Small Cap Value Report (Wed 9 Mar 2022) - Takeovers, SOM, STVG, HEAD, GFIN

9th Mar '22 by Paul Scott

42 comments 11071 reads

Good morning, it's Paul & Jack here with the SCVR for Weds.

The futures are indicating a rebound day today. The big question is whether the market is starting to form a bottom, or whether it's just a bounce in the downtrend. We've got no idea at this stage, so answers on a postcard please. I'll (Paul) be getting my chequebook out, with some early purchases of bargains on my watchlist. Selectively, I think there are some really attractive buying opportunities out there right now.

Agenda -

Paul's Section:

A brief comment on 3 takeover deals which have recently failed.

Somero Enterprises Inc (LON:SOM) (I hold) - superb 2021 results, in line with the update in Jan 2022. Lots to like here, and shares seem irrationally cheap.

Headlam (LON:HEAD) - briefly covered yesterday as looking a bargain, the price has moved up today on publication of excellent 2021 results, a solid outlook, bulletproof balance sheet, and news of both a special divi & buyback. This is right up my street, an excellent value share in my view.

Gfinity (LON:GFIN) - looks very wobbly, down 50% today on news of revenues falling short, and that it's run out of cash. Fundraising imminent, so expect considerable dilution. Uninvestable for me.

Jack's Section:

Stv (LON:STVG) - strong FY21 results and a confident outlook for FY22. This remains an intriguing property - Scotland’s most popular television channel and the fastest growing UK broadcaster video on demand service - but the operating enterprise is dwarfed by its pension schemes, which could be a deal breaker for investors.

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…

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Brookeda

9th Mar '22

I am long on Legal & General (LON:LGEN) and see this being a real coffee tin company. Its not going to hit the park out in any given year but with the progressive dividend there's a real opportunity I feel to use compounding at its best.

Doug2b

LGEN technically being a financial, although clearly not a bank, has had a double head wind, i.e. post 2008 caution re financials in general, in addition to the post 2016 head winds - some UK specific and some global, particularly since 2020.

So while the share price has been pretty static since 2014, it is worth looking closely at what happened to the share price from 2009 to 2014, despite the downer on financials. Since 2014, both the equity build up and dividend payout have been substantial. In 2013 LGEN's tangible equity was jsut under £6bn, today it is just under £11bn and that is after all those dividend payouts. The flat share price since 2014 can lead investors to think that LGEN just pays dividends and sees little share price gains, but if you look at the long term history of the share price and the last 8 year build up in equity and the current huge tangible surplus, LGEN is likely to multi-bag again, which it does have a history of doing after several years of a flattish share price.

truegent

i had no idea what their laundry business entailed until i saw one of their machines outside my local co-op ! its basically a laundrette in car park.

Neil W

Interactive Investor you can also buy from

Bouden54

Legal & General (LON:LGEN) life insurers have faced headwinds for several years from ever lowered interest rate (increasing liabilities) and more stringent capital requirements (Solvency 2 means they basically had to park more of their assets in zero yielding gilts) - the good news is that both of these forces could go into reverse, so these headwinds could become tailwinds. Very cheap and good growth prospects in my view.

davidjhill

Yes, that is the core issue with Gulf Keystone Petroleum (LON:GKP) but the politics are slightly different. The Kurds are semi-autonomous and assert the right to their oil. They are not going to relinquish it just because the Iraq supreme court says so. To enforce anything the Iraqi government will most likely need to revert to force and the Kurds are probably the better military outfit anyway, so that approach is unlikely. The most likely outcome will be a renegotiation in my view.

That said the other angle here is the payment schedule. The oil is sold by the Kurdish government and then paid to Gulf Keystone Petroleum (LON:GKP) each month but it's not exactly reliable.

Those two uncertainties hold back the price from being a more fair reflection and have done so for a while.

There are others out there. Petrotal (LON:PTAL) as an example will have a negative EV inside of 12 months at anything much above $100 p/b. It suffers from sporadic local community protests against the government (not the company, where there are actually very good relationships) and these do restrict production at times. Though management seem good at playing the negotiator between government and the local community which probably bodes well for them in the long term.

Serica Energy (LON:SQZ) is mentioned but I think I'd look for a UK north sea producer. Given the Russian situation it is certain that the UK will move as rapidly as possible to energy stability and that means areas around Britain should be back on the menu. Expect tax breaks for companies that can ramp up fast etc. Haven't done much digging yet on specific companies but am inclined in this direction. I also think Chariot (LON:CHAR) could be a massive beneficiary from its gas around Morocco and wouldn't surprise me to see this rapidly developed with a partner either.

Ms International (LON:MSI) could be interesting. They have a high weighting of cash vs market cap, pay a decent dividend and operate a defence supplier division that you'd imagine would be a major beneficiary of the current climate for years to come. Doesn't seem to have had any move during the current volatility.

BIACS

Yes, it's not without jurisdiction risk, as I mentioned, however the chances of Iraq wanting to shut down production on this field and cause a huge mess by revoking the license at a time of a global shortage of oil supply just doesn't add up and seems very unlikely - you can't view these things in a vacuum from the surrounding political and economic environment... If you were looking at this as a long term investment to hold for 5 or 10 years it would be a totally different analysis of course - but I'm looking at it as a 12 month oil price effect mitigant with an added big dividend thrown in and the decent chance of a capital gain on top if oil prices stay high enough. It won't be for everyone.

BattleOfBrit

Here are some names to consider for a watchlist:

I3 Energy (LON:I3E)
Riverstone Energy (LON:RSE)
Arc Resources
Tourmaline Oil
Meg Energy
Vermilion Energy
Whitecap Resources
Crescent Point Energy

Most of these are Canadian mid-caps.

It's all going to depend on your risk tolerance. I personally feel more comfortable with mid/large cap companies. One exception is the UK smallcap I3 Energy (LON:I3E), which is worth a close look.

One of the best energy analysts that I've come across is Eric Nuttall, who focusses on Canadian oil companies and who manages the top performing energy fund.

Snowbum

I took a starter position in Hurricane Energy (LON:HUR) last week following the U.K. govt highlighting the need for more domestic production. The price action on the chart suggests the bottom may be in for this one, when allied to the free cash flow they are currently generating, it seems like the company has turned a corner.

The point being that despite the many headwinds, LGEN has paid a large dividend and accumulated tangible equity on an accelerating basis - indicating accelerating genuine earnings, with remarkable consistency.

swanhunter

Related to the takeover point, my current employer is fund raising and it’s fair to say the climate is much more challenging than it was a month ago. Plenty have cash but there is a much greater reluctance to loan/invest until the world looks a little less uncertain. Feels much like March 2020 with the added attraction of Ww3.

Mike Wright

I work next door to the Headlam HQ, and their bosses cars are far less ostentatious than ours - so they get my vote.

Zipmanpeter

Re Saga (LON:SAGA) , the >80% of cruises pre-booked and its ability to raise prices.

Whilst what you say is true in 2022, after that I think ALL cruises will have to go up in price a lot but Saga will be relatively less badly affected than most since its 2 ships are brand new and more fuel efficient ie we can expect Carnival etc to go up by more.

In 2023/24/25, even if fuel prices stay high, that means bodies shifting to Saga (as well as those stopping cruising altogther). Since Saga targets and is priced for premium passengers already, I think they will still be able to pay and fill up ships esp if house prices keep going up. (Saga reports some crazy % of Saga customers are paper millionaires largely based on owning their own big property. At even 5% up on a house worth £500,000 is an extra £25K housing equity in a year vs a few thousand for a cruise even as your time spending it shortens!)

Furthermore, chances are that energy prices will fall back within 12months as oil is fungible -how much will a dodgy middleman cost for Russian oil to come back to Europe financially ‘cleaned’– +10% on cost? Alternatives to oil are also widely available after a delay, witness the EU plan.

I am not saying its nothing but if you believe that i) cruising by rich people will continue to cruise and ii) Saga is well placed to attract, on a multi-year basis the share price fall is overdone.

I hold Saga (LON:SAGA) on that basis and generally am struck by the power of Paul’s observation that in consumer stocks we need to be looking at the products for the 50+ market. For instance, I am betting on Unbound (LON:UBG) in a big way based on this insight.

I am more more worried that COVID or other outbreaks could undermine the appeal of cruising if COVID drags on for years which it could since as you say boosters only work for a time (and most of the world has had no jab at all!).

timarr

Re: oil companies

Riverstone Energy (LON:RSE) is a good call - could also look at Union Jack Oil (LON:UJO) or Iog (LON:IOG) for UK exposure, bringing production online at just the right time. They've shot up too, mind.

If you want to look outside the region then Jadestone Energy (LON:JSE) or Pharos Energy (LON:PHAR) combine production with decent exploration opportunities in regions that aren't too politically difficult.

If we assume that UK and European governments have finally woken up to the issue of energy security then we can reasonably assume significant investment in local hydrocarbons, nuclear and renewables. Get that right and we may get somewhere near to net zero by the middle of the next decade (frankly, I doubt it).

One added benefit of investing in any of these is that they're somewhat inflation proof, although clearly if we get a significant recession then the demand for energy will fall. So for anything other than on a short-term basis any energy based portfolio ought to try and diversify across potential energy sources rather than just focusing on hydrocarbons.

In the short-term, though, if oil remains over $100 then it's happy times for producers.

TheFloatingInvestor

I held PTHM till this share buy out bodge up...had great faith in the company restructure, and had just been tipped the weekend before that happened. I sold out that morning. What a shame, put a lot off I think.

KevinS1

Regarding Saga (LON:SAGA) and other cruise lines, whilst the bookings are fixed price, this isn't the case for all of the added extras once on board. I would therefore say that some of the increased "fixed" costs could be offset against all of the little extras that people purchase eg. booze, tours, events etc. I Hold.

davidallen77

hope that does not include the Norfolk Broads

stupormundis

10th Mar '22

I am intrigued as to why so many of you favour LGEN over Axa ... it scores higher on most metrics and a yield almost 3x greater .. what am I missing ?

Rusty2

AXA is french and not listed on the FTSE. According to my information, Legal & General (LON:LGEN) dividend is 7.47% on Stockopedia.

I don't have the European section on Stockopedia, so I can't see that information.

Small Cap Value Report (Wed 9 Mar 2022) - Takeovers, SOM, STVG, HEAD, GFIN

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Paul Scott

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