Small Cap Value Report (Wed 8 Mar 2023) - RTN, SOM, CTO, HEAD, BUMP, MMAG

8th Mar by Paul Scott

61 comments 7769 reads

Good morning from Paul & Graham!

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.

Paul’s Section:

Somero Enterprises (LON:SOM)

385p (down 3%)

Market cap £215m

Final Results

Somero sells & supports laser-guided concrete screeding machines, to lay perfectly flat floors, for use mainly in warehouses.

Finncap says these results are in line with expectations.

Revenue of $133.6m - matching the outstanding performance of the prior year.

Profit before tax fell to $40.8m, down 9%, due to higher overheads (already known) - note the very high profit margin.

Adj diluted EPS $0.55 (down from $0.61 prior year) - converts into sterling at £1 = $1.183 to 46.5p = PER of only 8.3x which looks strikingly cheap to me, for a high quality business generating a high profit margin, and copious cashflows.

Dividends - are generous, with the ordinary divi $0.2778, and a supplemental divi of $0.077. The StockReport is showing a forecast yield of 7.4%, which is clearly very attractive.

Buybacks have also been done, reducing the share count slightly.

Outlook - there’s more detail, but this is the key part -

…With all factors considered, 2023 revenues are expected to be comparable with 2022, and with targeted added resources 2023 EBITDA is expected to be down modestly from 2022, and with 2023 working capital investment expected to remain…

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BnB

8th Mar

In defence of Paul and Graham, they can only compare valuation against other possible Small Cap investments. In which case, relative valuation within a particular industry is completely irrelevant.

I want to be clear that my comment was not intended as a criticism of Paul. Rather, the intention was to encourage forum members to look beyond the name's overly hasty damnation as "expensive". And I think you'll find Paul and Graham habitually adjust for sector in valuing a carpet distributor as opposed to a software business. Let's do the same for an ingredients business.

One of my own preferred valuation measures is FCF yield, and it would be nice to see Treatt generating some

I have to agree. Brand new business operations on the scale realised in Bury do not come cheap but the benefit of the diversion of cash flow to capital is that debt is very low and still much lower than competitors. Forecasts anticipate progress but I would not blame anyone for waiting to see the evidence. I do think H1 is maybe too soon.

BTW the company is in Bury St.Edmunds, which is in Suffolk, not Cambs.

You're quite correct. I'm guilty of attaching the C-word to all sorts of locations in that vicinity as my son is moving there post-studies to marry his sweetheart, who always calls everywhere "Cambridge" despite actually living in Norfolk and moving herself to a job in Bury St E.

Paul Scott

What a good thing you spotted the missing tags, really helpful, thank you Rusty2!

I've put the tags back in again just now.

Best wishes, Paul.

planetx

Super switched on posh bloke that Richard Staveley and Christopher Mills is even posher.

I follow them very closely.

Was looking at Pressure tech past months both as an investment and also physically out the window as they are bang opposite us .

They are sat on a cracking bit of real estate right by Meadowhall, very large site.

Plus the FD of forgemasters who is going there is very well thought of.

Just feels like things are happening and it is very cheap now with some strong investors holding them to account so Ill follow Rockwood .

Looks a very good acquisition for Avingtrans .

Tanks for flagging, Snazzytime. I've put the tags back in now.

Snazzytime

hi all

I have been getting increasingly irritated by the disappearing tags on daily SCVR's. I know Rusty also shares my frustration.

I have therefore sent a message to Stocko via the 'green blob' (my first one!). For your information I have copied my message below.

There is a problem with Paul & Graham's tags on company updates dropping off after being applied. This makes it almost impossible to find a comment at a later date as there is no easy way to locate historical SCVR's (even if you had the time and knew the date to scroll back to). This is a most irritating problem and is now almost a daily occurence. Subscribers are regularly pointing out missing tags to Paul. He must be fed up with this and it's not of his causing. Surely Stocko IT can sort this out with a fix? It needs fixing now, please.

When I receive a reply I'll post it on here.

Snazzy

G Morris

Held Treatt previously but sold as valuation didn't justify the growth and would have thought idea of breaking up a cartel is for lower prices generally.

Zipmanpeter

Re Treatt (LON:TET) in 2019 they also completed an expansion in the US that was x4 "Others" and x2 "Citrus" capacity ie a really big increase. Together with the new UK base, these really were once in a generation factory upgrades which increased capacity, capability and also reduced their cost to make.

On the cartel issue, I used to be MD of a small soft drinks company. The ingredients they make are typically so deeply embedded in formula /manufacturing processes and critical to taste that they are very hard to shift - I think any action is more likely to lead to the big 4's customers demanding better pricing rather than to switching except over the medium to long term.

However, Treatt are so small that this might be a lever to get even consideration by some more players and they could double without the big guys noticing. Their expertise is in citrus and tea but they can do most things.

At some point, IMHO this business is likely to worth a lot more. I don't hold but wish I did.

simoan

FWIW I held Treatt (LON:TET) until they mentioned they were going to build a new facility and move all operations to a new site back in 2017. Too much of a business risk for me. As such, I can't say the lack of free cashflow and the healthy net cash position (at the time) turning into a net debt position now has surprised me. These things always take longer and end up costing more than planned, and of course, a pandemic in the middle of the big move has not helped. It's a company I still follow, but to be honest I've never been happy with the relatively poor gross margin (the kind of margin I'd associate with a distributor rather than a manufacturer) which is not generally a sign of a high quality business with pricing power in my eyes.

All the best, Si

Good to have the thoughts of others. Thanks.

jonno

Hi planetX, Avingtrans (LON:AVG) from zero to hero, Mr Market capricious as ever. Plus ca change

On the matter of Pressure Technologies (LON:PRES) I have taken an opening position for reasons covered in my recent post on March 6th. See link below if you are interested. However Richard Staveley covers the investment case much more adeptly. Prelims soon, possibly tomorrow.

As you say it would be a good fit for Avingtrans (LON:AVG) , but Messrs McQuillan and King won't overpay and Christopher Harwood will want top dollar I suspect, but never say never.

I am currently trying to decide what to do with my holding in Somero Enterprises (LON:SOM). A good company but facing headwinds and currently out of favour. Any thoughts?

Stockopedia | Boon's Fund Recap – February 2023 - Which is Mispriced, Bonds or Shares? | By Boon

Gutty

I must be a ludite. I've just bought a cd/dvd player. I've even got a sony Walkman floating around. Bought tax free while serving in Germany.

JONNO

Im trimming Somero from full position to half a position . Sold a lot today and took the pain. The loss offsets the CGT on crestchic .

I took half out of the market for new business just helping.

And put half in Pressure tech and half back into LDG

LDG looks good, I jumped in and out in January before the Simon Thompson tip , but fortunately put that to good use ons Avingtrans which has gone supercharged.

LDG own a chink of Finsbury food and and chunk of Alliance Pharma and have a mountain of cash almost market cap. With buybacks looks a bit of a no brainer.

Keep increasing on both Croma and Titon which are really too small for most people, think Titon is way undervalued and has understated real estate that is actually worth 7 million alone .

Croma are selling off their security division which should spit out cash plus they have a good business full stop

Other than that I topped up on Holders the other day and apparently according to ADVN forum Im about Ito launch a bid for it .

All these three microchips are very high risk so be careful if you like to sleep well.

Im happy to hold on Equals, Wynnstay, Vertu, Colefax, Hargreaves, Sureserve, Vertu.

Also like and am holding non AIM shares J Smart, Bloomsbury, Bank Georgia, Georgia Capital and National World though National world im waiting for update.

J Smart is a no brainer but illiquid .

TamzinPiworld

Headlam (LON:HEAD) full year 2022 results presentation & Q&A given this morning video & podcast. A great presentation by Chris Payne, Chief Executive, who presents from their Coleshill location. The questions are from investors who attended the webinar.

ISAallowance

I sold out of Tclarke (LON:CTO) a few years ago after comparing board remuneration with shareholder returns for a number of smaller companies. In 2018, CTO made net profit of £6.2m (or £6.4m adjusted), paid the board £2.8m, and declared £1.7m of dividends. In contrast, UP Global Sourcing Holdings (LON:UPGS) in 2018 made net profit of £4.28m, had a total board cost of £1m, and paid out £3.55m in dividends. CTO was consistently among the worst companies in my spreadsheet for board remuneration to shareholder return ratio. Additionally, IIRC the CTO board appeared to buy or hold very few shares with their own money.

The latest annual report is 2021, they paid around £2.85m in board remuneration, and around £2.3m in dividends. They also have a DB pension scheme, and are paying £1.2m p.a. in deficit recovery payments for the next 8 years or so. Very unusually, the DB scheme is not closed to further accrual, although new accrual is on a career average rather than final salary basis, and I'm fairly sure from a past company presentation that it's closed to new entrants, although I can't find that stated in the 2021 AR.

They seem like a very nice, well-run company. I'm sure they're great to work for. I just don't think shareholder interests rank highly enough to want to buy them unless they get really cheap again.

Khanco

Why doesn't Caterpillar buy them?

Thanks planetX

I will decide on Somero Enterprises (LON:SOM) tomorrow, but selling 50% seems a plan. I shall also look at Logistics Development (LON:LDG) and talking of Simon Thompson bargain shares, I also like CML Microsystems (LON:CML) although no longer such a bargain.

I also hold Wynnstay (LON:WYN) Vertu Motors (LON:VTU) Hargreaves Services (LON:HSP) and Bloomsbury Publishing (LON:BMY) . The latter two I sold having bought much lower down but have recently bought back as they have come off their highs somewhat.

Will be interesting to see how Pressure Technologies (LON:PRES) evolves. Speculation Avingtrans (LON:AVG) sells Booth Industries and acquires Pressure Technologies (LON:PRES) fantasy me thinks!

All the best.

9th Mar

Paul always dismisses the name (Treatt) on the basis of valuation. He’s thoughtfully endeavouring to protect his readership from excesses - like WAND ;-)

Never was a truer word said in jest - though I did not expect to be so prescient so soon. I hope most managed to avoid this fraud. I found the CEO far too bullish and I’d be surprised if he did not know about the cooked numbers.

Graham Neary

You're welcome, JASVFS!

re: TT electronics (LON:TTG)

Hi Lefty, I didn't get around to covering this on Wednesday but it has now been covered in Thursday's report. Thank you very much for reminding me to do this one! G

Hi planetX

Sold 50% of Somero Enterprises (LON:SOM) for a modest loss and added a few Pressure Technologies (LON:PRES). Not sure what propelled the latter this morning, although the prelims must be any day as the AGM has been announced for 31 March.

Small Cap Value Report (Wed 8 Mar 2023) - RTN, SOM, CTO, HEAD, BUMP, MMAG

Paul’s Section:

Somero Enterprises (LON:SOM)

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Paul Scott

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