so deserted, and so much fear about it elsewhere, if getting coronavirus is no worse than mild flu.

Tombholliday

No comment on Hargreaves services trading at a significant discount to asset value with a dividend yield scheduled to more than double?

Gromley

Re Hargreaves Services (LON:HSP)

There are often too many qualifying companies reporting for Paul or Graham to cover them all, so if there are any that specifically interest you then if you can it is worth getting your request in early - together with a snippet such as you have given as to why they might be worth looking at.

I have not looked at them before but a quick scan of the StockReport makes them seem quite interesting.

A few quick thoughts though (on which you may have some insight?) :

Operating profits have been negative for the last 4 years, although in 2 of those years they actually turned in overall profits.
Operating cash-flow certainly looks impressive and if the lower capex in 2019 is the new norm, then FCF could be good too.
Reading the StockReport "profile summary", it looks like they are a Coal (& other mining products) distribution company? If so, that sounds a little end of life; so the discount to NAV might just reflect a doubt as to whether some of the Assets actually have a resale value?

I can't cl;aim to have added any real insight there, but those are the things that leap out at me from the StockReport. I am tempted to have a more detailed look at some point, but am rather "time-poor" currently.

Brilliant Leader

Thank you, I shall take a look

Hi Ken

Apologies, I have only just seen this reply. Of course, you are right, the discount/premium does throw up valuation anomalies (I remember you creating your own niche in warrants and similar valuation anomalies back in the day) but my mindset is to buy forever or certainly for the very long-term. Hence, I am more focused on NAV performance and would like my investment to broadly mirror that.

Both approaches are valid.

Cheers
Simon

SHi Simon

I agree re using Investment Trusts as potential long term holdings, but like to buy them when that Country or region is good value and better still if out of favour as then good chance of buying at a significant discount too.

I usually hold a range of Investment Trusts, but when U.K. value shares, and these were often big dividend payers, got so cheap I mosltly sold my Trust holdings to invest in those instead, along with some of the smaller Companies covered so well here by Paul and Graham., but am beginning to buy Investment a Trusts again.

And yes, warrants and subscription shares were an added Investmeant Trust bonus but sadly there are hardly any left now.

Apologies if other readers are irritated by this being off topic.

Hi Tombholliday,

Hargreaves Services (LON:HSP) is a special situation, so it's not simple to analyse. Therefore it's not practical for me to spend hours trying to interpret it, on top of everything else there was to look at today.

There's a new note from N+1 Singer, which is available on Research Tree, which is your best bet for coverage of this one.

Regards, Paul.

mojomogoz

30th Jan '20

Hi Bonitabeach

I applaud you for your high level snarking.

We will be sure to pay humble homage if you are proved right and kowtow remorsefully to your superior wisdom. It may be necessary as Tremor International (LON:TRMR) is undoubtedly risky with lots of muck to shed and dirt to pack down.

For the moment David and I will take solace in our gain...from muck we have a partly polished something that's approaching 100% up on purchase.

I'll bet you one whole British pound that Tremor will rise more in coming months into the 250-300p 'this might be a real company range'. There's very good reason to look back and hate and the future is never certain. But the future for Tremor seems different from the past its price was locked into.

The high level comparisons you make with XLMedia (LON:XLM) are level 1 persuasive but as we all know to invest successfully in whatever style we must move to level 2 plus at least....and there your points fade to reveal misunderstanding. We can discuss them further if you wish...

However, your warning re quality of company and management are well made and no-one should be in any doubt that Tremor is a speculative stock...moves in the price over the last 18 months both up and down prove that....so people of a delicate disposition and a need for rigid certainties like you shouldn't play. The working capital point is well made but again it is necessary to understand and contextualise what is going on to weigh the risk.

I am known to be wrong at times and to take too much risk in a contrarian style...I don't recommend it to others

Best of luck and lack of hubris with your investments

Your mojo
xxx

31st Jan '20

Hee hee - loving the red thumbs

Small Cap Value Report (Wed 29 Jan 2020) - GATC, QXT, EMR, PDG, RNWH, SCS

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Paul Scott

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