Small Cap Value Report (Wed 3 March 2021) - Budget Day, NXR, GETB, SNWS

3rd Mar '21 by Paul Scott

77 comments 16590 reads

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

Budget Day today, so I'll be focused on that from lunchtime.

I've also got Hotel Chocolat (LON:HOTC) to finish off from yesterday, and 5 more companies reporting today that I want to look at (Norcros, Getbusy first, then Smiths, Cambria Autos and Barkby, if there's time). That's the plan, so I'll get cracking now!

Agenda -

Norcros (LON:NXR) - positive trading update, with guidance raised 12% for FY 03/2021. Looks good.

Getbusy (LON:GETB) - FY 12/2020 Final results. An interesting software business, with 1 highly profitable product, which subsidises 2 newer, loss-making products.

Smiths News (LON:SNWS) - Deep value share. In line trading. Looks very cheap, but has a weak balance sheet.

Norcros (LON:NXR)

235p (pre market open) - market cap £190m

Trading Update

Norcros plc ("Norcros" or the "Group"), a market leading supplier of high quality and innovative bathroom and kitchen products, is today providing a trading update for the ten month period ended 7 February 2021.

A positive update here, ahead of expectations -

Norcros continues to win share in its two main geographical markets, reflecting the Group's strong competitive and financial position. The Board remains confident that the Group's leading market positions, established brands, broad distribution channels and experienced management team will deliver further growth, notwithstanding that economic conditions are likely to remain uncertain as our main markets continue to adjust to the impact of the pandemic.

Consequently, it is now expected that reported underlying profit for the year to 31 March 2021 will be no less than £28m on a post-IFRS 16 basis and ahead of current market expectations of circa £25m.

That’s presented in a very clear way, giving us both profit guidance, and the figure for market expectations. It’s so simple, why can’t everyone report like this?

Revenues - Norcros was already reporting an improving trend, with Q2 (July, Aug, Sept) already up on LY on a constant currency basis, slightly behind in reported currency (for the South African part of the business).

Q3 (Oct, Nov, Dec) and the first month of Q4 (Jan) combined saw group revenues up much more strongly, at +114% reported and +117% at constant currency versus LY.

10 month YTD figures are now down 8% on LY, reported,…

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MichaelFBS

3rd Mar '21

Thx Peterg.

Racer70

This isn't advfn

Thornabian

The 'super deduction' (130% tax credit for capex) in the budget is really interesting and I wonder who will be the big gainers?

"In aggregate, the UK’s non-financial companies have been been building their cash holdings steadily since 2009-10—from 15% of GDP in that year to nearly 25% today.

The pandemic is unlike previous recessions in one key way. In all the past four recessions, firms have drawn down their cash buffers by an average of around £40 billion in current prices. In stark contrast, money holdings have increased in the four quarters since the onset of Covid-19 by around £118 billion.” - Resolution Foundation.

Not sure how much of the following will be UK based capex but to name a few companies and rough numbers of those which have relatively high capex:

BT up 7% on the news today and have a capex bill of over £4bn (total) per year. (has quite a big pension deficit)

Rolls Royce £700mio (total) capex, share price barely moved.

BAE £500mio (total) capex, share price didn't move. (has quite a big pension deficit)

IAG net capex c. £1bn (total), share price up 7% today.

THG has over £1bn (total) of capex expected, share price didn't move.

CRH over £1bn (total) capex, SP up 2%.

National Grid over £1bn UK capex, SP down 2%.

I've just put this together very quickly so the numbers are very rough and not completely accurate because companies don't usually give regional breakdowns on capex but it would be interesting to see some detailed analysis of this, probably a few companies which will benefit quite considerably.

Bullygig

Thanks for taking the time to reply. I think I may have taken the graphical representations of the stockstyles a little too literally!

Wimbledonsprinter

Agreed. I bought (more) Topps Tiles (LON:TPT) today on the back of the Norcros (LON:NXR) report. Topps last updated the market for the 13 weeks to 26 Dec 2020 (ie upto the current lockdown) with LfL retail sales up almost 20% on same quarter 2019. Norcros today reported UK revenues up 15% in the 4 months to 7 Feb and with the profit upgrade today I think that it is safe to assume that similar growth has continued into the start of March.

It is difficult to see a scenario where Nocros’s UK business is performing well but Topp’s retails business is not. So I have more confidence in a positive next trading update from Topps Tiles (LON:TPT) (due 31 March)

mojomogoz

An area that is perhaps missed in the first flush of analysis on the 130% super deduction is startup and early stage businesses.

There's a lot of PE, VC and angel money sloshing around in the UK. There is a tendency for this to find its way into asset light businesses (SaaS-y) as these business take less capital and VCs etc are happier funding things that asset light. I know there are many incentives around new businesses (tax credit etc) bu nevertheless this is probably net (very) positive at the more capital intense areas (whether exciting or mundane...probably more the latter which is also probably better for general employment)

In addition, vanilla bank lending to industrial activities just became a whole lot more attractive and less risky. Move away from sexy tech/healthcare/ etc related stuff that VC is happy to chase after and into mundane workshop in Hull and this is big news. The bank is important to them as their primary source of meaningful capital.

I can immediately think of two of my holdings that benefit:

Mercia Asset Management (LON:MERC) -> Early stage investor with a decent exposure to capital intensive technology, industrial and medtech businesses. 130% super deduction could have significant revaluation impact on these cos. This is both in their balance sheet investments and their 3rd party fund management portfolios.

K3 Capital (LON:K3C) -> Seems less obvious but this tax change could be a boost to number and value of corporate finance transactions

I'd then add a third very non-sexy:

Time Finance (LON:TIME) -> Asset based lending and small corporate lending is a significant part of their book of business. They are a sort of non-bank bank. Their niche is lending to businesses that are too high risk for the high street lenders. High risk is as much about scale or early stage (but mundane like a builder rather than a PhD activity) as credit risk....they lend in an area where the main banks find it impossible to apply their data based credit process and uneconomical to pay for real eyeballs and shoe leather based assessment.

I read pessimism from timarr re freeports and economic zones as mere shuffling deckchairs on the Titanic as we head into to non-EU oblivion as we are not part of mega economic zone like US, China or EU. The first two are out of reach...and of course we left the latter...but the economies and benefits of scale in the EU are much less than US or China and the complaint is irrelevant IMO...

The issue is what best for us to do. An industrial and investment policy would be a good thing...and this seems a first step. Change is not usually a net neutral economic activity when are talking physical rather than virtual assets. Anyhow, most growth we experience over time is a result of mundane change....but we have a misplaced narrative that its 'innovation'.

I need to read more carefully but my first impression is that this could be impactful. Its likely to attract capital to UK as well...and it tends to want to come here for many structural reasons even if there has been a recent hiatus.

A step I would like to see is the govt enacting policy that more directly liberates the somewhat frozen out bank balance sheets that has happened post 2008 crisis and subsequent austerity and bank capital adequacy reforms. Productivity and growth is linked inexorably to credit growth. We now need a decade of credit growth. I outline how the above will encourage it...I had hoped that the govt would also target credit growth through effectively a credit policy whereby it partially underwrites lending to targeted areas (eg renewables, deprived economic zones, etc).

UK_Investor_8888

What's an advfn?

robino

Getbusy (LON:GETB) Take a closer look at this one.......

The earnings for ye2020 are from their software; Smart vault and Virtual Cabinet - this is specialist software that seems to be aimed at Accountants

They now have Get Busy which can be used by Businesses with Clients - a much larger market.

This type of business is very attractive - no raw materials or processing or transport issues or issues with regulators or etc

The income is sticky - much of their profits are from renewals!

Albertos

Remember as a young, bushy tailed and starry eyed auditor in the early 80's I had a chemical plant as a client. With Regional Development Grants, 100% first year allowances against C Tax and other stuff which I can't remember , the cost of capital investment was negligible .

But, even so, what caused them to "do" capital investment was demand for their products not how cheap it was.

The Government always seems to be on the wrong side of the equation. House building is a classic - this country needs more affordable supply not more demand - yet the distortion continues.

Bring back John Delorean!

Paul Scott

Hi Cleeve,

Spreadex are not opening new positions in the stocks that I want to trade

I'm surprised to hear you say that, because I've been opening lots of new long positions with Spreadex lately, in small caps, with no restrictions.

Also, Spreadex lowered their margin requirements on Saga (LON:SAGA) (I hold) this week, which is such a pity, as I was forced out of my IG SAGA position just days earlier.

I was asked by Spreadex to sign away my regulatory protections on my cash pile held with them last week, which I agreed to, because I know and trust the management, who are very conservative, and have strong financial backing, and a superb track record (they were bulletproof in 2008-9 financial crisis, as billionaire deep-pocketed shareholders provided liquidity when needed).

Spreadex's last accounts show balance sheet, as at 31 May 2020 showed NTAV of £82.4m, and profits of £23.4m (pre-tax) on revenues of £49.1m, so it's financially strong.

I'm told that Spreadex hedge some of their client positions via IG, but have relationships with other brokers too.

In summary therefore, for my account anyway, it's been completely business as normal with Spreadex. But my account is classified as professional, and I've signed away my rights over my cash pile. That makes it a more profitable account, and means Spreadex can use my cash within their pooled capital.

I've approached them, and asked if Spreadex want to do another interview with me, to discuss these topics, as there seem to be different experiences for different people at the moment.

Regards, Paul.

Cleeve

Hi thanks not tried city of london is it a broker?

Hi Pete

tried them but spent ages holding only to be told by an automated service that my call could not be taken maybe there is a gap in the market here

Hi Paul

Thanks for your thoughts - Spreadex would insist on me losing all protection as well however I mentioned 4 stocks to them and they said that I had no chance of opening positions in any of them with or without the protection. They are not stocks which will pass your tests I fear but maybe you could ask if you could open a position in #AAA or #DEV or even #ASLR would be most interested in your findings. Thanks Steve

Did you see that recent documentary about him? It was fascinating! Highly recommended for anyone who hasn't seen it.

Mulberry

4th Mar '21

Not in supermarkets. Hotel Chocolat (LON:HOTC) has two main strengths: its multi channel online depth, and its exposure to US and Japan (tiny, but hard to break into). Its financials are perplexing. Constantly low margins and never seems to achieve its potential. They are behind on the ethical side of cocoa sourcing, no matter how hard they talk about "happy cocoa farmers" etc. The chocolate itself is really not special. It's mostly made from Ghanaian "bulk" cocoa, ie standard beans. It's the chocolate equivalent of "supermarket wine" in that you can't tell anything about the grower or the grape variety. There are many handmade english artisan brands which make truly world class chocolate. Look at www.duffyschocolate.co.uk for example. Twice the price, but many times better. Once you taste bean-to-bar chocolate, it's hard to go back to industrial chocolate like Hotel Choc.

Hello, are you going to have time to do Hotel Chocolat (LON:HOTC)? It's a unique company, but intriguingly and consistently unprofitable for its reach and size.

TheArb

5th Mar '21

although Howdens is trade only.

8th Mar '21

I did. Fascinating story of Government folly and desperation policy. Governments love a "white knight" riding in offering jobs and enterprise.

Ken Peare

10th Mar '21

if it wasn’t for the Newspaper declines this could be a very interesting . 55% market share and 24,000 customers 7 days a week plus nighttime collation of products represents a substantial moat. The PER is exceptionally low and the price to cash flow is modest. A number of relatively new appointments to the Board have taken place and some of them look very relevant.

It is not a complex business .

Key Questions - will independent retailers continue to decline - at what level?

Similarly will the newspaper continue to decline

What could a very valuable distribution be used for in the future ie can they replace papers with toys etc.

I think it could be very interesting

Small Cap Value Report (Wed 3 March 2021) - Budget day, NXR, GETB, SNWS

Norcros (LON:NXR)

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Paul Scott

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