Small Cap Value Report (Wed 6 Mar 2019) - HEAD, CAMB, ANP, RBG | Paul Scott

6th Mar '19 by Paul Scott

34 comments 12608 reads

Good morning, it's Paul here!

Please see above the companies which have caught my eye this morning.

Market conditions for small caps still feel very depressed. The UK small caps space seemed to have a nice bounce in January, but a lot have slid back again. Bad, even only slightly bad, news continues to be punished severely. I think that's mainly because there's a buyer's strike, until we know what's happening with Brexit. So some prices are falling too far, below what makes sense.

Selectively, I see some obvious & compelling value. Today's buyer's strike could well be tomorrow's buying stampede. It's market conditions like we have currently, which lay the groundwork for some big future profits, in my experience. I could trot out that Buffett quote about fear & greed, but everybody already knows it, I'm sure.

It all depends though, on where we are in the economic cycle? This recovery from 2008 looks very long in the tooth now. Is a global recession coming? The recent major recovery in the US stock market suggests otherwise.

We've had 10 years of ultra low interest rates, which has supported equities. What's to stop us having another 10 years of low rates? Will they ever normalise? It's really difficult to know where things are heading, which in turn makes it difficult to value shares.

EDIT: a friend has emailed me several articles, showing that housing enquiries in London are up, and that there is very positive data on construction of high rise buildings planned, especially in London. This is strengthening my growing conviction that we could, perhaps, be on the cusp of a post-Brexit boom. Even if it's a complete muddle (looking very likely), the removal of uncertainty could unleash a backlog of investment. Hence I'm back in buying mode, in terms of my small caps portfolio.

Headlam (LON:HEAD)

Share price: 420p (up 0.5% today, at 09:43)
No. shares: 84.6m
Market cap: £355.3m

Final results

Headlam Group plc (LSE: HEAD), Europe's leading distributor of floorcoverings, is pleased to announce its final results for the year ended 31 December 2018.

This looks a mature business (i.e. little growth in profit), and is priced accordingly, so it's a value share. It has grown historically by making lots of acquisitions, funded from cashflow - quite a nice business model.

Underlying…

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FREng

6th Mar '19

Good morning, Paul. Have you managed to write up your discussions with £RBG? I'm looking forward to it!

MichaelFBS

Hi Paul

Re "Market conditions for small caps still feel very depressed...."

Can't resist saying, not if one holds Bioventix (LON:BVXP) which is up 20% in the last 30 days.

But I know what you mean. It is not soi much depressed as cautious with so many uncertainties out there: China/US trade deal, slow down in the world economy, Brexit.

Whether 30th March will bring relief for our little of the investing world only time will tell.

Best wishes
Michael

Camtab

Paul just wanted to present heads up for Airea tomorrow morning. I have now given up trying to value them (as advised by Rhomboid) and he is right far too much guessing at numbers. As you point out bad news or not good news is being punished (as we saw in particular with BKS)!! In this environment part of me is yelling sell before the news as noone ever went bust taking a profit. BUT there is that thing called greed banging away so I will deter my decision until after a jolly good lunch.

jonno

Upbeat results from TT electronics (LON:TTG). Improved margins and ROIC. Positive outlook and good cash conversion. The shares remain inexpensive in my view.

Paul Scott

Hi Camtab,

Yes I like Airea (LON:AIEA) - but have top-sliced my holding into recent strength. It's still a mid-sized position in my real world portfolio, so let's hope we have some good news tomorrow. A rare spot of positive performance, in an otherwise fairly dismal time for me.

Such is life - drawdowns (sometimes quite savage) are just part of the process, if you specialise in smaller, more speculative shares, in a concentrated portfolio, as I do.

Regards, Paul.

barnetpeter

https://citywire.co.uk/funds-i...

For those that have missed it, CF are apparently selling up many or all their holdings (mostly held in small and micro caps) having filed notice to appoint administrators.

Unfortunately the link to the holdings list does not seem to work on here...see below.

I mentioned yesterday Miri; it appears CF took just over 4p for a stock that was around 12p at the start. It appears they also sold their entire stake in MNO...this was floated a few months ago at 15p and was below 3p today. There are other holding rns appearing on other small cap stocks too.

I should emphasize that I know absolutely nothing about these companies (although both appear to be trading well below cash and I bought Miri yesterday on that basis) or this fund. There seems to be a lot of dross in this list but that's just my opinion. However this seems to be an extraordinary special situation and if one of your holdings suddenly falls into a heap you might want to check the holding list to see if CF are trying to sell out well below normal bid. Clearly the market makers are aware of the position and are not exactly being generous.

I see this as an excellent opportunity and obviously your own research here is key. All very strange!

Zipmanpeter

Paul, A bit outside of SCVR range now but but links to your comments on (London) construction prospects - excellent results IMHO from Ibstock (LON:IBST) yesterday .

Old school IPO in 2016 to fund expansion projects now starting to deliver. Looks a structurally safe(r) bet on UK construction given brick industry dynamics - see table below - and cross party support for building more new homes without the political risk arising from housebuilders' excess profits.

So good each way bet: if Brexit goes well, post-leaving boom; if it all goes bad, housebuilding an obvious govt make work/economic multiplier/balance of payments/make-the-young-love-me political play

* Financially, offers good dividend (9.5p/3.7%) well covered by free cash flow and very low debt plus special dividend opportunity (6.5p in 2018) .

* Revenue up 7.9% to £391.4 and EPS up 17.5% to 18.8p as investments/upgrades come on line

* Main brick business is 3/4 of turnover and leads an oligopoly where top 3 control 90% UK supply

* Record brick imports in 2018 - same year as their massive new brick factory (0.1Bn bricks pa) opens.

* 2018 also saw extra CAPEX/time invested in maintenance to underpin volumes going forward

* Sold off US business to focus only on UK - so very simple and focused now

* Conservatively used cash from sale to reduce debt. Debt: EBITDA now only 0.4

* Strongly placed to make further investments (another brick plant?) or related acquisitions

* Political support for more new builds (54% of brick use) plus signs digital/automation/product innovation starting to come to traditional construction industry

* Hiding in plain sight on Stockopedia computer (SR91 Q75, V61, M86)

(Disc: I own and will be topping up)

5c7fab877663b190306__IBST_-_Brick_S&D_20

The attachment seems to be encrypted Barnetpeter.

Banzii

It worked for me if I cut and paste the whole lot into a browser window as a URL. It being split over a couple of lines seems to have broken it as a clickable link for Stocko.

yes trying to get the link up....see if this works. The link is too long I think so the full link below needs to be copied and posted in your browser to get it to open.

City Financial Investment Fund Series IV - Reports and accounts (interim)

https://www.cityfinancial.co.uk/assets/download/15013/City%20Financial%20Investment%20Fund%20Series%20IV%20-%20Reports%20and%20accounts%20(interim)%20-%202018%2010.pdf

Albertos

Ten Entertainment (LON:TEG)

1.6m shares of Ten Entertainment (LON:TEG) seems to have been sold this morning. City Finance holding per the above is 3m.

Another big shareholding I notice is Ramsdens Holdings (LON:RFX) .

Phil

heron

Where do I find Paul’s comments on RBG please?

PinkDalek

City Financial Investment Fund Series IV - Reports and accounts (interim)

This should get you there (rather than having to C&P):

https://preview.tinyurl.com/y3mmyt22

Paul's article concludes:

I'm popping our for lunch now, then will return to write up (finally!) my notes on my meeting with Revolution Bars (LON:RBG) management. Sorry for the delay.

Small Cap Value Report (Wed 6 Mar 2019) - HEAD, CAMB, ANP, RBG

Headlam (LON:HEAD)

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Paul Scott

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