Small Cap Value Report (Wed 9 Oct 2019) - RCN, TCN, VTU, FAN, CDM | Graham Neary

9th Oct '19 by Graham Neary

50 comments 8171 reads

Good morning,

A few bits to cover today.

Redcentric (LON:RCN)
Alpha Financial Markets Consulting (LON:AFM) - dropped this one, as not interesting enough!
Tricorn (LON:TCN)
Vertu Motors (LON:VTU)
Volution (LON:FAN)
Codemasters Group (LON:CDM)

Redcentric (LON:RCN)

Share price: 85.9p (-0.1%)
No. of shares: 149 million
Market cap: £128 million

Trading update

This is a simple one: trading in line with expectations.

Redcentric is a managed IT services provider that offers the IT/Cloud services you'd expect from a mid-sized group.

Net debt is light, at £16.5 million - no major surprise, then, to see that RCN is paying out dividends and also buying back £2 million of its own shares.

Net debt has declined over the past year despite dividend payments and "an acceleration of network and infrastructure capital expenditure in the period."

While reported net income has been nothing to write home about in recent years, if this company hits its forecasts from now on then it will offer decent value at current levels.

Tricorn (LON:TCN)

Share price: 11.2p (-38%)
No. of shares: 34 million
Market cap: £4 million

Trading Update

I'm not going to bother covering Alpha Financial Markets Consulting (LON:AFM), which was in the original list.

Let's move on and see if this announcement from Tricorn is worth looking at.

Paul covered the company in April. His summary opinion was:

It's difficult to get excited about this - a small engineering group, with a bit too much debt, is not going to attract a high rating.

Deary me.

Today's announcement is a nasty one. Let me put the problems in bullet form:

USA demand "broadly in line with expectations"
USA margins are down, due to tariffs on Chinese imports. Tricorn phrases this elegantly, saying there is a "lag" between the imposition of these tariffs and its negotiation of higher prices with its own customers.
UK demand "slowed significantly", with H1 revenues down 12%.

The upshot is…

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xcity

9th Oct '19

I assume you have read it.
And actually they don't.
The GFA attempts to reconcile two fairly contradictory positions. The principle is that the Nationalists can act as if they are Irish, and that the Unionists can act act as if they are British. And they constructed a system of government which required the participation of both communities. And should a majority ever indicate a preference to become part of the Republic then there would be a referendum.
It never managed to achieve that - Stormont has been suspended for a long time because Sinn Fein won't participate.
The Germans are upholding one part of the agreement (that the Nationalists can act as if they are Irish), by rejecting the other part. This is why the DUP are so adamant about rejecting the original Irish backstop.
The most recent British proposal (consent from Stormont) works in theory by achieving consent from both communities, though possibly not in practice because Sinn Fein have collapsed Stormont.

Trident

I was originally a marginal Remainer, but have switched to Leave. Its clear we have to rebuild a relationship with the EU, rather than reform from within. This is obviously a very complex situation, but its odd really that the EU has become a money washing operation of funds donated by the UK and others to feed it back to UK countries such as Scotland and Wales in the form of grants etc, so that they can feel better about themselves that somehow the money doesn't smell as if it originally came from us!

Perhaps we should leave it in an anonymous Swiss bank account in future, and say help yourselves!?

chrisgb

Xpediator (LON:XPD) in their half-year report say "... custom clearance activity is potentially a significant opportunity for the division." Hmm.

SundayTrader

On the subject of Brexit beneficiaries, what about Costain (LON:COST) (and some other contractors currently looking cheap)? On the same rationale, namely release of infrastructure projects currently held up by political deadlock, but a lot cheaper than Kainos (LON:KNOS) which I think the market rates as continuing to prosper whatever the politics.

If we think the £ would go a lot lower, then we should be stocking up on export heavy businesses - but that faces the difficulty that the whole world is looking more recessionary, nothing to do with our politics.

jwebster

"I'd like to ask what people's views are on the winners and losers among small cap shares from a no-deal Brexit"

Many moving parts. Day-one the Pound will drop and yo-yo around looking for equilibrium. Bond market will go crazy, with yields dropping expecting an emergency response from BOE. But, if Sterling drops too much, BOE would actually increases rates to defend the Pound.

Assuming not, i.e. base case is Sterling drops to around 1.10 to the USD then the FTSE100 large caps will move around, miners like RIO up with the FX gain. Domestic firms like Lloyds down. Property companies and builders down.

Small caps, I'm not sure. They should mirror large caps, i.e. firms with USD income gaining. For example, I bought a few Vitec (LON:VTC) recently, with their international earnings part of my value consideration.

But what I'm not sure about is the uncertainty and investors initially selling off everything and hiding in bonds, gold, cash. Bargains would arise in small caps in that case. Could be some great buying opportunities with a sell off.

I'm sure the government will then announce a huge borrow and spend programme to prop up the economy, which will whip the markets. Who will buy all those Gilts? Potential to actually raise rates here through too much supply. Government contractors could be winners here.

Following this, a hard Brexit means the UK actually have to go back to the EU to negotiate a trade deal, so expect another couple of years of back and forth.

The other dimension, is an upcoming general election. Tories will lead on no-deal to fend off Farage. But a Corbyn win raises the spectre of all sorts of issues for the share market, such as the 10% reallocation of shares, dividend taxes, nationalisations.

Not sure H&T and Ramsdens do well within a recession, as loss rates increase. Usually sub-prime lenders crash first, then gain just after a recession when a wave of new customers arrive and loss rates stabilise. Actually, in a recession most shares just sell off, with the exception of utilities.

I think individual companies with strong balance sheets and good international earnings will push through regardless. I would like to buy dips and have a shopping list. But need to see a good margin for error given the issues.

I've also noted, fairly extreme policy outcomes previously unthinkable are now politically on the table from both parties, thus, overseas diversification as well.

Gromley

I note that AdEPT Technology (LON:ADT) shares are down c. 10% today on no news that I can see. The drop actually happened from 10:30am. I was going to say that this was on quite low volume (c. 25,000 shares traded) but I hadn't realised how thinly traded these shares are, the volume is already well above a normal day.

Anyone know anything? Is this just the response to a single investor selling or is there other news reading across to this?

TamzinPiworld

Here's £CMD FY19 results presentation, to help put today's trading update in context.

Also, we've just published DX (Group) (LON:DX.) H119 results webcast. (Results were published about 2 weeks ago.) . The new management team who arrived in 2017 are turning things around. Here's all three of them talking through what they've achieved, their strategy and the outlook.

Beginner

I live in NI. The arguments regarding the agreement are a total red herring. There is no real peace here. Dissidents will however use the departure from the EU as a means for legitimising an increase in violence. The various Govt of Ireland Acts from the 1920s onwards guarantee freedom of movement and reciprocity of services. The UK will not impose border checks. Will Ireland? Probably only if instructed to do so by the more influential EU players.

Useful investments may be those companies which pay dividends in Euros ( £PTEC ); or those with substantial US interests ( £WG or £BP ).

sharw

AdEPT Technology (LON:ADT)

Doesn't look like a "single investor" - 3 trades Thursday, 2 Friday, 5 yesterday and 22 so far today. ?Tipsheet.

HornBlower

anyone following Liontrust. Quarterly AUM out today. Has had inflows of LTM run rate of 21% over the last 8 quarters. trading at 16x calendar 2019 EPS

I might be adding 2 & 2 and getting 5, but I note Water Intelligence (LON:WATR) are down by a similar percentage as AdEPT Technology (LON:ADT) with the "action" also starting around 10:30

Curiouser & curiouser

FREng

Isn't it the case that the EU cannot allow the NI border to bevome a route for goods to flow into the EU that they wouldn't allow in across other borders (maybe also services and people)?

In which case, the choice for the EU is either a border in Ireland or one between Ireland and the rest of the EU, just as (for goods flowing into the UK from the EU), the choice for the UK is either a border in NI or one between NI and the rest of the UK. The UK's problem is somewhat easier because (as an EU member) all EU goods are currently acceptable in the UK, though that will change as the regulations inevitably change on either side.

Surely this has been obvious since 2016 and that's why the hard decision was kicked down the road by inventing the "backstop" until a solution could be found.

timarr

If we think the £ would go a lot lower, then we should be stocking up on export heavy businesses - but that faces the difficulty that the whole world is looking more recessionary, nothing to do with our politics.

Since the referendum the fall in sterling has dropped through to exporters' bottom lines. However, if we leave the EU without an agreement then any further fall will be balanced by an automatic increase in tariffs to exports to the EU and the countries the EU has free-trade agreements with. So I don't think you can assume exporters will benefit from a further drop in the pound, you have to analyse on a case by case basis to see where they're exporting from - and whether they import components from EU, which may be affected by border controls.

More broadly I don't think it's possible to predict the outcome of a no-deal exit: some of that must already be priced in, some it is in the realm of unknown unknowns. More generally, you'd expect good companies to manage the transition better than poor ones, but no doubt unintended consequences will lead to surprises where we would least prefer them.

bryans1311

Agree with your comment Beginner. Also, good to see a fellow NI resident on here. I always thought I was alone!

greenhat2

The Germans are upholding one part of the agreement (that the Nationalists can act as if they are Irish), by rejecting the other part. This is why the DUP are so adamant about rejecting the original Irish backstop.

With regards to the latest UK proposal, this isn't the case at all.

The Germans and EU rejected the UK proposal which was to give the NI Assembly (not sitting at the moment) a veto every X years.

The fact is, the DUP (and SF) have a veto on anything the Assembly enacts.

Thus the DUP could have scuppered any interim customs arrangement even before the first X year revision date.

It was totally unworkable.

It seems UK Govt put this proposal forward without even checking this... or did the DUP suggest it in full knowledge that if the EU accepted it, it would fall straight into their lap and make them political and statesmanship genii.

doublelutz

I have next to no knowledge of the Irish situation but had we dropped out of the EU last night without a deal what border checks would now be in place. The UK has no need to have border checks provided that we have no intention of applying duties to goods originating in the Republic. Maybe the Republic would want to apply duties to UK goods entering their country but that would be their decision or that of the EU.

In all honesty, I don't think there would be any visible border checks, on the Northern Irish side. The UK government has already stated as such, and I think with the political situation being the worst it has been since the mid 90's, they would be afraid of providing further propaganda to republicans.

On the other hand, I think we would see more of a visible presence on the ROI side. they will need to be seen to be "protecting" the EU frontier. Also, the current Irish administration- especially Varadkar and Coveney- have been rather provocative on the border issue, and have made no secret of their desire for a UI. I can actually see them taking some pleasure in being as visible, and making life as difficult for NI as possible. ie. "Make them suffer, so that their only way out is unity".

Personally I voted remain because I foresaw that the NI border would be a problem. Now that it's inevitable, I'm very much a hardline Brexiteer, after seeing the behaviour of both the EU and Irish government.

Back to the original question, listed beneficiaries of Brexit I see as those with USD denominated revenue, and zero impact from any tariffs. Anglo Asian Mining (LON:AAZ), RockRose Energy (LON:RRE) and Bioventix (LON:BVXP).

Aislabie

With volume now up to over 80,000 this is a big day for AdEPT Technology (LON:ADT) shares. The free float is only 43% and almost 23% was held by Charles Kingsman, who between November 2017 and May 2019 was also a non- exec director. If he is starting to sell it would put a lot of weight on the price

The UK has no need to have border checks provided that we have no intention of applying duties to goods originating in the Republic. Maybe the Republic would want to apply duties to UK goods entering their country but that would be their decision or that of the EU.

As we're after hours ... it wouldn't be an EU, Irish or a UK decision, it's governed by WTO rules.

The UK does wants to apply tariffs to some goods from the EU, as under WTO rules we have to charge everyone the same unless we have free trade agreements in place. The latest proposed tariff schedule is here: https://www.gov.uk/trade-tarif...

The same applies in reverse - the EU has to charge the UK the same tariffs as any other country trading with it on WTO rules. So somehow there needs to be some form of border check (physical or virtual) to prevent the NI border becoming a backdoor for tariff free imports into the UK/EU. The alternative is to have checks at the point of entry into the mainland, but that creates a de-facto border in the Irish Sea, which the DUP are opposed to, or with the Republic, which breaks the Treaty of Rome (and won't happen).

Secondly the UK wants to stop free movement of people - somehow there need to be checks on people coming over the border, otherwise this becomes the easy route for illegal immigrants -- and a target for criminal gangs, probably connected to dissident Irish groups. That seems to me to be the most likely flashpoint for violence.

Thirdly the UK wants to diverge from EU standards, so in time there will need to be border checks to make sure that our new standards are being met. All of these issues apply in reverse. To take one particularly unlikely example, if the UK ever did a trade deal with the US and allowed the import of chlorinated chicken then the EU would want to stop this flowing across the Irish border and potentially into the rest of the EU. I doubt that will ever happen, but it makes the point quite well.

I have some sympathy with politicians on both sides of the border - I think this is an intractable problem. None of the governments want a hard border but the logic of the UK reclaiming control of its borders makes it difficult to see how to avoid one. Personally I think both the EU and UK should agree to a temporary backstop and to simultaneously fund a border technology project to the tune of a few billion, with the resulting technology deployed to avoid hard border controls. It wouldn't be perfect, but it'd be better than another war.

ken mitchell

Re Brexit and share ideas.

Key fact rarely covered is that really there is no such thing as no deal. If Brexit happens there will then be years of negotiations ahead, deal or no deal. Arguably those negotiations will go better for both sides if not after rancorous UK exit.

As for share winners once this first stage of Brexit is history, arguably it is the bombed out larger Company shares currently on very low PE ratios and sometimes extraordinarily large dividends that could benefit the most. Short term perhaps further 20%ish downside if imminent no deal. If out with an agreement likely immediate bounce. If (favourite?) another extension then those shares likely to continue to drift with best tactic to buy on dips and close to 12 month lows.

I posted examples of shares that could do well in this post (21) a couple of months ago. Most are a bit higher now. There are many others that maybe are even more worth checking out?

https://www.stockopedia.com/content/small-cap-value-report-mon-19-aug-2019-ixi-gnk-rbg-bvc-mti-505711/?page=2#comments

Others worth a look include these 2 mining sector shares, though China/US trade war and slowing world economy rather than Brexit, is behind their share price falls,

EVRAZ. £4. In freefall at present and down from £7 but PE 5 and astonishing 14% dividend if held. Their last update did show significantl profit fall but outlook comment was positive. Stocko Q92 and V92.

CENTRAL ASIA METALS. £2. Recent low £1.80. PE7 and 7% dividend with increase quite likely.

AND 2 non miners worth a look?

IUKD. IsharesUKdividend. 720p and 7% dividend. I know little about this one but it was suggested by a poster on a thriving BARGAIN thread on Mike Walters subscription website. The investments are in big dividend paying UK shares and these are often in FTSE100. Buying could solve the problem of which ones to choose. Share has been over £10 and low in 2008 extreme bear market was £5. So perhaps 50% upside in time with dividends on top, and worth an average down if buying half stake now. Most of my dividend buys are half stakes for now.

HAMMERSON. 769p. £2.68. PE10 and dividend 9%.

They still have a progressive dividend policy though for how much longer? I bought at £7.10 which is close to recent low. That price or lower again on no deal crash out?

By all means have a go at any of the big dividend paying shares worth looking at in this post and in the previous one. And better still, I’m also keen to know of smaller companies paying good dividends that have fallen heavily and look well worth considering.

Small Cap Value Report (Wed 9 Oct 2019) - RCN, TCN, VTU, FAN, CDM

Redcentric (LON:RCN)

Tricorn (LON:TCN)

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Graham Neary

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