Small Cap Value Report (Wed 5 Oct 2022) - Macro, VTU, PCF, KETL, TPT

5th Oct '22 by Paul Scott

80 comments 8328 reads

Good morning from Paul & Graham. Today's report is now finished.

Agenda -

Paul's Section:

Starts (below) with some macro/markets general commentary. I should emphasise that these are all ideas that I pick up on my travels, from a wide network of experts. So I'm not trying to set myself up as a guru, but instead am really just regurgitating & summarising all the various good ideas & views that I think are the most interesting, and credible, that I've picked up from the best sources in my network.

Vertu Motors (LON:VTU) - I've completely re-written this section, after originally dropping a clanger by reviewing an old trading update by accident, doh! Interim results look good, and it now expected to beat (very modest) full year expectations, due to good trading in Sept, and the benefit of recent Govt help on energy bills, and lower NICs. Balance sheet is superb. Even taking into account the known bear points, this share still looks remarkably cheap to me.

Topps Tiles (LON:TPT) - Q4 and FY 9/2022 trading update. Profitability is expected to be at the top end of market expectations, so about £15m. That's not bad, given the tightening macro picture, and low consumer confidence. Balance sheet looks fine, with net cash. Great divi yield too. Providing consumers hold up reasonably well, then this looks a good, cheap entry point. If you're expecting armageddon, then obviously you won't be interested at almost any price. Thumbs up from me - it looks a solid business, well-managed I think, and shares look cheap.

Graham's Section:

PCF (LON:PCF) (£7.5m) - this stricken challenger bank announces that it continues to explore options to raise “growth capital”. If it doesn’t get it, it might engage in various disposals or “other options” to deliver value and certainty to shareholders. It’s scary language as management continue urgently looking for external help. They also announce today that PCF will cease any new lending activities, and will also look to cut their corporate overhead costs. In the main section, I review some of the warning signs (there weren’t many) that the wheels were about to fall off this company, and conclude that the existing equity should be assumed worthless. Balance sheet equity was £41m in March, giving hope of a recovery, but ongoing losses have spooked the new management team and…

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WarrantStar

5th Oct '22

Strix (LON:KETL) To me, the declining share price chart and the declining EPS forecasts chart on the Stockreport are both saying the same thing. What they say is "Don't buy until the share price has stopped falling".

Paul Scott

Hi Robert,

I didn't say Gleeson's houses are any good! ;-) I've looked at the floorplans on their website, and yes the designs are clever, but very cramped for more than say 2 people to live in one of their tiny houses. Still, it's better than living in the spare bedroom of Mum & Dad's house, or a winnebago, or a converted shipping container!

Anyone who's looked at Trustpilot can see that Gleeson's certainly don't delight many of their customers!

But they're cheap as chips, and even a couple on minimum wage can afford to buy one.

The website says that many are sold to key workers, so if it was a rough neighbourhood, at least you'd probably have off duty emergency workers on hand nearby.

Regards, Paul.

egdikbury

Placement raises £13m. Much as usual they have ignored the private investors who can't buy any shares at 115p, unless of course the price falls further . . .

Indie

Double news from Integrated Diagnostics Holdings (LON:IDHC) (I hold) - its radiology venture, Al-Borg Scan, has obtained ACR accreditation "widely considered one of the most prestigious certifications for radiology service providers in the world", and they also announce the launch of Al-Borg Scan's sixth branch.

Rusty2

Yes thats true, I had Daniel Thwaites (OFEX:THW) (Daniel Thwaites) is in several of my folios, that has completely gone off the system, not just the share but Stockreport as well.

Update: the Stockreport is now back but the prices and a lot of the information is missing.

rogerh

I know this is a small-cap focused report (and a very good job it does of it too) but I would also love to get some feedback on quality larger caps via the expertise on this board. We are told to buy quality stocks at low prices. It would be nice to have two or three stocks in my portfolio, which don’t go up and down quite so much…

Judges Scientific (LON:JDG) is a quality stock but the time to have bought was March 2020, as it was for most stocks. AstraZeneca (LON:AZN) is a quality stock but the time to have bought that was also in March 2020 or when its reputation was being sullied by the eminent virologist M. Macron. Is Next (LON:NXT) a quality stock? Probably. After reading this board many times a day for the last 18 months, I now know quite a lot about quite a lot of stocks but they are all small ones.

It has been shown before that whereas a portfolio of high stock-ranked stocks will perform well, one can’t rely on the stock rank for individual stocks. In football parlance, I am happy with my attack options but the defense needs shoring up. Any recommendations welcomed.

RDHOWARTH

Afraid this is very true - at current rates borrowing capacity has fallen from 250k to 100k - this will kill the housing market. In theory it should half. Highly unlikely current rates are still relevant in such an environment. Paul’s right rates have gone too far for now esp if UK housing affordability is your barometer.

TheFloatingInvestor

Concurrent Technologies (LON:CNC) am pretty bullish about this companies prospects and the new ex QQ. management structure, coupled with the roll out of new products, but with restricted supply of semiconductors they cannot get the orders out.

So IMO its a matter of when they start to deliver good results rather than if.....the problem is when....and do you believe the management who are saying supply chains are to improve as of now. The market didn't think so (nor did I) so there was a decent sell off following the recent trading update.

I have been reading that folks are not buying laptops etc etc because of tighten money so chips are becoming more available, are they the right chips? I have no idea, but took a punt this morning, at 75p, and to be honest I would not pay anymore than that at the moment because of this potential shortage, and the risk of another sell off.

I do think the price will come back down towards 75p and will try and build a position from there, but am not sure a 9 percent increase on one product launch RNS is justified.

One final point is the CEO has said he would sooner not give dividends in favour of product development, so not a great surprise he suspended the dividend.

mojomogoz

I think there will be zero read across for Time Finance (LON:TIME) from PCF (LON:PCF) - it’s possible they pick up a bit more business flow as pcf backs away from new customers. Time’s balance sheet capacity is good and they have managed their risk thro long covid period really well. As is always the case when times get tougher they will be finding more requests for their service. To date they’ve shown their underwriting of risk to be good .

NewInvestor1972

Eurocell (LON:ECEL) - Somehow EQMC quietly bought nearly 13% of the company as the price kept dropping.... Strange but good, they seem to know what they are doing:

"EQMC is the leading, award-winning active investor in the European, listed small and mid-cap space, one of the best performing funds of its kind. It has an active ownership strategy which has achieved 15% net annualized returns since its inception in January 2010. The fund has outperformed indexes by 170% to 220%+ as well as most hedge funds, with controlled risks while typically holding a small net cash position with no leverage.

The fund’s portfolio of 12 to 15 companies is managed by an investment team which is disciplined, thorough and held to strict value metrics for the investments it makes. EQMC has around €1.3bn AuM under the strategy. Our 12-person portfolio management team is supplemented by a group of advisors with executive level experience and connections to boards across Europe."

GTrader

Strix moved to a capital light model 15/16ish, so capital is now stock, cash etc. Production is entirely outsourced. So quite difficult to compare to other manufactures who own the fixed capital and would have lower ROCE. Good if your can control capital and IP.

Neil P

Regarding the US property market, a commentator I've been following for some time likes this for an indicator:

CME Metro Area Housing Index Futures

This would suggest a bottom in early 2024...

Cricketfan

£VTU I thought the webinar very reassuring. Both CEO and FD appear to know the business inside out and come across as realistic and forward thinking. I shall continue to hold.

Boon

True, Time Finance (LON:TIME) bad debt metrics are pretty good so far, and they have reported up until Aug22 so the data is fresh.

sprite

Dear Paul,

Please excuse my ignorance but you keep using ‘amp’ and I cannot work out what it stands for! Please illuminate.

I don't keep seeing "amp" in Paul's report. Maybe because I am reading it on my Windows 11 laptop. Maybe you are on your mobile? Anyway "amp" is probably short for ampersand. Ampersand is the name of the symbol "&". It means "and".

pushing my luck, you wrote a couple of weeks ago about your’ increasing belief that Small Caps were not appropriate for long term holds.have you written up your thoughts on.this or otherwise could you elaborate,please.

lightningtiger

Regarding Corp tax being kept at 19% & not going to25% will make a big difference to UK companies. That is a 6% saving instead of a 6% extra cost.

I can remember in the US about 10+ years ago when different states had cheaper Corp tax than others, which caused companies to move to the cheaper areas to save paying higher rates.

Another example is my Hyundai which I bought new just over 10 years ago which was supposed to be made in Korea & it was actually made in India because it was cheaper to make them there. I think it was mainly due to cheaper labour costs. There was a boatload of about 3000 cars on it, so I had to wait for more than 3 mths or so for delivery.

The point I am making is that companies will move to a different location if it is worth it.

The biggest problem looming now are that mortgage payments about to double, & the UK debt is going up.

I used to do loads of mortgages & re- mortgages years ago as a Financial advisor for 14 years, but now retired. Not sure if there are any discounted deals out there now just as it is needed most. At least you can now get 4% interest for cash.

Discounted deals available 2 year @ 2.34% variable rate.

FREng

The Tern (LON:TERN) accelerated book build this evening (£1.3m at 7.5p - 14% discount) has been supported rather weakly by the directors. I hold but won't be trying to avoid dilution.

Good stuff, lightningtiger - but I’m not sure it was my post you meant to reply to!

Small Cap Value Report (Wed 5 Oct 2022) - Macro, VTU, PCF, KETL, TPT

Agenda -

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Paul Scott

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