Small Cap Value Report (Weds 11 Nov 2020) - ZOO, MKS, WATR, RCDO, RNO, MCS

10th Nov '20 by Paul Scott

96 comments 11055 reads

Good evening/morning, it's Paul & Jack here with the SCVR for Wednesday.

I'm starting this report early, on Tuesday evening, with some catch up sections from my backlog.

Agenda -

Zoo Digital (LON:ZOO) - Interim results from yesterday (Paul, done)

Marks And Spencer (LON:MKS) - interesting interim results webinar (Paul holds a long position) - (Paul, done)

Water Intelligence (LON:WATR) - interesting news on a new product (Paul, done)

Ricardo (LON:RCDO) - trading update and share placing (Jack, done)

Renold (LON:RNO) - Half year results (Paul holds a long position) - (Paul, done)

Mccarthy & Stone (LON:MCS) - Trading update (Paul, done)

Timing - today's report is now finished.

Zoo Digital (LON:ZOO)

Share price: 53.5p (down 3.6%, at market close)
No. shares: 74.6m
Market cap: £39.9m

Interim Results

ZOO Digital Group plc (LON: ZOO), a world-leading provider of cloud-based localisation and digital media services to the global entertainment industry, today announces its unaudited financial results for the six months ended 30 September 2020 ("H1 FY21").

I’ve been following this company for several years now, and it never seems to manage to live up to the expectations created. As you can see from the graphs below, at times it’s been valued at a high PER, despite lumpy and overall rather unimpressive profits, and it doesn't pay any divis;

rb1zEVMYkEYLGMBd3HTZWoCiCVaaf_0riDTJf_BP_3gKPfgyJgsoQRjXU7DlkSChpjVbAm-ekfZLlJQ80o4PKr-glC4JuM95HwrG86I7R7L6LhCXZdgBAIqwDxu7zRGivOxorqaU

I covered the trading update from ZOO here on 23 Sept 2020 where it indicated H1 (to 30 Sept 2020) should deliver double digit revenue growth. Nothing was said about profitability.

Interim results today;

H1 revenue growth of 15%, to $16.4m, consistent with the last trading update
Lower gross profit though, due to increased costs
Loss before tax of $(710)k vs. $374k profit in H1 LY - not very impressive
Balance sheet - quite weak, with NTAV negative, at $(2.0)m. Receivables look rather high at $9.2m

Outlook comments seem quite positive, especially the bits I’ve applied the wonky highlighter to below;

UZqoNciy_1eqGN5b3kVz-iWynfjjl0kj9Fm861X8utDhKXi4bwKl67fmLwBxsZKRpBNprKClbrjSr8JUFv0JXNSXdSEU8g3MFMYqweNFbXSSAtl_ITGd7ydeybvVkKylIxEfCOM8

My opinion - I‘ve not seen anything in these interim results to make me want to buy this share.

To be fair to ZOO, the TV/film sector has been struggling this year, due to social distancing,…

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Albm7

11th Nov '20

Premier Foods (LON:PFD), (I hold) Hi Jack, any thoughts on PFD results from yesterday? They looked ok on the face of it to me, I realise the stock got knocked down on the commentary linking duration of lockdown to further gains. I also liked the comments re: TV advertising as a potential read across to Itv (LON:ITV) ( I hold) .

Thanks Alb

timarr

Hi Chriskay

Fair enough but just remember that IG are not really a stockbroker, they're primarily a spreadbetting platform. In fact some IG clients had account access issues earlier this week. I'd also note the issues raised by Stuart Stone below.

To put this in context IG had access issues last year and earlier this year and most of the major US platforms crashed during the crisis in March. It's not really good enough, it's not like this doesn't happen with depressing regularity.

That said I hold a lot of both Aj Bell (LON:AJB) and Ig Group (LON:IGG) so personally I'm neutral :-)

simoan

A J Bell - The broker from hell!

9.38am and the value of my portfolio with A J Bell looks remarkably similar to what it was last night. In fact it is identical to what it was last night! They are unable to update them this morning due to 'technical problems'. Going to dig into my pocket and bear the cost of transferring everything out today assuming they are still in business!

Actually, you should be able to transfer stocks from AJ Bell at no cost since I won a FOS complaint against them a couple of years ago. The FCA stepped in to stop them charging exit fees for transfers to another broker. Of course, Andy Bell wrote some gushing promotional letter after the event making out it was a jolly good thing they were doing for their customers. You could hear his teeth grinding... the very essence of being disingenuous!

Anyway, I agree they are useless but still use them to hold my more long term SIPP holdings - there's no way I'd want to trade regularly using them in ordinary conditions, let alone on trading days like we have seen this week.

All the best, Si

Sorry for replying to my own post but I see that the FCA never banned or capped exits fees. How utterly toothless they are. I left this story once I had won my case against AJ Bell at the end of 2018 and accepted the compensation they offered. They also offered me a free transfer in specie from my SIPP to another provider, which I declined at the time, as that was not the point of my complaint.

However, it turns out the FCA never enacted a full ban or a cap on exit fees as they had proposed as part of their investigation. This means AJ Bell still charge £25 per stock for transfer out to another provider from ISA, SIPP or Dealing accounts. Just for a laugh, this is the announcement AJ Bell made at the time of the FCA findings in March 2019:

The FCA has today published the final report from its Investment Platforms Market Study. As one of the UK's largest investment platforms, AJ Bell welcomes the FCA's findings which it believes will help improve competition in the market and deliver improved customer outcomes.

Andy Bell, chief executive at investment platform AJ Bell, comments:

"Investment platforms play a vital function in helping people manage their long term savings and the regulator is absolutely right to question whether consumers are receiving the best possible service and value for money. Identifying areas where customer outcomes can be improved is vital for the development and growth of an increasingly important market and today's report is a significant step in the right direction.

"The FCA has confirmed that measures to improve transferability of assets between platforms will be extended to comparable services which is a positive development, particularly in relation to exit fees. A restriction in platform exit fees would not have a material impact on our business and as a net receiver of assets, we would expect to benefit from greater transferability of assets in the market.

“Enabling easier transfers of assets between platforms and other competing products will ensure customers are able to move more easily to better value services and will ensure healthy competition in the sector. We look forward to engaging with the FCA during the consultation phase.”

Andy Bell is wasted running a financial services company - he should be doing stand up.

E1Sutton

Paul your Nov 5th article was favourable re N Brown open offer at57p what say you now as the shares are trading now at 51p

QARPY

Thanks for your input JohnEustace and kgb1953. Yes correct, all i want to know really is what companies (listed) they have in mind and then research if they are worth investing. thanks

Wilbraham

Re Renold (LON:RNO) and other companies with material DB pension liabilities, people really should at least skim read the Pensions Regulator's latest consultation document summary https://www.thepensionsregulat...

In particular, p. 11 suggests trustees aim for a target 'Long-term Objective' for technical provisions (ie the present value of future liabilities) once a scheme is 'significantly mature') based on a discount rate of no more than Gilts +0.5% pa. Also note ''We are consulting on the principle that a scheme’s investment strategy and asset allocation
over time should be broadly aligned with the funding strategy, including consideration of
the TPs and journey plan. At the point of significant maturity, the asset allocation should
have a high resilience to risk along with sufficient liquidity and a high average credit quality.'' So, as time goes on, there won't be a great deal of scope for assumed equity out-performance and this is likely to become reflected in schemes' actual investment strategies.

Remember that 'employer covenant' is long been a key metric in tPR's thinking. In particular, a financial weak employer should take less risk and repair deficits faster than a stronger employer might be allowed.

It's all an evolving, joined-up approach to ensuring that pension promises are ultimately met. Some might argue the pendulum has swung too far towards member protection at all costs......

That would be nice, but I feel that a call for 'no exit fees' is whistling in the wind. As I understand things, there's often significant manual involvement in stock transfers between nominee accounts due to the complexity of different custodians etc. It's not a common activity so there's probably no great incentive to build a streamlined process. Perhaps ShareSoc is working behind the scenes to improve matters? For most investors, it won't be simply UK equities, but investment funds, overseas holdings etc which I suspect can be more complex. I suspect things could get quite sticky with a small stand-alone broker is there were a mass client exodus and they drowned in admin.

As things stand, £15-25 per line of stock doesn't sound unreasonable. My last transfer was at nil cost because the broker (ODL/FXCM) had decided to ditch its UK clients. Even that took a while and there were complications, eg with nil-value shares that had become delisted where I still had to sign undertakings that I was happy for them not to be transferred (as the receiving broker couldn't accept them).

There's a basic description of the transfer process here https://www.willisowen.co.uk/h...

The more I reflect, the more I feel it's often best just to bite the bullet and liquidate everything before initiating a transfer. And maintain at least two broker accounts to accommodate occasional 'issues' with one.

Would be interesting to hear from anyone who's experienced a smooth transfer process!

davidallen77

same with halifax prices were last night close

Paul any thoughts on Yu (LON:YU.) 100p made a small acquisition yesterday, mc 15million massive 100m revenue rather to small market cap maybe turning itself around the strongest of the bunch nice staff long term incentive plan up to 625p ceo owns 50%

apjacko

Hello timarr, nice piece of writing. At the end you have said 'that there are some little gems sitting round waiting to be stolen', in your opinion who are the little gems waiting to be stolen ?

Gromley

Another thing that struck me as being of interest is that whilst the beneficiary stocks of COVID and the WFH revolution have dropped this week - the drop hasn't been anything like the rise for the beaten down, cyclical and value stocks that have absolutely flown. So we have an asymmetrical situation of some things rising monumentally, and others falling a little.

I nearly missed that comment until someone flagged timarr's response to it.

I think it comes down to perspective - as I noted in an article shortly to be published at cube, by close Tuesday (I haven't updated for Wednesday yet) UK pubcos had soared by 30% on the back of the vaccine announcement. - That seems insane to me, given that for their purposes Christmas remains cancelled.

Taken in a wider timeframe though - Restaurants and Pubcos are still down c. 40% (average) on pre-pandemic levels.

So perhaps - they have seen an insane rise this week, but are still insanely cheap?

(Other interpretations of course, as ever, are available).

Tortoise investor

If you look at the Marks And Spencer (LON:MKS) half year operating profit for Ocado and the food business, once clothing and home gets back to some sort of normality (even if long-term trend in that business remains negative) you can see a decent re-rating of this share happening.

Also some of its most up-to-date food stores (e.g. Clapham Junction) are incredibly well designed and great places to shop. I think they need to improve the store experience for clothing and home though as I agree with kgb1953 that those stores feel a bit drab.

Chriskay

Thanks sharw. I thought my ears were burning over dinner. In fairness exit fees are only part of a platform cost package and one usually finds if they don't charge for one thing then they make it up by charging for something else, so the bottom line comes out at around the same figure across the board. My trades per month are reasonably high so that brings the cost per trade down too. Having been in IT for most of my life and also managed a lot of web design projects, I am acutely aware of sites which flow and ones which are just plain hard work. AJB must have designed theirs over a pint on a beer mat whereas IG's which I understand is a new one, is a dream - one click searches, intuitive, live SPs included and the ability to design your own workspace. Also end user evidence suggests that AJB clearly have creaking IT which I simply do not want to trade on or trust with my cash.

Hi apjacko

I started a thread here, but at the moment I'm talking to myself :-)

https://www.stockopedia.com/co...

I'm talking my own book there, but even after the rally a lot of UK stocks are looking cheap.

You'd think that someone would be running the rule over the Central London property REITs as well. Possibly Sage (LON:SGE) too? And Burberry (LON:BRBY) is far from out of reach in the high fashion stakes - LMVH have just bid $16 billion for Tiffany.

I should note that have a lousy record of predicting M&A. I can unfailingly pick the one company that doesn't get taken over in a sector rife with consolidation ...

whatmore1951

I was a pension scheme trustee for 25 years. The whole thing is a dog's breakfast. We see what is happening to some plc's but many private companies are under pressure as a result also. Indeed there have been many insolvencies caused by pension scheme deficits. More insidiously, funds that would otherwise be used in developing the business such as keeping up to date with technology or paying competitive wages are being poured into the pension scheme black hole. Over time, firms with pension scheme deficits get overtaken by companies that never had one in the first place. An example would be traditional retailers with old style pension schemes trying to cope with new online rivals.

I could go on. My personal view that investing in companies carrying a pension scheme deficit is not worth the risk Just my opinion.

MCTheDog

That’s an interesting insight and (pension deficit shoring up old, legacy tech firms trying to update/compete (read Digital Transformation). I keep a watchful eye on the solid Q and V fundamentals, but even they are easy prey to a management pressure point of “lets shore up the pension black hole”.

Good insight and noteworthy

Excellent insight, whatmore1951,

I am invested in a few companies with pension deficits and my rationale is essentially that they have more than enough cashflow to satisfy the top-up payments and that the share-price is overly suppressed by pension concerns.

Given that their business plans don't appear to be cash constrained, it never occurred to me to ask what they would spend the cash on if they didn't have to top up the pension.

The cynical answer might be that they would spaff the money up the wall on corporate vanity - but I have to have more faith in the management teams I am invested in.

I might try this question on a few CFOs and see what answers I get.

Paul Scott

12th Nov '20

Hi E1Sutton,

I've just re-read my notes on N Brown (LON:BWNG) again, here on 5 Nov, and wouldn't describe them as a positive or negative, it's quite nuanced.

If the open market price is 51p, and the open offer is 57p, then clearly it would make sense to buy in the open market, rather than taking up open offer entitlements for existing small shareholders.

I don't really have a strong view either way on BWNG. What's your opinion?

Regards, Paul.

Well, seeing as I took AJ Bell to the Ombudsman about their exit fees and they found in my favour and I received compensation for my exit fees from AJ Bell, I'd hardly call that "whistling in the wind". What's more, a few months afterwards in March 2019 the FCA published their final Investment Platforms Market Study report: https://www.fca.org.uk/publica...

Which contains the following:

Exit fees: discussion on the scope of potential remedies
1.10 In the IPMS Final Report, we state our view that a ban on platform exit fees is likely to be appropriate as a measure to reduce consumer harm. The report notes that to achieve
our aim, we need to consider the scope of any such remedy, given that platforms
compete in a wider retail distribution market. In Chapter 4 of this paper, we are
seeking further views on the potential nature and scope of this remedy. This includes
the extent to which any intervention should be extended to other types of firm that
compete with platforms in the retail distribution market. We are particularly keen to
hear from firms that are active in the distribution of retail investment products, but
which were outside the initial scope of the Market Study

Outcome we are seeking
1.11 Our proposals seek to improve consumers’ ability to switch between platforms
and enable them to benefit from lower costs and/or better functionality that suits
their needs. In turn, we expect this (along with the other remedies set out in the
Final Report) to improve competition in the sector, including lower prices, increased
efficiency and an improvement in the consumer experience. We consider that overall
this will help us to deliver public value through a better functioning retail distribution
sector.

My own assertion to the FOS was that it may all be very well imposing exit fees but £25 per stock is ludicrous. Does transferring 10 stocks really cost 10x more than transferring a single stock? If it does, why? High exit fees have only one use, as a disincentive for consumers to move provider if they are unhappy with the service they receive.

If other companies allow in-specie transfer out for free, why does AJ Bell still charge £25 per stock?? It's because they are egregious money grabbers who want to lock you in to their platform. I know that Hargreaves Lansdown and other brokers dropped exit fees following the FCA report but didn't realise that AJ Bell had clung onto them for dear life.

Small Cap Value Report (Weds 11 Nov 2020) - ZOO, MKS, WATR, RCDO, RNO, MCS

Zoo Digital (LON:ZOO)

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Paul Scott

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