Small Cap Value Report (Wed 3 June 2020) - Re-opening, Zoom, FORT, ANG, VTU

3rd Jun '20 by Paul Scott

83 comments 10778 reads

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

Estimated timings - there's very little news in my sphere today, so it should be possible to finish by 1pm.
Edit - I got carried away with macro stuff, so need more time to finish the company sections, say by 3pm.
Edit at 15:03 - today's report is now finished.

The Re-opening Trade

This is a theme that I am currently focusing on. As the economy re-opens, then companies are coming alive again, and there could be some bargains around, if the consumer comes out and starts spending again. The market is clearly becoming more optimistic that consumers may be more prepared to get out and spend money, than previously thought. I think that seems correct, for these reasons;

Many people are tired of lockdown. Younger people in particular seem to be realising that (if they have no existing medical conditions and are normal weight) CV-19 presents little to no risk to them. Bournemouth beach was very busy yesterday evening, in the glorious sunshine. I don't see any fear in people's eyes any more, and my hunch is that people could flock to the shops once they re-open, having been deprived of an enjoyable activity for over 2 months. I also think people are getting used to queuing, distancing, and wearing a face mask if they want to. Plus there will be terrific bargains, as fashion retailers rush to clear out excess spring/summer inventories. I reckon we could see a surprisingly strong re-opening of the High Street, but of course that's guesswork at this stage.

Evidence from the USA - is that whilst sales are down, they're not down as much as feared, particularly in apparel I hear.

Bank balances - a friend kindly sent me an interesting article from Bloomberg, stating that during lockdown, Britons have been hoarding cash - because we've got nothing to spend it on! Other than takeaways, beer, and buying random junk on Amazon after consuming the beer! Oh, and gambling online. In March & April, household bank balances rose by £30bn. What's the betting that this fuels a spending spree from 15 June? That sounds plausible to me, and share prices are reflecting the increased likelihood of that happening.

Property REITS - going bananas at the moment, I was a little early to this trade, buying Hammerson (LON:HMSO)…

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topturkey

3rd Jun '20

Norcros (LON:NXR) isn't one i've spotted before so thanks for mentioning Paul and Fegger and Zipmanpeter. looks very very good value indeed (should be closer to c£250-300m market cap perhaps easily? seems to have missed out on the rally as you say - any idea why? Profit warning earlier in year maybe, were they too pessimistic?). Have added a reasonable holding to sipp and will continue to appraise. Thanks

hp01

Excellent insights Paul. I also enjoyed your interview on PIworld. Re: Zoom - When you mentioned recently that you had shorted it did make me think, as I bought some around the middle of April. Although I share your concerns about competition, Zoom could prove to be sticky for the time being, and having gained so much popularity in recent months, it's becoming the Go-To application for video calls. I now know at least a couple of people that have bought the premium version in the past couple of months. Momentum and price action are strong. I think with US large caps, sometimes valuation needs to be overlooked when momentum is the key driver of the moment. I'm not certain it will be the dominant video application in 5 years because technology applications are fickle and a better option could be around the corner. Until the momentum and price action changes, will ride the zoom up.

With regards the re-opening theme, what do people think about Greggs? I'm actually looking forward to a Greggs pasty when I get the chance.

Kieranj077

Afternoon everyone,

Interesting comments Paul about Zoom. It's a difficult one to predict whether the growth and valuation will continue. It's likely there will be greater competition, like Google and Facebook's recent video product.

From an investors perspective, I'm surprised a few more companies aren't using these types of services for their investor presentations. I've joined a couple of company presentations through Investor Meet Company - https://www.investormeetcompan... . My initial thoughts is that the service is very good.

Some of my other experiences on conference calls/bridges have been quite painful. Hopefully more companies recognise there is room for improvement with better services available.

Does anyone have any other experiences that have/haven't worked well?

Cheers

WarrantStar

Paul, I like the way you put your comments in red next to Angling Direct's highlights. It make it easier to compare you comments with their's. It's like you're marking their homework!

Paul Scott

How interesting, thanks for posting that re French bars & restaurants.

fwyburd

Brilliant output again today Paul, thank you. I haven't been commenting much recently as I've been focused working on repairing my battered portfolio but have really enjoyed and valued your work over the last few months.

cheers

Francis

timarr

The retailer such as Dunelm (LON:DNLM) that spent money being omnichannel are much more resilient than those that haven't.

Absolutely. Click and collect, e-commerce, anything to relieve pressures on the stores. Anything that needs high footfall to survive will struggle with social distancing. And omnichannel is really hard if you don't have the right platforms - get it wrong and you end up with tons of fraud.

The Associated British Foods (LON:ABF) update on Primark was quite good - most European stores reopening, all busy but the bigger ones with lots of footfall won't be able to handle pre-pandemic levels due to distancing. Larger basket sizes but maybe due to immediate pent-up demand - summer clothes for kids, for instance.

Overall discretionary retailers with a good omnichannel offer and those that need lower footfall will do very well I'd think.

On the IKEA thing - a lot of the demand is coming from renters needing to move. The Rightmove (LON:RMV) update the other day suggests a surge in rentals which are non-discretionary unlike house sales. Property agents specialising in rentals will probably be doing quite well.

john652

Hi Paul & all,

I'll give you a spanish anecdote to go with the French one, on opening up. Now, I've been fairly vocal about the NOT in proportion global lockdown, and it seems to me thats all now coming to the fore in the terrible media the UK endures...
But not to dwell on that. In Spain we had an incredible harsh Hugo Chavez, police state lock down & in the main the Spain are furious with just about every personal freedom being taken away. Not least after 3 months the final piece of 'control' being mandatory mask. Rightly or wrongly the majority are not having it. But, I slightly digress, the large shops & shopping sheds opened on Monday. Ive been every day to get a feel & to buy all the things we were to buy before the rude interuption. The UK followed Spain into lockdown and I believe will follow Spain rapidly out because the economy here & it will happen in the UK, was imploding. As it imploded the anger rose.

The rules have quickly been relaxed. I really cannot fathom what old Boris is doing with a Furlough until October (I mean what!!! what on earth is the reasoning for keeping people paid for another 5 or 6 months, if anyone has an inkling please do post).

So, we have all these guidelines here, and bureaucrats just love an opportunity to micro manage everyones lives, but the shops have been packed every day this week. The bars are all full, people distanced by two meters of course, 50% of internal space now usable for restaurants. Outside terraces have been allowed to double by the council's. The roads are full, the cars washes are full, and two Spanish business friends say they think they can recover the two lost months as the phones are ringing. Millions of jobs lost for sure but for me this is a good indication of pent up demand, There are still many old people walking around with face shields (which do nothing) and look at a child coming down the path in the same way as if Freddie Crougar had just jumped them. But hey, you cant blame them, the government told everyone 'it's gonna get you'. Mind you, lots then sit down for an Americano and whip off the hazmat, not much logic there but logic is a rare commodity these days.

So, I for one have gone from mega bearish too much more 'cautiously' optimistic.

The latest money week podcast with James Ferguson (who used to write for MW is excellent) he's no fan of lockdown but his comments on the effect of the money printing are very interesting & he's for Gold and equities as a result, because there is now so much more cash around.

I can easily see the leisure sector bouncing back, well at least the shares, for a short time if the above happens. Is a 24 year old barmaid really going to stop people standing together in a pub (regardless of the rules) ? Incidentally Brighton beach bars are open for take away. And if customers happen to sit on one of the tables outside, I mean what are they to do.... which is exactly what is happening.

Tommy H

Hi, This is one for Graham as he has covered before, I cannot remember whether he was a hold, or whether this was sold for his house purchase. T.

Strader

Hi Paul

Loving the new comments you are leaving, please keep it up!

S

PeterW

Really enjoyed your pre-amble Paul, absolutely excellent and thought provoking.

rmillaree

Norcros (LON:NXR)

seems to have missed out on the rally as you say - any idea why? Profit warning earlier in year maybe, were they too pessimistic?). Have added a reasonable holding to sipp and will continue to appraise. Thanks

Your best bet is to look back at the hitorical articles with regard to nocross and they will give you the flavour of why the buisness has hitorically been related very cheaply on p/e basis - albeit they had had a really good run to a more normal earnings multiple pre covid.

I would say the main reasons are

Large South African elemty to there sales / profit.

Historically large pension deficit , as they have acqyuired add ons over th eyears and beded them in the pension decicit isn;t as bad as a % of the larger combined entity.

Debt - the company has not inconsiderable debt.

Bolt on large acquisitions - they have newish acquisitions that some would probably presume need to p[rove they were worth the value the company paid for them.

Anemic organic growth.

That's probably "potential" red flags tgo put some or most people off - i am bit of a NXR fanboy when it comes to looking at the overall situation and saying the buisness is fundamentally wort more than a p/e of 5 or 6 ignoring covid. Generally spekaing pre covid looking at the cashflow from the main operatoions that shoudl be enough for dividend / acquisition rleated installments , small add ons pension payments and ability to pay down the debt. So it has the potential every couple of years to buy in extra profit without stretching the debt too far. I am guessing covid reasons will mean that temporarily the debt may be going up rather than down which is potentially another worry.

arfournier

Even more impressive Zoom generated $252 million in free cash flow on revenue of $328 million in Q1 2020, or a 77% free cash flow margin. Which is jaw-dropping, to put it mildly.

Thornabian

With the queues at B&Q since it opened, I think you might be right about the 'stay-cations'.

The bank balance bit is a great little nugget of information, I've been trying to find more data on this and UK consumer spending power.

Remember UK unemployment is expected to peak at 10% and reduce to about 7% by year end. A lot of that saving is in the expectation of harder times ahead. I doubt anyone on furlough at the moment is considering a spending spree.

Singh73

Paul really like you putting your comments in red - it’s very useful - maybe something you could look to do going forward.

6th Jun '20

Thanks hardeep. It's a bit more time-consuming, but I'll try to do more of this.

Memoimoi2017

21st Jun '20

Hi, despite the financial picture for the last year not being great for angling direct can't get away from the fact that fishing is very popular (as an outdoor and socially distanced activity people can do), the website has a statement saying there is unprecendented demand and delays in deliveries indicating they're doing alot of business. All shops are opening 15/6/2020. Noted a substantial fund holding declaration afew days ago. Google trends showing a massive spike in most fishing related searches recently and in my local park in London never seen so many people fishing. Anyway I'm pretty sure I will take a position in this, as turnaround potential. I know people will say that longer term things will go back to normal but doesn't the stock's popularity/price going up at least for some time. What do others think ?

Momoko Miyamoto

I sold out of Angling Direct (LON:ANG) once the price recovered to near pre-covid levels. The company is barely profitable and I doubt people will splash out on the higher margin high end equipment in the current climate. Also the imported Japanese kit is likely to cost more, again hitting margins.

Small Cap Value Report (Wed 3 June 2020) - Re-opening, Zoom, FORT, ANG, VTU

The Re-opening Trade

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Paul Scott

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