Small Cap Value Report (Wed 5 April 2023) - NTBR, DFCH, LOOK, SDY, FRAN, DLAR, TPT

5th Apr '23 by Graham Neary

48 comments 6580 reads

Good morning from Roland and Graham!

Today's report is now finished (10.30am). See you tomorrow!

Other companies reporting today -

Hilton Foods (HFG) - FY results/CEO £622m
Airea (AIEA) - FY results £15m

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.

Graham's Section

Northern Bear (LON:NTBR)

Share price: 37p (pre-market)
Market cap: £7m

I covered this building services group in some detail at its full-year results last year. Unfortunately the share price has gone backwards since then, and it’s now below our £10m cut-off. So I’ll try to keep these comments brief.

I do still want to cover this one though, because it has shown signs in the past of being a better-than-average micro-cap. However, in recent years it has written down the goodwill associated with some acquisitions, and this has impacted its official results:

KaloLWTDhacjfL3mVm5qXOa6XInbkLwcHOvrwtRuKHulNVLJIqemOXvxwL8ZL9GdKa1YXdTfTp58wkYbSTRDsLhErE6mt8_p0xH1_LNFHXCrvXWx4B0vn1_Ld4SM8JI7lYx6F9p0Lf4jjgDdQ2B4azg

Since 2020, Northern Bear’s Chairman has been the Canadian investor Jeff Baryshnik, who has a 25% stake in the company.

When the company declined to pay a dividend last year, and said that it was studying larger acquisitions than it had made before, I assumed that Mr. Baryshnik had aggressive plans for the business. But today’s update strikes a different tone:

After a review of strategy and dividend policy, the Board is pleased to report that the Group will pursue a…

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Albm7

5th Apr '23

Just an fyi Cazoo (NYQ:CZOO) does have 7 service centres dotted around the country. I own Lookers (LON:LOOK)

Paul Scott

Thanks Mark!

I had a quick look at Airea results first thing, and my very brief notes are -

£16m market cap (pre market open), a 3-year high (recent surge). 3.36p EPS, but note the low tax charge which boosts this figure somewhat. £4.0m investment property, generating rental income, so if you adjust it out, remember to also adjust out that income. Nice balance sheet. Pension deficit of £1.3m on an accounting basis, need to check actuarial & overpayments (if any).

My conclusion - seems OK, probably priced about right.

I'm trying to avoid getting sucked into new positions in tiny, illiquid, wide spread type shares.

ChrisW

And Bill Currie has sold about 1.9m shares since Nov if my sums are correct.

He bought about 3.5% of Sosander in Feb.

Just FYI

Michael Tee

Franchise Brands (LON:FRAN)

Hi Graham

Thanks for your write-up which paints the picture well.

I have held FRAN shares since end 2019. Management and the share price have done very well since then. I think the shares have been highly rated in part because management hold a lot of shares - both number of shares and also number of directors with large holdings. With 17% each, shareholders Helmsley and Wray are experts in operating a franchise model and also very experienced. They enjoyed tremendous success with Dominos Pizza, have done very well with FRAN to date and the Filta acquisition last year has done exceptionally well.

As with all acquisitions, especially large ones such as Hydraulic Authority I Limited' there are risks. For me this one boils down to your perception of management. With the track record I have described, large shareholdings and also participation in the placing, I will continue to back them.

Fulham Shore (LON:FUL) I own but at a higher price than take over - Is that not the conundrum we face with smaller companies, I look for companies where management have skin in the game but then they can do this to smaller shareholders. I have had it with Talktalk Telecom (LON:TALK^C21) and we saw an attempt by ME International (LON:MEGP) to try a low ball bid. Maybe too much skin in the game is a risk too?

The Boon Fund

That's the downside of being a small shareholder I'm afraid. Only participating in share price gains and dividends. But no say or sway in strategic decisions.

On the other hand, easy to buy in and out as you please. Albeit, you give up this benefit, if you're a "coffee can" type investor.

Tommy H

Hi Whatmore1951

Income is very important with respect to my mum's portfolio (pension/life savings held in ISA form).

I would concur that there has been a big sell off in many areas over the last few months, especially around the various REIT holdings, with concerns about asset values at book and what they may decline to, and also about the overall leverage used by some of them and what the term and what revised interest rates mean for each business and the longer term business model for some.

In a simple world you would say recycling profits to pay down debt given the changed nature of interest rates in the last 18 months, or to invest in additional assets for future profits, but with the REIT structure there is obviously a payout requirement.

There is also the direction of government forcing owners to improve EPC ratings of existing stock and the capability of market (products, supplies, capabilities), then the cost and disruption for doing these works. You can reinsulate the loft or change all the light fittings in most houses in a day, not so with a warehouse or factory.

Sorry slightly off track. I have been spending more time researching the broader world of income options, after all the Bank of Hunt & Sunak (NS&I) now offer 3.9% monthly, but diversifying with smaller holdings (~1-2%) so accepting the fractional dealing costs, versus a good return for an 80 year old to live her life to the full.

Currently there are only a very few REIT type holdings left in the portfolio such as Ediston Property Investment (LON:EPIC) , mostly as the decline in value has triggered a manual capital protection sell. But I am prepared to buy back in again, as they are good source of income.

With regards to opportunistic investment and purchase, I think we are going to see more of these coming around, there are a lot of companies, and people, who are sat with cash and thinking longer term, so unfortunately a bomb out share price is going to mean things are taken out and as small private investors, we loose another option to us.

Good luck

Tommy

The HestBanker

I preferred the "slow and steady wins the race" approach. Hope the management haven't gotten over confident following the Filta deal and bitten off more than they can chew with this one. Pretty miffed with a 25% fall on one of my biggest holdings but I'll stick with it for the long term given their previous record, keeping a close eye out for any warning signals.

Tommy,

Have a look at Alternative Income REIT (LON:AIRE)

Are going to pay 5.7p dividend (and I suspect a bit more) on a 68p price.

The portfolio has an average lease length of over 17 years with 90% plus linked to inflation but with a cap of about 4%.

There is no research on it and the Stockopedia dividend numbers are wrong.

A hidden gem.

Lucky dip

Fancy this: Market is worried about recession and one of my recession proof share is dropping too!

Not sure what to make of Begbies. It has been touted as a company which benefits from the difficult economic climate. Maybe it has become more aligned with the property market now!

With CGT limits changing next year is there some profit taking going on today, or even bed and ISA'ing?

Silver Moon

Chris, since I have no new cash I'll be bed & Isa-ing later on in the New Tax Year, at least it will help deflect Hunt's attack on potential savers who carry risk and get no reward from lawmakers.

Silver

Metatron

The way Fran management have cut private shareholders out of the placing is shocking but one can see the case for the acquisition.It will fit with their existing drainage business and give them the scope to expand their businesses into 7 'Safe European' countries.Only time will tell if Fran have overpaid but like you willing to trust the management until they make a mistake with acquisitions and continue to hold shares.They go xd next week.

looking at the share price of TUI possibly yes.

In that case we should expect a bounce tomorrow!

BnB

The way Fran management have cut private shareholders out of the placing is shocking

That would be true if shares had quickly spiked from the placing level. But you can buy the shares at a discount to the placing today. So, putting ethics to one side and focusing on expediency, what's the problem?

ridavies

Does anyone here (including Paul Scott?) anticipate additonal (0r a revival of) M&A activity in this sector, with Lookers (LON:LOOK) and a large invested (blocking???) shareholding here with TDR Capital, as also with Pendragon (LON:PDG) (with Hedin taking a 28% share (invested or blocking, as with TDR and Lookers?).

Is PDG really worth approximately half of what the Hedin shareholding took it to in late autumn last year, or again are retail investors really being messed about yet again.

I have to say I blame myself with Pendragon (LON:PDG) because the writing was on the wall when Hedin asked for an extension to the access to the accounts. I believe the board should have said to them at the time, put up or shut up. Did they really expect to get a better offer. On the other hand, it's my own fault. I should have taken the 28/29p and ran. Should've/could've!

davidallen77

Great piece on Lookers Roland many thanks

mojomogoz

Re Distribution Finance Capital Holdings (LON:DFCH) - I like it and business model. But I think its priced quite highly for what's visible and some uncertainty what their non-dilutive growth trajectory is beyond 2-3 years and then what happens re earnings (returned to shareholders or re-invested to expand). My hope is some meaningful cheapening then this is an interesting share...and if you want something similar at a better price...well Time Finance (LON:TIME) is a bargain. I don't believe external finance is an issue and in some respects is 'higher quality' as it means they can focus much more on the credit quality-arbitrage decision for small corporates and reflect through NIM rather than be caught by the restrictions of bank regulations which force a focus on 'higher quality credit'...which often just means bigger companies that credit data can get a read on but often lower actual credit quality...but you got to lend at lower NIM as its officially higher credit quality. This is why non prime as long as you are not too non prime is a rich space.

*I acknowledge some hair on Time and hard for many to stomach...its not a recommendation just a point (I do own tho...and would like to own DFCH at the right price...strategically I desire exposure to business lenders as I believe there will be quite a boom in it through rest of decade)

TamzinPiworld

6th Apr '23

For background, here's the Franchise Brands (LON:FRAN) FY22 analyst presentation from about a month ago, which is very comprehensive. It covers Filta's integration and their strategy video & podcast.

In my experience of placings, the vast majority of the time the share price drops below the placing price. So although disappointing that retail are often not included, it could actually work in our favour.

Small Cap Value Report (Wed 5 April 2023) - NTBR, DFCH, LOOK, SDY, FRAN, DLAR, TPT

Graham's Section

Northern Bear (LON:NTBR)

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Graham Neary

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