Small Cap Value Report (Wed 9 Feb 2022) - MNZS, SYS1

9th Feb '22 by Paul Scott

84 comments 10010 reads

Good morning, it's Paul & Jack here with the SCVR for Weds. Today's report is now finished - quiet news day, and I'm off for an investor lunch.

Agenda -

Paul's Section:

John Menzies (LON:MNZS) - a cash bid approach, from a Kuwaiti infrastructure company at 510p (52% premium) looks very appealing. However, the Board rejects it, saying it's opportunistic & undervalues the company.

System1 (LON:SYS1) - Q3 trading update looks OK (in line with expectations), but a broker downgrade has taken the shine off things this morning. Difficult company to value, but there might be something interesting here, time will tell.

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:

John Menzies (LON:MNZS)

335p (pre market open) - mkt cap £294m

Rejection of Unsolicited Approach

Big news here for MNZS shareholders - the company has received a 510p cash takeover bid (up from previously, apparently undisclosed 460p cash bid) from a Kuwaiti infrastructure group called Agility. Agility’s shares are listed on the Kuwaiti & Dubai financial markets.

Having a quick look at the investor relations section of its website, Agility looks a credible bidder - and offering a full cash bid for MNZS, it’s not mucking about. 510p is a generous 52% premium - likely to be very tempting for MNZS shareholders.

I can’t see any previous announcements about a takeover approach, so it’s surprising that MNZS does not…

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Wilbraham

9th Feb '22

Pretty please. So many posts today giving no clue as to what company they're rabbiting on about. Generally I just move on as clicking on the post they're replying to takes several seconds to load up and then I lose my place in the main thread. What's so difficult about including a tickr, guys n' gals?

RebelChatRoom

Hi Paul. Re MNZS - What the co say about another £200m in sales in the short to near term would double sales and on much better margins. Also Philipp Joeinig bought 1.2m shares @ 390p in Sep 19 just before Covid when he tookl over as exec Chair which is a lot of skin in the game, he bought a further 1.2m @ 290p in May so an ave of 2.4m @ 340p - I think he fully understood the value he could create here, coming from Swissport. I think there's much better value in MNZS staying independent rather than 510p. During the pandemic they have gone around acquiring on the cheap, winning loads of contracts and now Australia, Sweeded and lots of other countries they serve are just starting to fly again. I've seen estimates of £7 being the value here and in the added sales are correct they will justify thsat on a PE basis before long imo. I'm obviously biased and long from 130p so I would say that.

topvest

I hold System 1 . Management are very strong - definitely an intelligent fanatic iconoclast (using Ian Cassel language!) running the show. I am not surprised by the price pull back today as the quarterly results looked a tad disappointing. Maybe some COVID-19 negative impact. I guess the potential is enormous if their data revenues keep accelerating. The path forward will be bumpy, as nothing grows in a straight line. For those following System1 its worth subscribing to their daily ad. email - keeps you abreast of the top TV Ads and how their system works. It's free.

I thought the Wynnstay presentation was really good. Happy to hold this steady and old fashioned company.

yiannos1

I said you are absolutely wrong but good luck with this one.

You don’t need to convince me that they haven’t got a massive debt.

They do and they pay £14m per year in finance costs.

This is a company that has been capitalising its costs for years.

This is a company that it’s revenue it’s falling and will continue to do so.

We agree to disagree so let’s move on.

intuitive6191

Completely agree. I would also add that many experienced posters who contributed greatly to the board seem to have disappeared and their content now very difficult to find.

davidjhill

ok - I give up. You have an attitude of "I am right don't correct me with the facts!"

If someone shows you something that is black you will swear blind it is white, so never mind. It's a waste of my life discussing anything with you so I won't bother anymore.

No it’s not like that at all.

Do you have a mortgage?

If you have then you do not owe money on your mortgage ( this is what you are trying to persuade yourself ).

N Brown has a massive debt and without that debt wouldn’t be able to finance its customers.

It wouldn’t be able to operate unless it had net cash of around £400m , something that will never be achievable.

This is why they pay £14m of finance costs per year.

If you looking for a dirt cheap value share though , try Coral Products plc. Around £8m cash , and I am talking about real shareholders cash ,and another £2.5m of property on sale. A profitable business and a 7% dividend yield. Market cap around £13m. Directors are buying and there is an ongoing share buyback programme.

Good heavens I despair. This is my very last try.

N Brown (LON:BWNG) operates a finance house. It is basically acting as a bank. It has already lent £600m to its customers in loans who are paying that money back over time. But because it had built up £300m of cash it only needs to go to the wholesale market and borrow £300m. This debt is secured borrowing against the loan portfolio. On the £300m it has borrowed it pays interest of £14m, or 3%, but it lends that money to its customers at a much higher rate. The difference is called the NIM (net interest margin).

This is the same for every finance house. The business therefore has real net assets of £300m. In other words if they just let the book run off and not continue to lend to new customers then they would be left with £300m sitting in cash (less any defaults).

This comment has been moderated

James101

We shall see David but hopefully you're thesis is right. I have a Boat load of these so the more the better.

Out of interest what is you're say 2 year price target for Saga (LON:SAGA)?

bryans1311

I don’t think that could’ve been explained more accurately, more clearly and more patiently!

Hi James - I think Saga (LON:SAGA) can be doing £150m profit from the insurance business, £100m from travel (inc cruise) and £20m ancilliary over the medium term of 2-3 years. Thats EBIT so conservatively call it £150m after tax. Should trade on maybe 12* in normal conditions so up to £1.8bn market cap.

So if they execute well and get some normalised conditions that equates to anything up to 1500p. I'm not saying they will get there but I think that's the potential. Personally I'm looking for north of 1000p on eps of around 80-90p in 2 or 3 years. Looks like broker has a 1 year forward eps of 50p.

Agree with dahokolomoki and Dicktrade too per below : I think they will be a big net beneficiary of the new "price walk" insurance quote rules and should have very strong pricing power on travel insurance.

GrahamF

”Management are very strong - definitely an intelligent fanatic iconoclast (using Ian Cassel language!) running the show”

I don’t think I would agree with that. Kearon botched the name change from Brain Juicer.. They don’t even own the www.system1.com domain! Net profit for 2023 is forecast to be substantially lower than it was in 2016 and 2017.

Bouden54

Sounds like an interesting special situation N Brown (LON:BWNG) will need to take a closer look. Trading at discount to net tangible assets, so appears market is ascribing a negative value to the actual trading business - this would normally only occur when the underlying business is expected to be persistently loss making and suck all of the value out of the balance sheet.

jamesalastair

You are a patient man Mr Hill!

Epsilon

Re the valuation of N Brown (LON:BWNG) .

There are quite a few UK listed companies with a P/Tangible Book Value < 0.6 that have seen FY1 upgrades in the past three months including Barclays (LON:BARC) Kenmare Resources (LON:KMR) Seplat Energy (LON:SEPL) Petra Diamonds (LON:PDL) & Virgin Money Uk (LON:VMUK) .

All of these names have market cap > £100m.

Moreover, the first three of these companies enjoy a StockRank in excess of 90, compared to the 69 of N Brown (LON:BWNG) .

yep Bouden - Having gone through this in detail today I agree. They've stopped the recurring "one off" exceptional items that had been a feature previously so no dodgy adjustments, which is positive to see. I calculate the EBITDA of the product line (online apparel retail) at circa £60m less Capex of £22m so £38m appears a reasonable ongoing number of actual FCF. The residual £35m EBITDA (£92-96m guidance) is from the finance book less the interest of £14m so that appears to throw off £20m profits after impairment write downs.

Hence, as you say the online retail trading business is basically valued at nothing but should generate £38m positive cashflow. There will be chunky depreciation for a few years to work through the accounting numbers but obviously this is sunk cost borne by previous shareholders. I prefer to look at cash generated going forward.

Taken them a while to get their house in order but I have them at FV of around 75p assuming the Allianz claim goes against them in full and around 90p if not. But trading at a significant discount to TNAV that looks like a good risk/reward skew. Dividend is mooted to be back on the table too.

Paul Scott

Respect Richard! You foresaw the turnaround here, I remember us discussing it a while ago. Well done :-) Banking the profits? Must be tempting. I'm surprised it didn't rise more early doors.

Boon

I think I also read Ryanair changing their tune today and being super positive about spring and summer?

Small Cap Value Report (Wed 9 Feb 2022) - MNZS, SYS1

Paul's Section:

John Menzies (LON:MNZS)

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