Small Cap Value Report (Wed 30 Sept 2020) - BOO, AIR, TAST, TPT, BWNG, PRES, STU

30th Sep '20 by Paul Scott

140 comments 16523 reads

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

Many thanks to Jack for covering yesterday.

There are loads of results out today, presumably to meet the 6 month deadline for 31 March period ends?

Timings - mostly done by 1pm official finish time.
Update at 14:18 - there's lots more to cover, so I'll probably be carrying on until about 6pm.
Update at 17:39 - today's report is now finished.

Agenda

Boohoo (LON:BOO) - interim results - my favourite share, and one which many readers hold, so despite not being a small cap, I'll look at this, as usual. I think we can do a victory lap, and push the noses of the shorters into their mess! :-)

Topps Tiles (LON:TPT) - trading update

N Brown (LON:BWNG) - trading update

Air Partner (LON:AIR) - half year results to 31 July 2020

Pressure Technologies (LON:PRES) - Major contracts & trading update

Plus anything else that there's time for & looks interesting. Please remember I cannot cover everything, and dull things like in line with expectations updates, don't really add any value. I'm looking for unusually good or bad things, where we can make some money, or avoid losses.

Buy the dip, or sell the rally?

A strategy of buying the dip, has worked incredibly well for many years now. I think it's one of the reasons that the market rally from the March lows this year seemed to get out of hand in the USA. As we know, the US market tends to set the tone & the direction for UK markets too.

As mentioned at the time, I hedged my portfolio back in Jan 2020 with some large shorts on US indices. It was a bumpy ride, but thankfully that worked very well, with profits from the shorts more than offsetting the heavy losses on my UK small cap shares. Sometimes people asked me why I blindly held onto things like Revolution Bars (LON:RBG) and French Connection (LON:FCCN) whilst they dropped 90% or more. The answer is because I'd hedged the positions, and that was the strategy I planned. Although, with hindsight, I didn't realise how bad the losses would be, and obviously it would have made sense to ditch them, but never mind. Both…

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Paul Scott

30th Sep '20

How kind, thank you Phil!

It's just me & Jack now, as Graham moved on to concentrate on his own website, after several years sterling service here!

rmillaree

Boohoo (LON:BOO)

Abtan

Provision for Liabilities is presumably for returns (longer returns policy)

Per the last annual report provisions for liabilities was primarily returns but alos included dilapidations provision (£4mill last annual report)

It was explicitly confirmed in announcement today that returns provisons are higher

Returns provisions are higher due to the longer time we are giving customers to return product and the longer time it is taking to receive returns, especially from overseas.

Accruals is for....inventory?

they confirmed the following in the announcment today.

with high levels of trading activity driving increases in returns provisions and payables and accruals for inventory and goods in transit.

Accruals will likely also have other random odds and sods inluded.

In some respects an increase in provisions and accruals is somewhat pleasing - these provisions reduce profits so the fact that they are in at a high "warts and all" total suggests they are not pimping the numbers to flatter the profits. It tends to be the provisions entries on the accounts that are most easily manipulated if they were wanting to flatter the numbers for whatever reason. a bit of expalined natural variability is fine by me. Thats total idle speculation on my part in that regard.

Trade payables is for factory owners?

i would guess its primarily for stock.

From memory (its a while since i sold out of boohoo sighhhhh) i always thought that the Boohoo accounts and balance sheet were much more pleasant reading than ASOS reports - that suggested that they had nice tight ship. I know asos have materially higher sales but there stock is over £500 mill per last annual report - so guessing comparatives will still be favourable for boohoo.

Tortoise investor

Really helpful commentary from Paul and others today on Air Partner (LON:AIR) - thank you. I was probably overly bullish on the balance sheet and going through the numbers too fast this morning so really helpful commentary on that. I'm probably still going to hold in the short-term because of my working assumption of a difficult second wave and the potential benefit to freight, but it is tricky to value this share.

Dogon

Hi Michael,

There's a small TED talk here: https://www.youtube.com/watch?v=Z5KZhm19EO0

He's also written a book - Grow The Pie - see a couple of sample reviews here:

I do not know whether capitalism is in crisis. But I do know Alex Edmans’ superb book makes the case, compellingly and comprehensively, for a radical rethink of how companies operate and indeed why they exist. It is the definitive account of the analytical case for responsible business, but is at the same time practical and grounded in real business experience. It is a tour de force.
Andy Haldane, Chief Economist, Bank of England

Politicians are calling for large companies to be regulated or split up. In this compelling book Alex Edmans argues that there is indeed a problem with corporate behavior but that the solution may be simpler: change corporate purpose so that companies focus on growing the pie rather than grabbing more of it. Edmans’s arguments are a powerful and persuasive antidote to much of the conventional wisdom about the corporate world.
Oliver Hart, 2016 Nobel Laureate in Economics

mojomogoz

I see it got a bit fraught about Orangeman in here today with a covert Russian operative shutdown. Well he's going to win the election...all that happened last night was that Biden didn't blow it all at once. The positive reception for Biden is a lot that he wasn't as weak as feared. But his head is now above the parapet and has got to stay there with The Donald on a relentless Biden hunt with his magic 47. Time for us in the UK to pucker up...

https://medium.com/@mojomogoz/...

I know you'll disagree with me...but hey...I was feeling discordant as wanted to post re a stock that reported today and got very low attention so on to the main thing...

What if I said you can have 14% 3yr sales cagr, mid 40s op margin, p/e less than 7 and dividend yield above 7....high quality, with good growth and very low valuation. Jeez-Louise! Too good to be true?...

Well yes it is...if you believe that being in the financial sector doing something fairly traditional rather than whizzbang is a reason to shun something. Clearly a lot of people think this.

S&u (LON:SUS) reported interims today. Its primary business is hire purchase on used car purchases for non prime borrowers (up to £15k loan with c.£6k typical, typical c.17% flat rate or c.35% APR). It also has an organically developing property bridging loan business too (retail and typically c.£450k I believe from memory). Both types of lending are asset backed providing useful recourse.

Today's interims show that business stayed 100% operational during covid and traded successfully (although clearly there was a big reduction in new business for period).

Dividend continues to be paid but was cut by a 1/3 at moment (I guess that will be temporary). EPS for half year are down 2/3 but that is entirely driven by prospective provisioning for any loan problems coming out of Covid...this is much much worse than performance to date but is prudent. Cash flows were strong although there was a £9m reduction due to payment holidays granted (FCA mandated that these be offered so at peak they had 25% of clients on them).

Loan performance continues to be good. Lending is back to 80% of what it was pre Covid. It could have exceeded 100% based on demand but the company has tightened lending standards and move closer to prime being cautious to assess ongoing conditions. Collateral for loans has effectively strengthened with second hand car values up c.14% as supply struggles to keep with demand. Perhaps, most interestingly is that demand is particularly strong for sub £5k vehicles and over 7 years old (supposedly some people looking for 2nd and 3rd vehicles to avoid public transport and lower income people looking for a personal travel option too). This reduces some risk from lowest quality borrowers particularly where their loans have aged a couple of years (NB a new loan is higher risk as depreciation of vehicle will initially be quicker than the recoup from flat interest rate but then the latter years of the loan become very profitable as principal is worked down and the collateral value of vehicle remains...which now has a stronger market for it too).

And the future is much brighter. Some less well run lenders (there's always a lot of them) will either close or wind back business. High St banks and mainstream dealer finance will narrow its definition of prime customer so pushing higher quality than normal customer to S&U.

What about their debt? Well if you look at it correctly for this type of business you see that debt level is really low. They have retained and growing cash that they effectively continuously recycle into more loans (after paying fairly chunky dividends too). Its hard to exactly pin down due to the way that principal runs down but interest payment stay flat but gross receivables (which is an amount inc discounted interest payments minus adjustment for expected credit losses) are c.£280m with £108m of debt against that figure. Off balance sheet there is effectively an asset which is all the cars they have lent against (ownership transfers at end of hire purchase upon payment of transfer fee...c.£200 I think)...in last 3 years they've advance c.£420m (they'll have loans up to 5 years but using 3 as a proxy for some short term loans and/or early payback etc to be conservative about 'off balance sheet collateral')....anyway, its a long winded way to say that S&U are running a considerable float that provides both risk buffer and increases margin (plus ensures their funding is at low interest too).

This is what high quality durable franchise looks like...but everyone just hates it right now. S&U is perhaps one of the easiest high return options in the market right now...unless you think we are headed for a depression (....but then you should worry about ratings on some more glamorous names and S&U probably carves out solid business in harder times too and takes market share). You get a non distressed and high quality company at distressed type pricing. TBH it struggled to get above 12x earnings in past 5 years despite performing well...I think that's clearly sector dislike. Capital cycles turn and the love moves...

You're welcome.

abtan

Thanks for taking the time to respond.

I guess my main question is what's the difference between Trade Payables and Accruals here? I did check the report today and the last annual report and I didn't think it was very clear.

I think Trade Payables are invoices that Boohoo (LON:BOO) has received, but not yet paid, whereas accruals are (mainly) invoices that haven't been received yet, but which the company is, well , accruing for. They are essentially for the same thing, but are confusingly separated for clarity.

Does that sound right?

If others agree, then that's fine I guess, but it seems an overly complicated way to split out inventory costs on the balance.

Thanks for taking the time to respond Paul.

I agree, there doesn't seem to be anything untoward in today's accounts (other than the lack of splitting out by brands, which I liked).

I'll hopefully get a chance to listen to the call later.

Cheers

Zipmanpeter

Paul, FYI, I wrote in 3 questions for Portmeirion (LON:PMP) before for the InvestorMeetCompany webinar and heard all 3 asked - even my tetchy plea for why they did not simply use some simple tables in the trading release instead of or to accompany words that I'd only hoped would be read!!

InvestorMeetCompany looks a great free service for private investors to connect with companies and I promised to say so on here!

FWIW, I also hold PMP and thought the strategy update useful and more focused than in the past eg focus on online sales and 2-3 new 'big markets' from ROW to add to US/UK and Korea. Not rocket science but then again selling crockery isn't either. I also liked the simple pictures showing where the CAPEX was going reassuring. I hasd worried they were being sucked into a hand sanitiser bubble.

I think the business is tailor made for personalised sales and online collections in the long term and could easily double in next 2-3 years (where it would still be below its peak,

GrahamF

ESG will mean different things to different people. In some ways it is about trends rather than compliance.

Consider, which is better a company that sets a target for reducing its emissions of volatile organic carbons by 20% per unit of production in five years’ time and achieves a 17% reduction, or one that set a target of 10% reduction but achieved 12%? The first did not comply because it missed its targets but it achieved a greater reduction than the second. But then again perhaps the second company had already made big reductions when it set the lower target.

Then of course you have have to consider the various different aspects of sustainability - carbon footprint, water footprint, waste production, use of plastics, VOCs and so it goes on.

If you want to see which companies are generally considered to be heading in the right direction then look to the members of the Dow Jones Sustainability Index and the FTSE4Good Index.

These indexes are far from perfect but they do go some way towards being a standard for quoted companies.

However, many people seem to confuse sustainability in terms of a company’s own performance with the world of companies that deliver products that have a positive impact on the environment in the sense of renewable energy production and so on, which is a different kettle of fish altogether.

Yes you are 100% correct in your assumption - I don't think there is anything particularly confusing here - other than the fact its the sum of the two parts that matters so as you need to add the two together an extra calculation is there that you probably feel is more harm than good. It's very standard procedure though to have payables per billed invoice and separate accruals total being expenses that relate to the year but not billed (eg accountancy fees - last months energy bills if paid month in arrears etc etc) . It's certainly not a boohoo oddity that they have payables and accruals having both is the norm - albeit their accruals total is higher than the average bear booboo.

Rhodie Jonners

I’ve looked at this share previously and the only thing that put me off investing was the 17% free float. The rest is owned by the directors and a Jewish faith charity. You might be entirely happy with this and I am all in favour of the directors having aligned interests with private investors, but I felt in this instance, the balance of alignment was far too skewed in favour of the directors.

I certainly don't remember splitting out accruals from invoiced payables when I was making postings, especially when they related to the same thing - the liabilities just went into the same pot.

In any case, I think we agree that it's probably no big deal.

Thanks for your assistance.

JohnEustace

Biden did say that but the generals said they would have nothing to do with it and would leave the situation to the politicians to sort out.

Minds Machines (LON:MMX) (I hold)

Thanks for your thoughts on this Effortless Cool.

I agree with everything you have said; this is a simple, highly cash generative business, with what appears to be relatively stable recurring revenues.

If there was any downside, it looks as thought revenue/domain is slightly lower this year ($6.18 H1 FY20 vs $6.53 FY FY19), but I find that hard to believe this is correct given the majority of revenue is from renewals, where the company can presumably charge slightly higher amounts.

It might perhaps be all the funnies in the accounts last year skewing my workings, but this is only a minor issue and it is clear that risk in this tiddler looks quite low, with reasonable upside through the acquisition of more TLDs and new products.

OldSchool05

thanks for this; one of my bigger holdings and has been a great source of dividends for me over recent years. Reinvested them.

They are doing a presentation on investormeetcompany on Friday morning and I personally find a good sense of alignment with the director - shareholders. Listed and run by the same people for many years. Sleep at night investment for me because they run a tight and focussed ship.

This is one which Maynard Paton follows on his excellent blogs; difficult for me to add much over what he and you have said

Phil O.

Mexican generals could be cool with plumed hats? - bit camp. Take him to a door in a big wall and leave him outside..anyway I digress. apologies

1st Oct '20

Free float is a bit higher but yes a Jewish charity is biggest outside holder at near 20% and then the Coombs family own north of 40% so I make it getting into the high 30s in terms of other shareholders. But it tends to be a very steady and loyal base it seems.

Coombs family have owned the antecedent businesses since 1938 - started as store in Midlands, expanded into a bit of related manufacturing, listed LSE 1961, move into home credit in 1975 (around the time of liberalisation of credit which actually started with Labour govts before Thatcher), founded Advantage Finance in 1999 (now main business non prime car finance), sold home credit in 2015 to Non-standard Finance (LON:NSF) for £82.5m (NSF have been writing off goodwill since) and started Aspen Bridging Finance in 2017 (growing it slowly but successfully).

This looks like v good long duration stewardship that benefits from the family's oversight, strategic abilities and steadiness of leadership. They have made a few but very good shifts over time. Don't sprint, stay on focus, look for high margin business. The move out of home credit was particularly adept as it seemed to see the regulatory stresses coming. That said home credit is the highest quality part of the NSF business (and probably no coincidence that the new CFO who has been busy tidying up the balance sheet comes from that part of the business) and has buy and large avoided regulatory opprobrium.

The twins that run it now are 67 so there will be some transition at some point in future and this may loosen up some shares.

What do you reckon? If S&U were a tech business or niche manufacturer people would look on the founder involvement and stewardship more positively...alignment etc...

The price for this stable very high quality biz is silly. The future has just got brighter for it to (harder times create growth opp).

Agreed. I'm a johnny come lately shareholder though only building my position in the last few months so I missed out on the good stuff earlier on...but today it seems Mr Market wants to give me a chance at redemption...

PS the company have certaintly been very accommodating in answering my questions. Some of them were reasonably involved and they gave quite specific answers rather than generalised handwaving that comes from others (looking at you PCF...see comment in 1 Oct SCVR). They seem to value shareholders...

Small Cap Value Report (Wed 30 Sept 2020) - BOO, AIR, TAST, TPT, BWNG, PRES, STU

Agenda

Buy the dip, or sell the rally?

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Paul Scott

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