Small Cap Value Report (Wed 8 April 2020) - CALL, D4T4, CHH, RWA

8th Apr '20 by Paul Scott

67 comments 9741 reads

Good morning, it's Paul here with the SCVR for Weds. Please see the header above for the companies that I'll be reporting on, driven as always by today's news feed of results, and trading updates.

EDIT: apologies, I forgot to put in the estimated timings - it's 4pm finish today. Edit at 15:34 - today's report is now finished.

We're seeing the usual flow of money from companies to shareholders reverse at the moment. So dividends widely being suspended, and placings coming thick & fast (e.g. Joules, WH Smith, Asos). My worry is that entire sectors need to refinance, and I wonder how much appetite for funding so many companies that shareholders will have?

All the focus on efficient balance sheets, and high ROCE, has turned out to be mistaken - it actually left many companies dangerously exposed, with no reserves to tide them over something unexpected. Maybe attitudes might change towards more prudent balance sheets once this crisis is over?

From what I'm observing, there's a strong case for arranging "rainy day" bank facilities - i.e. having a big bank borrowing facility dormant, then drawing it down in full to provide cash reserves in a crisis. Although there's a cost to that, as banks charge hefty arrangement fees as the price of tying up some of their reserves. After all, we need to think in terms of the possibility of coronavirus coming back again after this initial crisis. Hopefully by then, if a second wave does hit us, there might at least be some kind of treatment available to make it less deadly for older/vulnerable people.

We're still in the realms of having powerful rallies, as is usual in a bear market, but will they stick? I think the market is starting to look beyond coronavirus perhaps, and a resumption of economic activity, but that doesn't immediately change the fact that we're facing utterly dire, probably never-seen-before type of economic data. Also, many companies are going to be reporting unthinkably bad figures for H1 2020. How that all fits together? Your guess is as good as mine.

My worry is that shares which rally strongly with the general market rallies, could end up crashing back down again when the full enormity of trading losses in H1 2020 become apparent. People say they're looking beyond terrible 2020 figures, but in my experience with small caps, bad numbers tend to…

Unlock with Email

Unlock with Google

Already have an account?
Login here

Simon O'dowd

8th Apr '20

I put new ISA stocks and shares money into iweb (Halifax) no problem. Seems their (temporary) incapacity relates only to transfers.

Rusty2

Difficult to compare as flu deaths this year have been low, one month ago we only had 3 deaths from COVID-19, now we have over 6,000 and that is just counting hospitals deaths. With lockdown maybe there are less road accidents and murders, although that could change. "The provisional number of deaths registered in England and Wales in the week ending 27 March 2020 (Week 13) was 11,141; this represents an increase of 496 deaths registered compared with the previous week (Week 12) and 1,011 more than the five-year average." Up to 27th March there were only 649 involving Covid-19.

WDWombat

I am interested in the RoCE comment. I suppose if you have low cash balances you tend to get a lower 'Capital Employed' denominator and thus higher RoCE? But it may make you more vulnerable to these extreme drops in revenue as you have no cash padding if you simply cannot meet overheads. Crudely, lean and mean not so good now against stolid but well padded? I would be intersted in any considered thoughts here or furher comments from you Paul.

I cannot close without also giving my heartfelt condolences to all your London 'house' on the loss of mum.

Zipmanpeter

Navishtrix writes: "Paul and Graham, several of my holdings have announced placings that are restricted to management & institutions and shut out existing shareholders. What are your views on this?"

I strongly recommend we all write to our respective company Secretaries / Investor Relations where we expect such Placings/Rights Issues to occur and remind them of their duties to work for all shareholders, not just the large and cash rich. I have done so and got answers from several saying they will at least relay message to Directors. We need to be visible and in their faces!

I would welcome commentary here or by Stockopedia that we could copy and endorse to have a bigger voice. I would particularly like to hear from anyone who practically knows how hard/costly it is to make a digital Open Placing ie where can either all bid for shares at a fixed price (allocated back in proportion if oversubscribed) or a simple auction whereby shares are bid for until enough money has been raised. I would add this to my notes. I fear these approaches will not be city supported since they would undercut the fees under by players able to find cash now.

I accept that there may be time to do it now but at worst this can be a positive legacy. From a technical point of view, how hard can it be?

In the short run, is someone like Cenkos Securities (LON:CNKS) a good bet for 2020. A lot of money is going to need to be raised.

Meldrew

I have to confess that when I shared the news with my trusted medical adviser/researcher she quickly poured cold water on it and pointed out that the situation is far too uncertain for definite forecasts. There is simply not enough information. She added that she gets her American stats from the National Center For Health Statistics in Maryland not IHME.

I was suitably chastised.

Tribal: Although the universities are closed the boring admin computer systems that earn Tribal much of its money are up and running. They have to be to provide students with the services they need during the lockdown so Tribal continues to service them.

It was the ongoing revenue from the servicing of the university computer systems that enabled Tribal to survive its bad times some years ago and should enable it to survive now.

'They have reduced staff costs and scrapped the dividend.'

Quite so. However, they do not only provide services to universities. They operate internationally in more than 55 countries and serve over a thousand higher education, further education and vocational institutions; several thousand schools; and many government and state bodies, training providers and employers. It is inevitable that some of those would be affected. However their SITS 'Students' Information System' is a major earner. I believe that it is unlikely to be significantly affected by Covid-19.

LON:AVON makes rubber based products. It is a different company to LON:AVO

LON:AVO is Advanced Oncotherapy who make proton therapy systems.

Their website states that 'Advanced Oncotherapy is a specialist developer and provider of a breakthrough proton therapy system, the LIGHT system, which is the result of 25 years of work at CERN ...'

I have been keeping an eye on it for some years. Their LIGHT system is due to enter production later this year. It is planned to treat the first patient at their clinic in Harley Street early next year.

AVO have entered into a contract to provide and install the system at the Mediterranean Hospital of Cyprus at a cost of around £42 million . That compares to the cost of providing and installing a conventional cyclotron based systems of around £125 million.

I believe it has reached the point where it is worth a small punt.

Ouch!

luckym

I used to work in university IT. As Meldrew states, many universities (eg Oxford and St Andrews in the UK) use their student information system (SITS). Indeed my university migrated from a home-grown system to SITS. Simply, the student record system became so key to the university that it felt uncomfortable relying on the limited number of analysts and programmers it had on its books to maintain and develop the in-house system. Migrating large computer systems is non-trivial and you'd need a good reason to move onto another platform and so I would judge the recurring revenue to Tribal (LON:TRB) from this source would be pretty stable, particularly at this time. Acquiring new customers is difficult at any time. I do not hold Tribal (LON:TRB) shares.

tightfist

Hi Paul, ref D4t4 the analyst FY Revenue forecast, it appears to be 50 (fifty) weeks old; the perils and opportunities of a one-broker company. The Stocko TTM figure was a lot closer to the mark - but surely it’s the outlook that shines through!

Thanks for making some very enlightening reading, tightfist

OK thanks, I put AVO in stockopedia and it did not come up, AVON was the top choice. If you put a £ in front it should bring up the link Advanced Oncotherapy (LON:AVO). I will have a look into them.

Re: Tribal (LON:TRB), many schools are closed, in their report they do mention Australia and UAE, so they can't access them. I will look into it more, once schools start opening again they should recover.

Richard Goodwin

With respect to Derwent London (LON:DLN) I suspect you are right in terms of reduced daily commuting. Prime London will however suffer least, if only because people will still want to live there and visit it. If there is less "tippy tappy" space then there will be more meeting space, leisure space and residential space (conversion). Other parts of the country may not be so lucky and I have sold my holding in Cls Holdings (LON:CLI)

Digging around for figures I did find this "In the 56 days from January 11 to March 6, the total number of people who died in England and Wales was recorded as being 90,940, only one of whom was known to have tested positive for COVID-19. Others who died may possibly have had the disease, but not been tested for it. However, it’s unlikely that the virus was widespread in England and Wales in the first few months of 2020. That’s because the 90,940 deaths was 5,023 people lower than the average in the same eight-week period over the previous five years, which was 95,963."

So indeed the last few months has been lower than average, up to early March. I think it's a bit too early although the figures for the week to 3rd April should be out soon, that should give a better idea.

Trident

Thanks for the responses. A transfer of funds worked today for the first time in several days of trying.
Bought into two stocks. Will now pause and watch for a bit.

'More or Less' is brilliant and in my view should be required listening for everyone! Long ive Tim Harford!

jonno

Hi Trident

I also use Halifax for my stocks and shares ISA and haven't had any problem in transferring in this years allowance. However annoyingly they have stopped providing a trade plan option

Hope you manage to sort it.

All the best

m3taphysics

I will be incredibly shocked if they do not extend for at least another 3 weeks.

Paul Scott

9th Apr '20

I was working from a broker note that was issued today, on Research Tree, for my comments on D4T4. It gave revised figures issued today. So current research, definitely not 50 weeks old!

simoan

herbie,

Please take this the way it is intended, but I'd give up trying to analyse these numbers. I heard today that a friend of a friend died of Covid two weeks ago. He was 60 and pretty fit by all accounts (walking running, cycling). Thing is, and here's the point, they tested him twice and he was negative for Covid 19 both times before he died. So not only is the number of tests nowhere near the same as the number of people tested, but there are also false negatives, and so you cannot even assume that everyone that dies tested positive. Does that count as a Covid death or not?

Only madness lies in wait for people trying to form an opinion based on the official data although I realise lots are doing it because as humans we have to try and rationalise and understand something so appalling.

If you're partial to a little bit of maths and want an idea of the worst-case with respect to the time period over which we'll be having lockdowns, I was forwarded an article by a friend at Cambridge University about the work of Professor Julia Gog: https://plus.maths.org/content/how-can-maths-fight-pandemic

Warning! It doesn't paint a pretty picture so let's hope this scenario doesn't play out.

All the best, Si

Fair points but those figures were before Covid-19 has had an impact, it is comparing deaths in the same period over several years, this year deaths have been lower, probably because of a mild winter and less flu related deaths, but they did start to rise in March. If from 6th March the figures jump up then it is quite likely to be caused by the virus and was in response to someone saying the deaths had not gone up much this year. These figures are published by the Govt. on a weekly basis, this maybe more accurate way of counting the virus deaths than just counting everyone who has died infected by the virus. I have read only about 50% of the deaths are actually caused by the virus, but it is very difficult to get a real reason for a death.

I had a look at that link. Maybe I misunderstand it but cases don't keep doubling every 3 days, they did to start with but then level off, I think the UK is now doubling every 6 days, if you look at Italy and Spain you can see a similar, A lockdown when your health service is about to keel over is far too late, it takes about 2 weeks for a lockdown to take effect, we have been in lockdown now for 17 days, cases now are levelling off. I think that was the same in Italy and Spain. Yes it a concern that it could be worse in winter, if combined with flu it could cause real problems but at least it gives more time to prepare but maybe by then we will have herd immunity?

TheArb

12th Apr '20

"From what I'm observing, there's a strong case for arranging "rainy day" bank facilities - i.e. having a big bank borrowing facility dormant, then drawing it down in full to provide cash reserves in a crisis. Although there's a cost to that, as banks charge hefty arrangement fees as the price of tying up some of their reserves."

A long time ago, someone much cleverer than me suggested always having enough cash in the bank account to pay for 6 months expenses, assuming no income. I've always kept to that and a lot of companies would be wise to do the same.

Tommy H

14th Apr '20

I got some money in the other day but could not make a further payment today

Small Cap Value Report (Wed 8 April 2020) - CALL, D4T4, CHH, RWA

Unlock the rest of this article with a 14 day trial

About the Author

Paul Scott

67 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...