Small Cap Value Report (Weds 1 Sept 2021) - VLX, ECK, CHH, MNZS, SFR

1st Sep '21 by Paul Scott

28 comments 9432 reads

Good morning, it's Paul & Roland here with the SCVR for Wednesday. It's September already - that's summer gone then.

Today's report is now finished.

Agenda -

Paul's section:

Volex (LON:VLX) (I hold) - Ops Director's wife spends £238k buying shares at 390p in the market - a hefty vote of confidence in the company.

Eckoh (LON:ECK) - A very brief in line with expectations trading update. Looks expensive, and note that broker forecasts have been falling this year.

Churchill China (LON:CHH) - Interim results reflect the part-closure of the hospitality sector, but more recent trading is now ahead of pre-pandemic levels. That's very encouraging, so I can see why the share price has been strong this year. Lovely balance sheet. Overall though, it's too expensive to interest me, with recovery fully baked into the current price.

Roland's section:

John Menzies (LON:MNZS) - this aviation services specialist has reported half-year profits ahead of 2019 even though air travel hasn’t yet made a full recovery.

Severfield (LON:SFR) - this steelwork group has reported a record order book and trading in line with full-year expectations. Is there still further to go?

Explanatory notes -

A quick reminder that we don’t recommend any stocks. We aim to cover 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 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

Volex (LON:VLX) (I hold)

415p (yesterday’s close) - mkt cap £634m

Director Purchase

This caught my eye last night - a hefty Director buy, from the wife of Volex’s Chief Operating Officer, who…

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sharw

1st Sep '21

Paul - an aside from shares - is this what life is like in Bournemouth? -
https://www.bbc.co.uk/news/av/...

Chriskay

Sorry I don't hold Downing Strategic Micro-cap Investment Trust (LON:DSM) cwatson but I did notice the update which looked very encouraging. Maybe someone who holds could comment?

TooBaldTooSoon

Morning Paul. It would be good to hear your thoughts on John Menzies (LON:MNZS) if you can find the time. Interim results out today, a company I've had my eye on for several months now.

Breakout Trader

Worth noting that Volex (LON:VLX) has now broken through this long term support / resistance level of around 390p/400p as seen on the monthly chart. This comes off the back of almost 2 years of elevated volume, with respect to the previous 10 years or so, suggesting institutions have been getting involved.

This all looks good and I'm happy to hold for some years. It would not be unusual to see a re-test of the area between 385p-400p in the coming weeks, and unless there is bad news in the meantime, personally I'd be looking to top up in that area.

jonno

Is Alpha Fx (LON:AFX) really worth four times more than £AGFX on a crude forward PE basis. Admittedly I haven't dug into this morning's figure for the former's interims, but it strikes me that one of the share prices is wrong. Forward PE for Alpha Fx (LON:AFX) 8.5 or thereabouts and well north of 30 for £AFX.

Insofar as Argentex (LON:AGFX) is concerned recent business has been broadly positive. See the recent review by Jack in the SCVR of 1st July

Carl Jani the one of the original founders and ex-joint CEO of £AGFX has exited and recently fully disposed of his 12% stake, much of which was acquired by existing directors. The current CEO and CFO hold 12% and 5% respectively and there is solid institutional backing, with philanthropist, Sir John Beckwith holding 15% via Pacific Assets IT and Gresham House and Amati holding 5% plus. There may well be the proverbial elephant in the room, but to date I have yet to meet it. I have made an initial purchase and so please be aware that I am talking my own book.

As always please do you own research as I could and have often been wrong.

All the best.

Rusty2

Had a quick look at Argentex (LON:AGFX) and I see the profit forecasts have been revised £4m downwards for the next 2 years. Why did Carl Jani suddenly resign? I did find this article which maybe of interest: https://knowledge.sharescope.c...

Alpha FX (LON:AFX) which I hold is expensive but the revenue is up 90% in the last year.

I had a look at Downing Strategic Micro-Cap Investment Trust (LON:DSM), their largest holding is 17% in £RGF loan notes, maybe that is an issue?

It was 25% below NAV recently.

ken mitchell

c Watson

Downing Strategic Micro-cap Investment Trust (LON:DSM) has underperformed the UK Smaller Companies sector with performance dragged down by the very large stake in poor performing Real Good Food. But that stake is now down to 8% . That 20% NAV discount reflects past performance . Some successful Trusts often trade at discounts but the discount for DSM looks justified.

50% of their holdings are in Volex 14%, Hargreaves Services 10%, Real Good Food 8%, Fireangel 8% and Adept 7.5%. Stocko ratings for those 3 are 24, 24 and 62 for Adept. But Adept share price has been underwhelming.

I thought about investing in Downing but decided it was better buying the shares of their top 2 (which look good) instead.

joshwood976

Morning Paul,

Do you have any thoughts on the Instem (LON:INS) acquisition?

Thanks

BnB

I think the short answer is “yes”. I have held Alpha Fx (LON:AFX) for a couple of years and haven’t seen the forward PER expand anything like as much as the financial performance has rocketed. Yes, the PER is higher today than pre-Covid, but then so it is every other growth stock. Alpha Fx (LON:AFX) is on a fwd PER of 38, Cybersecurity super-stock Crowdstrike (NDQ:CRWD), which we also hold for some time and which also reported last night, is on a fwd p/sales of 38! Ignoring the brief crash in March/April 2020, neither has been “good value” at any point during my ownership - that’s simply not part of the thesis!

I consider Alpha Fx (LON:AFX) to embody everything that I look for in a stock: relatively new to the market, with a scalable, disruptive and sticky product that has a significant runway for growth. It has executed consistently ahead of expectations and shown great resilience during the pandemic. It even had to cope with one of its largest customers re-scheduling very significant payments at the pandemic’s height (I closed my eyes, prayed and doubled my position on the ensuing price collapse). And it has operating numbers that Terry Smith would purr at (ROCE in the 20s and operating/EBIT margins nudging 40).

I did however recently open a position in £AGFX. This was driven by a recognition of the burgeoning demand for disruptive FX services, £AGFX‘s own excellent operating numbers, and the opportunity of an entry point below £1, which looks opportune on a technical basis. The purchase is part opportunistic, part diversification. Argentex (LON:AGFX) may crash further or outperform in the short run but I do not expect Argentex (LON:AGFX) to match Alpha Fx (LON:AFX) for long term performance. For evidence, simply compare the historical income statements, but it’s also a question of the nature of the services. Alpha Fx (LON:AFX) is a technology platform while Argentex (LON:AGFX) has a very labour-intensive bespoke consulting product that is harder to scale.

I'd also like to point out the Downing newsletter re Volex (LON:VLX) was written BEFORE the Irvine acquisition! Very encouraging.

Downing Strategic Micro-Cap Investment Trust (LON:DSM) This large past involvement in Real Good Food (LON:RGD) puts me off, some of their other holdings are ok but not what I would buy, apart from Volex (LON:VLX).

rmillaree

£som Somero Enterprises Inc

One word of warning here (i am happy holder)

Generally Somero has traded on cheap ratings - if the current sales boom ends semi abruptly for them or we even get indication that the boom times may be over i suspect the market may revert back to type with this company. Ulitimately with the large capital items they sell the future visibility os never gonna be great. If they have temporary sweet spot boom i also wouldn't presume this would last for too long unless its due to expanded product portfolio - ie i want sales to be more of new products rather than spike in the old tried and tested ones.

I thought we were getting new product launch last month or was it the month before that ? was i wrong in this asumption - did i miss it ? or did the company fail to deliver in that regard?

Not Paul, but my 2p-worth would acknowledge the benefits of taking out a competitor and consolidating client bases at an accretive price (mostly in this morning’s gains) while twitching somewhat at the third acquisition in the past few months. I like the business and its market, where I have multiple holdings, including Veeva, a much larger competitor and one of the highest quality software businesses on the planet. I worry however, could indigestion become a problem for Instem in 2022? My other concern would be the big run-up in software stocks this last 6 months ahead of analyst PTs. On the other hand, Instem is relatively reasonably-valued.

mighunter

One can only guess with regard to Carl Jani's resignation, however if you look at his LinkedIn profile you will now see he has declared himself "Retired." So the lack of a sudden new start-up or alternative career direction (in addition to the period of ill-health whilst at Argentex (LON:AGFX)) certainly gives some potential clues.

GrahamF

I hold the Downing VCT. Has not been successful. They may present well at investor meetings etc but does Downing’s performance actually match up?

Bouden54

As others said this reflects poor performance in past. However I think as it stands today the portfolio looks interesting with positions in several companies I would consider owning myself such as Volex (LON:VLX) Hargreaves Services (LON:HSP) Ramsdens Holdings (LON:RFX) Duke Royalty (LON:DUKE) and Flowtech Fluidpower (LON:FLO) - they also have around 13% cash. The Real Good Food (LON:RGD) position is now only 8% and a loan note - from what I gather the company looks financially sound so hopefully this will get repaid without any problems

WDWombat

MNZS Menzies - a good and oft forgotten point on EV/EBITDA, the importance of depreciation and its relation to the replacement cost of capital goods which I would assume are increasing? I shan't spend time looking at the figures - I don't own the company but do know a little about the business - but will merely comment that given the near disastrous impact of the pandemic on an air freight handling business, and the awful timing for Menzies, thay seem to have done pretty well so far and some of the ratios look undemanding.

VLX Volex - thanks for pointing out the insider dealing which I had missed. It is pretty difficult to keep up with Volex but I suppose the acquisition and subsequent trading of De-Ka are really important for the next few years and so far the noises are very good. The company's gearing to electic cars is also crucial and will hopeully alleviate some of the pressure from the general new car slowdown emanating from the IC crisis.

QARPY

Me too. Somero Enterprises Inc (LON:SOM) next update will be on 13th Sept according to Google Finance?

The company is currently promoting heavily in the UK market and have invited all the major UK concrete frame contractor for a demonstration and seminar at their Chesterfield office in September (I do not have a precise date). To date, screeding of concrete floors in the UK is still done using hand operated floats...

Qarpy.

Somero results are on 8th September. They gave that date in their (upbeat) July trading update.

Small Cap Value Report (Weds 1 Sept 2021) - VLX, ECK, CHH, MNZS, SFR

Paul's Section

Volex (LON:VLX) (I hold)

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Paul Scott

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