Small Cap Value Report (Wed 5 Sep 2018) - SOM, QUIZ, KNOS, XAR

5th Sep '18 by Paul Scott

46 comments 12053 reads

Good morning!

I probably won't have time for reader requests today. The reason being that the dentist needs to reverse years of neglect of my teeth, with some repairs. It's nothing serious, but more a time issue, in that I'll be out all afternoon.

To get you started, here's a link to yesterday's report. I wrote loads more sections in the afternoon, so it now covers 13 companies in total.

Upbeat comments & results are out today from the UK's largest housebuilder, Barratt Developments (LON:BDEV) . It's outside the remit of this small caps report, but given the importance of housing to our overall economy, I always like to quickly read the commentary & glance at the numbers for major housebuilders. Barratt's CEO sounds positive about the outlook;

The Group starts the new financial year in a good position with a strong balance sheet, healthy forward sales and robust consumer demand supported by a positive mortgage environment."

So, cheap mortgages and Help To Buy are keeping the new house market healthy, it seems. For how long though? Nobody knows. It's strikes me as a crazy market, where cheap debt is fuelling Barratt's 17.7% operating profit margin.

Housebuilder shares seem to have come down quite a bit this year, and offer amazing (but probably unsustainable, longer term) dividend yields.

Somero Enterprises Inc (LON:SOM)

Share price: 391.5p (up 1.7% today, at 08:32)
No. shares: 56.3m
Market cap: £220.4m

Interim results

This US-headquartered company is the world leader in laser-guided concrete screeding machines. It's long been a favourite stock of ours here at Stockopedia - both with the SCVR, and also a consistently high StockRank (see below). My view is that, if human small cap specialists like it, and the Stockopedia algorithms do as well, then we've probably got a decent chance of getting it right! So far we have been right, although nobody knows what the future holds.

Interview with management - your questions please!

I have arranged to interview management on the telephone this Friday, and will publish the audio recording on my website. As usual, I am crowd-sourcing the questions from you, dear readers!

So please let me have…

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Rusty2

5th Sep '18

With HL I pay 15% witholding tax in an ISA.

abtan

As a holder of Everyman Media (LON:EMAN) I thought the results were pretty much as expected, perhaps a little higher than expected. Further thoughts:

I'm pretty sure that Everyman Media (LON:EMAN) will beat FY revenue forecasts (£49.6m) based on the H1 performance (£24.9m) and as far as I can make out they'll have just over 100 screens by the end of 2020 (vs 69 now), so a near 50% growth in just over 2 years.

A few rough calculations (using # of admissions, average ticket price, average spend on food and drink, which I believe they have provided for the first time) gives me annualised revenue of around £75m by the end of 2020 (assuming no increase in any prices).

30% of the market cap is in fixed assets as they buy freeholds.
Management hold a good chunk of the equity, and bought heavily last year - always a positive sign.
Cash flow remains healthy with a net cash position. I don't think they'll need to raise more in the future, but they won't struggle to raise funds if they need to.

As for a takeover target, I've actually seen it being a target for a company like Netflix! Controversial I know, but I see that as the logical next step for online streaming services with growing content. I used to work for one of the big movie producers and their cut of ticket sales was c30%. I imagine the online players will want a piece of that and certainly have the production budgets to continually provide new content. Most people will probably think this is far fetched, but only recently I read rumours that Amazon was looking to buy a US-based cinema chain.

In any case, takeover or not, Everyman Media (LON:EMAN) is certainly one for the future and in my opinion looks cheap at the moment.

peterg

Selftrade deducted 15% from my SOM dividend in my ISA. I'm pretty sure others reported full 30% deductions from non ISA accounts (but I'm not certain they were also with Selftrade)

Peter

glenborrell

Re Somero Enterprises Inc (LON:SOM). I got round this by buying it in my spreadbet account with IG. Still get all the dividends without the hassle of filling in forms etc. And you don't necessarily have to leverage. For example if you're buying £1000 worth of shares @ £2. You can go £5 per point on a speadbet and deposit £1000 into you account. Same thing.

ken mitchell

Just to say that I like the short updates, as Paul did today, a lot. The detailed ones are a must read, but when checking out any share on Stockopedia I always click the discuss button hoping that either Paul or Graham covered it when results or trading updates were out. So even a short heads up on any key plus or minus points is very helpful.

Also really like the updates on larger shares or a specific sector like the BDEV/housebuilders comment today. The big attraction there is the huge dividends, so even if not much, if any, share price upside to come, the almost certain 10% yield from the likes of Next and Taylor Wimpey means even if share drops by 20%, the overall result is around break even. It could even be worth timing the buys just ahead of the next time the share goes ex dividend.

e.g BDEV dividend soon is around 6%. Ditto PSN divi, but their next pay out is not until next March. So arguably a case for buying BDEV soon on any weakness and then switching to the next one with a big payout due soon, including Persimmon near to the ex dividend date. These tactics could enhance the already big income, and if sector disappoints we are only exposed to one at a time.

Hope the dentist experience today wasn’t too bad Paul.

MarkOR

John - thanks for the tip. I'll call barclays and pose the question re W8-BEN.

stepone - yikes! a 30% deduction take the forecast divi yield down to 3.5% net. even if you can buy/hold/sell, this detracts from the high and steady divi yield attractions. do you perhaps receive this 30% back through your UK personal tax return when it calculates taxes on overseas dividends?

Wol

Good evening Mark
Confirming what some of the other answers have said re Barclays. When Barclays changed from Barclays Stockbrokers to Barclays Smart Investor they stopped supporting quite a few types of instruments including all foreign shares. This includes foreign companies listed on the London Stock Exchange. So the withholding tax explanation is clearly wrong. This was a management decision. My guess is that Barclays no longer wanted to do the complicated work of servicing people who buy shares. Their new target market is naive investors who will buy funds from their recommended list and then hold them indefinitely.
The switch over from Barclays Stockbrokers to Barclays Dumb Investor took place almost exactly a year ago. It was a complete nightmare. I was locked out of my account for two weeks totally unable to trade. And the platform is still a bit of a mess though it seems to work fine to buy and sell UK shares (and funds of course). Barclays are also now attempting to compete with HL for the title of most expensive broker in the country. As well as charging for each trade you now also pay a monthly fee as a percentage of all your holdings.
Lots of people tried to transfer out of Barclays and got stuck in limbo with 3 month transfer times during which they were not able to trade. Being unable to trade would of course be a complete disaster if e.g. there was a profits warning during the period. I am taking a safer route out - for my Barclays SIPP and ISA I am transferring my holdings slowly to cash and then transferring the cash to another broker. Even transferring a cash balance is taking Barclays 3 weeks to complete the transfer. A straight forward trading account is easier of course, you just withdraw the cash.
I don’t know any other brokers who can’t buy Somero Enterprises Inc (LON:SOM) so if you decide to move, just ask them what restrictions they have on types of instrument they will process.
Good luck with all of that.
If you are interested, there was a lot of coverage (Investors Chronicle, Financial Times) of the mess Barclays made in moving to Smart Investor. You should be able to find some of it via google.

glen - whow! that's a great solution... so if understand this.. (1) on IG, I put a spread bet on (in perpetuity) and get paid £5 for each 1p that SOMERO rises above 200p, and vice versa. That £5 gets added/deducted on the £1000 deposit. If SOMERO goes to 0p, my £1000 deposit is wiped out. I can close out the bet anytime. Plus no CGT on the winnings, right? And (2) dividends (5% of £1000 = £50 per year) arrive in the deposit account on the "paid date". I assume that Mr Hammond wants his cut of those though?

JohnEustace

I would say the newly revised Naked Trader book on Spread Betting is a compulsory read before opening an account. Most punters lose their money spread betting so know the pitfalls in advance, but he explains how to operate a “Spread ISA”

jonesj

There are daily charges with spread betting. This is a relatively new area to me, but for your typical stock that might increase in value slowly, holding it directly may be better.

If you have maxed out your ISA and are in the habit of picking stocks that rise rapidly, then spread betting would be very attractive.

ISAallowance

Yes, the upside is that the additional spread is often smaller than dealing charges for a smaller trade, and there is no CGT or UK dividend tax to pay.

The downside is that the standard spread is typically the MM quoted spread, and hence often wider than what you can really deal at in a normal account at quote, and then for a daily-funded-bet (i.e. a non-expiring bet) there is a funding charge, currently about 3.25% per annum for IG (LIBOR + 2.5%).

I'm not sure about overseas dividend tax, I think that you'll still have to fill in a W8BEN and will get hit by 15% US withholding tax.

hsallan

6th Sep '18

I bought a second trance of SOM after visiting their Chesterfield HQ. You get a demo of a machine & I saw a second hand machine taken in part exchange & destined to be overhauled, then sold to India or China. I like their almost unique products, my only worry is that China will copy it despite numerous patents.

Dodge50

Hi Grumpy5
Have you had a result from the Ombudsman? I am about to write a complaint to them about the closure of the stockbroker platform.
It was an absolute nightmare, they were writing to my old address for over 3 months when they had evidence of my new address, and then took 6 months to transfer out to Jarvis locking me out of my account. They have lied repeatedly, delayed and shown absolute neglect, and have not cared a jot about my situation. I have full evidence of my case, but don't expect too much satisfaction.

Lion Tamer

Hi Paul

Somero Enterprises Inc (LON:SOM)
If not too late to add a question to the interview agenda, and if you are okay with the question, perhaps you could ask the management team for their views on IP protection in the Chinese market, and what steps Somro have taken to protect themselves from IP theft, particularly in China where patents are a bit less likely to be recognised or upheld?

Many thanks for your fantastic reports (Graham too). I might not comment often (for my insights are not worthy), but I am an avid reader everyday.

Nigel

dfhscgfsd

7th Sep '18

I've been considering spread betting. I am resident in Ireland, there are no ISAs and I pay capital gains on any realised gain (minus realised losses) over €1270 in a tax year. Capital gains is 33%.
I'm allowed to make gains spread betting tax free.
For Somero Enterprises Inc (LON:SOM)
Buy £2000 through broker in normal way, £10 on each end to buy and sell. Price was 420p to buy.
So that's 1% for open ending owning.

Buy £2000 through a 9 month (3 quarter, max IG do) spread bet.

Buy price 426.28p so an additional 1.47%, this is the IG fee for the spread bet.
So if I buy Somero Enterprises Inc (LON:SOM) at £5 a point, the value of my position is 5*426.28=£2131.40
I have to put a guaranteed stop loss on because of the new regulations, but the amount I need to deposit into ig is the larger of the minimum deposit for that share (25% for somero) or my chosen guaranteed stop, say I set that at 25%, so the amount I have to deposit into ig is 2131.4/4=£532.85
For the purposes of keeping this simple i'm not looking to leverage so would put the the remaining 75% into a savings account, at say 1%. So would be getting 1% on 75% of the position, I can also call that 0.75% on the entire position.
I'm not certain how the roll over works, I know after 9 months I can rollover my bet automatically, I believe (I read but can't find) that I don’t have to sell and buy back at the spread, I just pay IG a smaller spread to rollover.

Does anyone have any experience of rollovers and their cost? Itlooks too good to be true, am I missing something? It feels to me that for some shares if I can spread bet at about 0.5%-1% pa and avoid CGT it's a no brainer.

Gromley

Does anyone have any experience of rollovers and their cost? Itlooks too good to be true, am I missing something? It feels to me that for some shares if I can spread bet at about 0.5%-1% pa and avoid CGT it's a no brainer.

IG recently changed their policy on rollovers and if I read it correctly (I haven't had any roll-overs since so haven't double checked) i believe you now pay the full spread.

It is also worth bearing in mind that by default they only rollover to the next quarter each time so if when it becomes available in a few days you buy a June-2019 position (your initial 9 months) they only roll it over to September-2019 the next time. The will rollover to longer periods on request (but I think you have to make the request each time, so if I'm right in my point above, you might as well just do the sell and buy yourself.

A few other thoughts :

They relate their costs to LIBOR so as and when interest rates rise further spreadbetting will become more expensive.
Unless you actually did want to be stopped out in the event of a 25% loss, you may need to transfer more funds in if the price goes down and adjust your stop accordingly. That's not particularly onerous, but it is just one more thing that you need to keep an eye on.
Beware of "mission creep". You don't want to use leverage which is sensible, but beware of being tempted use the £750 you have sitting in the bank for other purposes or even for buying other shares.
Obviously you've worked out the cost difference between using a broker and a spreadbet, but if you move on to taking larger positions the cost difference increases. Also the broker can often save you money by quoting a price inside the spread, you won't get this from a SB.

Not trying to persuade you in either direction, but these are all just things you need to think about.

Thanks for your time and thoughts, the extra effort and temptation is something to consider. I wouldn't say I'm risk averse but I'm happy to get rich slow. I'm hoping that any libor costs would be mostly offset by changes to interest rates im recieving.

The expensive part for me is the spread every 9 months. I found this in the IG app. Under somero information. I think I'll email them and ask. I'm not sure whether that reads as half the spread plus the whole spread, or half the spread. Plus a fair value adjustment?

Rollover info
A quarterly shares bet rolled over to the next quarter usually expires basis the last traded price of the relevant exchange plus or minus half the IG spread. IG spread is charged on the opening of the new bet. There will be a fair value adjustment to the opening level to reflect an interest premium.

I wouldn't even consider it if I was a UK resident, but 33% capital gains on anything over €1270 here is just so costly that I might have to take a pa %.

It might be worth writing to your MP as well. I know someone who was treated outrageously by Barclays and incompetently by the Ombudsman. Things were eventually resolved speedily when his MP (Rupa Huq) got involved.
I've seen in other instances that MP's letters do get attention.

9th Sep '18

Thanks John, will consider doing what you suggest.

Paul,
Thanks for asking my question to the guys at Somero Enterprises Inc (LON:SOM) , very much appreciated.

I thought their response was as expected: price rises all around due to the tariffs, but with gross margins maintained.

Are the price rises economically sustainable? I don't know. I think there are too many unknowns in the short term with the current US government, so sadly I will remain on the sidelines until the dust settles.

It's a shame as Somero Enterprises Inc (LON:SOM) was one of my favourite holdings, with a stonking yield (nearly 6% including specials dividends based on my simple forecasts and a previous announcement that they will distribute all cash >$15m), strong balance sheet and a management team that seem to know what they're doing.

GLAH
A

Small Cap Value Report (Wed 5 Sep 2018) - SOM, QUIZ, KNOS, XAR

Somero Enterprises Inc (LON:SOM)

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Paul Scott

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