Small Cap Value Report (Wed 4 May 2022) - WYN, JOUL, MPAC

4th May '22 by Paul Scott

97 comments 11635 reads

Good morning, it's Paul & Jack with you today.

Agenda -

Paul's section:

Joules (LON:JOUL) (I hold) - yet another profit warning, from this very disappointing share. The CEO is leaving, probably a good thing - I think it needs a more hard-nosed rag trader to sort out the basics here, and strip out bloated overheads. Net debt is under control. I'm obviously frustrated with poor performance at Joules, from self-inflicted wounds. But with a tiny market cap, this could multibag on a recovery, or bidding interest.

Jack's section:

Wynnstay (LON:WYN) - I hold - ongoing conflict in Ukraine and the disruption of supplies from Russia means Glasson Grains continues to experience substantial one-off gains. As a result, FY22 profit should be ahead of expectations. These conditions won’t persist forever though, and the stock is close to all time highs, so valuation is a consideration.

Mpac (LON:MPAC) - increasing operational challenges due to macro conditions, but trading is in line and the prospects pipeline is ‘significantly above the previous year’. Longer term prospects remain positive. The shares spiked down recently before recovering, so perhaps one to watch in case something similar happens again.

Explanatory notes -

A quick reminder that we don’t recommend any stocks. We aim to review trading updates & results of the day and offer our opinions on them as possible candidates for further research if they interest you. Our opinions will sometimes turn out to be right, and sometimes wrong, because it's anybody's guess what direction market sentiment will take & nobody can predict the future with certainty. We are analysing the company fundamentals, not trying to predict market sentiment.

We stick to companies that have issued news on the day, with market caps up to about £700m. We avoid the smallest, and most speculative companies, and also avoid a few specialist sectors (e.g. natural resources, pharma/biotech).

A key assumption is that readers DYOR (do your own research), and make your own investment decisions. Reader comments are welcomed - please be civil, rational, and include the company name/ticker, otherwise people won't necessarily know what company you are referring to.

Paul’s Section:

Joules (LON:JOUL) (I hold)

36p (down 33% at 08:20)

Market cap £41m

Board, Strategic & Trading Update (profit warning)

This must be the third profit warning in the last…

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Year ended Year ended 31 December 31 December 2021 2020 GBP000 GBP000 Revenue from continuing operations 75,219 67,259 Adjusted EBITDA* from continuing operations 28,946 26,089 Operating profit 20,074 16,386 Profit after tax for the financial period 15,540 13,020 Net cash inflow from operating activities 23,589 22,255 Net funds 16,509 7,672 Total interim and final dividends paid 9,869 19,442 (pence) (pence) Basic earnings per share 36.85 30.87 Interim and final dividends paid per share 23.40 46.10 Proposed final dividend per share 12.50 11.50

MichaelFBS

4th May '22

No worries Harry. Damage has been done. I am just trying to decide whether to halve my exposure now. It is a difficult one but at now just 3.4% of portfolio (from about 12%) it hardly seems worth it but I was saying this when they were double where they are now.

Funny old world. Their revenue is 10x what it was when I first invested in November 2015, cost of sales 10x, operating profit 9x, post tax profit 7.5x.

Share price back in February 2016 I bought some at 44.35p. Today I could buy them at 70p.

Sometimes I do wander whether I really know what I am doing or if I am the patsy at the table.

And before people chime in - yes I am pivoting away from small caps; come two years half the portfolio will be in Berkshire and teh S&P.

Regards

Michael.

cmpeckham

Yes, until the last few days, my investments in warehouses have done very well e.g. Tritax Big Box Reit (LON:BBOX) . Perhaps the market is remembering that these are cyclical assets too.

colin1862

Andrews Sykes (LON:ASY) reported today - figures appear good and no sign of share dilution. Spread is 'challenging'. SVCR last talked about in 2018 - time for a refresher?

timarr

Less than 10% free float, held by a family trust controlled by Andrew Murray who is, I believe, 102 years old. Quite why it's listed is a mystery but the family could take it private whenever they wanted at no premium so probably not worth spending time on.

RE: Luceco (LON:LUCE)

Yes but the downgrade only relates to this year's profit - when you buy a share you have a stake in all of the company's future earnings stretching into eternity. Unless you think profits are going to be permanently 30% lower then the fall looks overdone.

Well I've been doing this investing lark for forty years now, so I do recognise that. I'm merely pointing out why it's fallen as much as it has, not agreeing with the rationale, or lack of, behind it.

But on that reasoning a profit warning would never result in a share price fall unless it was somehow a permanent thing. As we know people don't think like that, they tend to extrapolate recent events indefinitely into the future, rather than assessing whether these are one-offs or not.

Human nature, and all that jazz.

Re Andrews Sykes (LON:ASY) - fair point but we could do with more 102 year olds planning for the future like him

Nanotrader09

Exactly what I did with Luceco (LON:LUCE) this morning. I held as I try to trade on news not noise, the news was good so far but the SP continued down and I ignored (to my peril). Today the news was bad so got out. Obviously a stop loss would have been better than the 50% hit I took in the end. Hindsight.....

The Phoenix

Thanks for the reply I'm just thinking though who is going to buy them on the open market ? I would have thought the Chinese will be reluctant given how Russian external assets were frozen at the start of the war in Ukraine and Europe is struggling with its own issues.

I'm also thinking that inflation started with all the covid bail outs ultimately paid for by central banks buying most of the bonds to fund it all and then all the excess money rather than ending up in assets as in 08/09 hit main street which when you add in supply chain problems and the war led to where we are now.

Except it already fell 30% in anticipation of the problem - a characteristic that we are seeing all over the market this year - sell the rumour and sell the news!

Maybe, but not necessarily. We're seeing PE compression across markets where shares are being derated on the basis that future growth won't be worth as much as investors thought it would be previously, due to a combination of inflation, interest rate and recession concerns. So it's possible the previous fall was simply in line with the market and this is an additional hit on top.

We're seeing this across the board with previously highly rated stocks seeing their prices compressed due to reduced expectations about the value of future growth, even though they haven't warned at all.

I know these aren't comparable to Luceco but things like Dechra Pharmaceuticals (LON:DPH) (down 36%, current forecast PE 28), Genus (LON:GNS) (down 60%, current forecast PE 26) and Halma (LON:HLMA) (down 24%, current forecast PE 34) have suffered despite their perceived quality and are arguably still not cheap. Plenty of others out there. When larger cap quality companies like these get derated we can expect the fallout further down to be quite nasty.

I do think Luceco (LON:LUCE) looks interesting at this level, but I wouldn't be surprised if there was another warning as DIY growth slows dramatically this year.

Lennart

Joules.

I bought a shirt from Joules just to test the product. It was expensive and had a very "agricultural" feel to it. A luxury price for a very ordinary product. Needless to say I did not proceed to buy the shares.

RutlandRam

I agree Bouden.

Having held and got to know both over the last couple of years its strikes me that one is a fundementally good, pretty well managed business having some short term issues which I believe they are capable of dealing with. Where patience over the next year should pay off if buying at current prices.

Whereas the other is not and does not have the capability in house to deal with the problems they face, if they even recognise what those problems are. The best hope here, in my view, by whatever vehicle, is that the full board of directors is thrown out , replaced by properly qualified and experienced operators and the business is turned around over the next 3 or 4 years and sold on.

davidjhill

Inflation didn't start from covid bailouts at all. Inflation started as a supply side problem driven by the chaos caused by covid and lockdowns on freight and subsequent lower supply of components and goods. It was then exacerbated by the Russian invasion as this drove commodities significantly higher, pushing electricity & gas prices up significantly. It was then further compounded by a lack of workers who were either off with covid, left the jobs market or in the UKs case no longer here (post Brexit).

peterthegreat

Just to add to recent posts about sustainable energy related funds, I recently noted some interesting comments from (perhaps) an unexpected source as Peter Spiller of Capital Gearing Trust fame explained on Citywire why he had invested in a large number of such funds. His reasons include many of the funds benefitting from rising inflation. Admittedly too late, but yesterday Ripple Energy closed their innovative share offer enabling the public to finance the building of a wind farm expected to start operating in 2023, qualifying them for discounts on electricity bills. The value of the discount depends on the value of the electricity produced by the wind farm over its expected 25 year life.

Right now the problem in Small Caps is retail nervousness. As people have commented it is a case of sell the rumour and sell the news, irrespective of whether the news is good or not. Any selling leads to other nervous holders selling, triggering 5%+ declines on nothing. Rumours cause share prices to move and if refuted/false will rebound initially only to quickly get sold back down to similar levels as if the rumour was true. In-line or good news is met with indifference. Volumes moving the shares are generally light. Lots of small to medium cap UK shares are now priced on 3 or 4 times earnings even those with net cash. Clearly mis-priced as a real business but that just doesn't matter.

Investors are not really valuing business profits into the future at the moment. They are just assuming inflation and any income squeeze is permanent. We are in the opposite investing climate of "climbing the wall of worry".

Fundamentally commodity stocks are the only gainers. It's where any hot money has gone.

What turns this around I don't know. If the Fed tightens the market worries they've overdone it and recession is round the corner. If they don't the market worries about inflation. So there is no obvious catalyst there either.

Revs8

Good to see the volume of comments is up. I hope it’s a sign that things might turn around.

My broker AJ Bell pulled a binder today. Ive been out all day so I put in a limit buy order on Somero Enterprises Inc (LON:SOM) at 416p and they secured the transaction at 408.8p

Looking back on the day’s trading, that price was the lowest of the day and has since recovered to 420p (The bottom of the rising channel).

Thought I’d just praise a good deal from my broker as we are all quick to comment when we think they have dove a bad job.

PS There are quite a few quality shares trading at the bottom of rising channels with the RSI also at rock bottom so it would take serious bad news to take them lower. I’m buying those shares. Somero Enterprises Inc (LON:SOM) Redrow (LON:RDW) Barclays (LON:BARC)

ken mitchell

I sold at long last today, which might well mean there will be an immediate and sustained good run for the share! Should have sold ages ago instead of adding more.

Shein didn’t even get a mention. What else has been conveniently omitted?

This might well be the bottom but a share sold can always be bought back again. There are so many quality small company shares that have seen big share price falls even after excellent updates, that perhaps offer more upside and less risk of yet more disappointments as is the risk still with BOO.

And yet, it is when all hope is lost and there seems no way out, that the bottom is reached.

Im not sure we are there yet but I do know we’ll only realise the bottom long after it has passed.

BnB

Maybe, but not necessarily. We're seeing PE compression across markets where shares are being derated on the basis that future growth won't be worth as much

And, as an out and out growth investor, don't I know it.

But Luceco had already fallen 60% before today's 30% slump, following decent TUs. Of course the price had got toppy at ATHs but this is still a profitable company, with industry leading ROICs and margins, whose PER did not exceed 20x at the peak, as I recall. It's hardly comparable to Halma because it was still less than half the multiple at its ATH. Inflation/Fed is of course a contributing factor but I put the greater part of the moves down to extreme nervousness on the part of investors and I'll just stay patient with my very small, now smaller, position. I only take this view because management assures us that "all input cost inflation will be fully offset by selling price increases" - a sign of a decent moat and quality company which offers some hope of a reversal when inventories are run down. Normally I would sell on a warning this severe.

Paul2148

the gyms are in the Processing Centres, less posties jumping in and out and more stood at a machine all day.

Pretty well equipped and very cheap from what I recall.

stocksPP

Couldn’t disagree anymore. The above sounds like the rhetoric provided by the FED, governments and media. QE especially in the US and it’s method of dispersion has created this inflationary bubble. Inflation runs hand in hand with a loose economic policy.

Small Cap Value Report (Wed 4 May 2022) - WYN, JOUL, MPAC

Paul’s Section:

Joules (LON:JOUL) (I hold)

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Paul Scott

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