Small Cap Value Report (Weds 12 May 2021) - REDD, VTU, RBG, JOUL, MACF, MER

12th May '21 by Paul Scott

72 comments 10782 reads

Good morning! It's Paul & Jack here with the SCVR for Wednesday.

Timing - we're hoping to be finished by 1pm official finish time today, and I'll be catching up on a couple of overdue items from yesterday (e.g. Revolution Bars (LON:RBG) (I hold)).
Update at 11:48 - let's extend that to 14:30, as I've got 3 more companies to cover.
Update at 15:23 - punctual as ever (!!) - today's report is now finished.

ZANE Zoom

The team at ZANE (my favourite charity) have been absolutely thrilled with the £22,766 we've raised, with more in the pipeline from Mello Monday's charity pledge fundraising too. ZANE has doubled up our donations, with a release from its reserves, so that's over £45k in total - remarkable! Thankyou to everyone who contributed, large and small, all are greatly appreciated.

Anyway, the team at ZANE thought that, with so much interest being shown in the charity, that they would set up a Zoom for us, to meet some of the team, including case workers from Zimbabwe, who want to tell us about the current situation there, and the type of work they do. This should be a fascinating insight into ZANE's work, and I urge you to try to find the time to join the Zoom, even if only for a little while. Every time I hear about how dreadful life is in Zimbabwe, it makes me seriously thankful for my life here in the UK, and I stop moaning about my own trivial problems (for a day or two anyway!)

It is this Friday, 14 May, at 2pm

There are security issues operating in a difficult country, so I can't put up a public link.

ZANE has asked me to collate the email addresses of people who would like to attend, which I will vet & then pass on to ZANE, who will invite people individually. The audience will I suppose be in listen-only mode, so there's nothing required from us. Although I do think it's polite to put your camera on when Zooming, as it helps the speakers visualise who they're talking to, and get some body language feedback, or just a reassuring smile, but that's a personal choice.

To book your place on the Zoom (all readers here are very welcome!) just email me at: ZaneMeeting@gmail.com

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Watchdog

12th May '21

I think it was Paul who deciphered this to mean "Van Rental Company"!

55555

Paul ... a few things I don't think you are factoring in;

1. residuals in the used van market place are sky high at the moment, so Redd would have benefited from this in it's latest accounts.

2. When they switch to a contract hire format, they won't benefit from inflated residuals, the finance company taking the risk will. Although they are protected from any losses, the liklihood of this happening is small in this economy.

3. Why contract hire when money is so cheap; the finance company will be making a healthy margin that Redd would normally have benefited from.

Any thoughts?

Boon

Haven't read in fine detail but just did a scan and ctrl+f on Vertu Motors (LON:VTU)

"Semi-conductor shortages are also likely to limit new vehicle supply in the months ahead as several plant closures and curtailments of production have been announced across the globe. Manufacturers are also having to balance the emission levels of their sales, which may impact production and availability. In contrast, the renewed strength of Sterling against the Euro and Yen makes the UK a more profitable market for Manufacturers to export cars into and this tends to increase supply levels. Overall, the Board believes constrained new vehicle supply is a key uncertainty in the near term which may impact the business."

New vehicle volumes were 33% of FY21 total, and 50% of FY20. So quite a substantial chunk of total sales. So far they're not crystalising the chip shortage risk, as manufacturers themselves haven't confirmed CY Q3 and Q4 supply crunch. A key risk to keep an eye on for any holders of Vertu.

transport_tycoon

Just wanted to add my thanks for the excellent quality coverage you guys provide.

There's no way I would have looked into Redde Northgate (LON:REDD) if it weren't for both the quant approach of the site and forensic deep dives in your write ups. There is far too much spivvy ramping out there (actually puts me off some stocks that might be OK). In contrast, the approach here very measured and goes way beyond what I could do myself.

I really appreciate it.

rmillaree

Redde Northgate (LON:REDD)
Those are great comments 55555 - i was thinking along the same lines. I suspect at the moment covid has created a mismatch between suply and demand if new vans are not being built or imported at the rate they were previously - i would suspect as ever this supply shortage won't last too long and as ever it may be that as everyone ramps up production things could easily go the other way at that time could leasing benefit them perhaps?- its often the case with certain items that there can be surplus /defecit situation more than there is an even keel. I own redd and was thinking could this be the peak of good news? but the good numbers today and forecasts for 2022 sort of give me confidence that i have no reason not to believe that the people who do know the situation inside out are confident. No guarantees as often companies may factor in this year will be like last year - i also do take confidence from the volume of business they do - there is enough sales being done that £1 billion of revenue income should be enough to generate some decent profits come what may - looking at the old pre merger numbers on stocky the net profit generated seemed very resiliant over multiple years which is a good sign in that regard. So on the run your winners basis aligned with the modest valuation i am staying put - thats bad news for holders as when i move on the good news from the company isn't far behind(i sold down some sdg on monday).
I even managed to accidentally sell my somero shares last week after the good trading update as i either hadn't fully cancelled my limit sell order (was on my tablet and in a hurry to go to work) or my cancelled subject to confirmation limit order was sold before it was cancelled by my broker - be careful with those limit orders peeps ! - i was gonna sell the prior day but the trading update was enough to make me have an about turn.

Hi ... thanks for your response. I still think Redd will miss an income stream ie. residual value profit, by contract hiring their vehicles. The contract hire companies will always set their residual value with a good degree of safety built in and are known to make healthy profits; profits that Redd would have been making. Most companies use contract hire as it's tax efficient and to access fleet discounts, but for vans it makes little difference and Redde will already have massive buying power. Also isn't one of their directors from BCA auctions, so they will have an easy access too mass disposals to the trade. Anyway, I'm sure they have their reasons ...

Kevin Holloway

thanks I did look for it but I was in a hurry so might have missed it

Harry Hindsight

If they can get Carrie to endorse I'm throwing in the farm :)

Housemartin2

No not relevant but these snippets are very interesting nevertheless !

Redde Northgate (LON:REDD)
Hi ... thanks for your response. I still think Redd will miss an income stream ie. residual value profit, by contract hiring their vehicles.

I think you could very well be right here , if that is the case lets hope the current market forecasts have factored this fact into the pie - it should be if the amounts are material - perhaps that's where some of the very impressive merger savings have bene eaten up or the other numbers factored in would have been higher. In summary lets hope overall broker forecasts have the bottom line numbers on track in that regard.

Interesting announcement from On The Beach (LON:OTB) today. They've decided not to sell any holidays starting before 31st August at this time, until there is more "clarity".

They took this decision based on:

YouGov survey that only 15% of adults would take the risk booking Amber destinations at the moment
Their visibility of Google Search and booking volumes so far

Not a good read to other Europe travel exposed companies. But really strong signal for staycation, local tourism companies.

Airtel Africa (LON:AAF)

Hello Abtan thanks for providing further detail ref your calcs.

"To be honest I think poor cashflow is a very good way to criticise any company."

I would agree that its great practice to red flag poor cashflow however it doesnt mean that your critisism has any merit , a business can genuinly go through negative working capital needs for extended periods of time and come out the other side with the obvious reversals or stabalisation that one would expect leaving long term cashflow being close to long term profits. If a business is in such a capital intensive phase for genuine reasons that do unwind later or do not repear later is it really fair to criticise per se ? I am not convinced it is - but thats just my opinion and that means didly squat apologies if my comment came across in the wrong manner - i can't argue with the fact you have dug through the detail and come up with some good probing questions - cashflow issues should probably be red flag number one for most investors so i applaud your approach here in digging into the dirty details fo what is a fairly complicated business.

Looking at the numbers quoted by yourself you seem to have included the 270 million paid for "intangible assets" within your calcs that make you arrive at the $160 mill total.

"despite investing $247m of intangible capex to renew licences in two of our largest markets, Nigeria and Uganda, and acquiring additional spectrum across a few of our markets.

Looking at the outlay here it seems more probably than not that this is upfront genince cash outlay for licences that presumably last a decent time into the fuuture - to criticise a company for spashing out for necessary capital investment that has preumably mostly future reward seems unfair.

Note i don't have the same issue with the purchase of property and plant adjusts as they are are matched by the depreciation charge for the year - albeit they seems to have mixed the two together when they say "depreciation and amortisation"

If we add 240 mill to the 160 mill figure you ended up at thats a decent dint in the shortfall between stated profits and cashflow.

Ok onto your second point

There doesn't seem to be much operating leverage here, whereby a revenue increase will lead to increased profits, or even increased cash generation, but perhaps there will be at some point.

I would beg to disagree here - the numbers ref operating profit are as follows.

Operating profit increased 24.2% to $1,119m in reported currency, and by 32.8% in constant currency.

Thats a decent result i would say at the operating level there are 3 main adjustments below that line that bring the final botom line figure much closer to prior year.

prior year had an extra 60 mill of finance income - thats not relevant to lfl trading calcs really

last year had 70 mill non operating income - thats not relevant to lfl trading calcs really

tax due this year is up 90 mill on prior year - taxes are what they are and hogher taxes dont necessarily reflect badly on the cpompanies operating performance this year.

if we look at pre tax profit adding back the non relevant 60+70 mill prior year items thats

profit pre tax this year 697 compared to "rmillaree comparible adjusted profit last year" of 470

On fair comparible trading metrics alone the company appears to grown pre tax profits by 48% that number seems fine and dandy to me if i havent got my maths wonky!!!

In some repects i was expecting for numbers to be much closer to flat with p/e of 10 being present - preumbaly they are a fairly household name where they are and i would ssupect thjeir customer base along would be woth a few bob to one of the big boys ?

Note i haven't really looked into this company in detail before today and i have been very time limited today so i could be slightly wonky in my thinking ref calcs used. If nothing else its certainly a fun set of accounts to dig beneath the hood to try and fathom what the reality is.

I am slightly wary of this type of sector if i am being honest it often seems to be a race to the bottom with costs - i was reasonably lucky to sell out of vodafone about 6-7 years ago at about 220p and i see they are now worth only 140p - ok they may have paid out the difference in dividends along the way but if the big boys struggle to increase profits by above inflation amounts then what hope for the like of Airtel Africa. Especially if everyone if will just be able to have everything sent via starlink in 5 years time. It is still an interesting prospect that may end up on my watch list for fun.

abtan

Hi rmillaree

No offence taken whatsoever, I enjoy a discussion, especially where it's quantitatively thought out.

As you've pointed out there's clearly a lot of moving parts.

A few points and then I think it's best for me to stop:

I'd be wary assuming those intangible assets are one-offs.
Intangible asset purchases have gone from $125m to $155m to $270m respectively over the last 3 financial years.
It might never stop growing and I personally would assume it's a regular annual cost, not a one-off.
I try not to look at operating profit.
There are too many adjustments that can be made - something I know from personal experience as I used to be one of the people posting accruals/releases/etc....and mistakes can be made too.
It's why I focus so much more on cash - it's much harder to falsify or make a mistake.
Given the tax credit Airtel Africa (LON:AAF) received in 2019 (for Nigeria or Tanzania - I forget), I focussed on Profit After Tax when analysing this year's bottom line.
I generally don't look at PE's for the same reasons mentioned in 2.

Right, I'll stop there as I need to work on holdings I actually own now :)

Thanks for continuing the discussion and good luck if you do continue to hold.

barnakles

Ouch! Thanks for the clarification Paul, that does put a different shade on it alright. They mention the deal will "bring significant benefits from ongoing customer relationships" - are they suggesting the customers of the seller will now use £redd? I guess it's a possibility if the seller is getting out of van rentals. Hopefully, sounds pricey for such a large order otherwise, although as other commenters have noted, very high residual values at the moment.

What they should have done is rather than contract hire their vehicles they should Finance Lease them. It's the same money from the same source, but Redd would take the residual value risk / profit and would be responsible for selling them. They've made a mistake using contract hire on this occasion :(

I also note that TUI reported today that their "order book" for summer has actually decreased from Feb! Many people opting to push to autumn or next summer. Summer order book 69% down from same time 2019. Not sure if UK only or UK+DE or DE only.

Redde Northgate (LON:REDD) (no position)

Hi Patrick

"However, it does sound like there might be some one-off gains from used vehicle sales boosted by a (temporary?) market price rises which presumably will continue at least partly in FY22."

I think there is some truth in this.

A few days ago ALD - which I hold and who operate in a similar space to Redde Northgate (LON:REDD) - posted their Q1 update which stated that used car sales had resulted in a unit profit of 439EUR.

https://www.aldautomotive.com/...

Note the huge increase in Q1 2021 Used Sales Income to 38.2m EUR from 3.2m/12.2m EUR last year.
(NB1: note that there was a 9m EUR impairment charge in Q1 2020, hence the 3.2m/12.2EUR I've noted above)
(NB2: For comparison Q1 2019 was 19m EUR)

This was a big surprise as during their Capital Markets Day last year they stated an expected 200EUR unit income on used car sales.

A few more snippets that may be of interest:

a) An illustration on how their business operates and makes money:

b) Link to that Capital Markets Day Presentation:

Cheers

MrBeak

13th May '21

Macfarlane (LON:MACF) Thanks for the update. Actually hard to find much information. I brought at 80p so its a share that is doing well for me

Boonboon

Vertu Motors (LON:VTU) interests me. Just wandering what the long term implications of electric vehicles are on servicing revenue.

Effortless Cool

Hi MrBeak,

Lot's of information on Macfarlane (LON:MACF) here:

https://www.stockopedia.com/content/macfarlane-the-long-story-451513/

I'm glad to hear you have made money on them. I think there is a way to go yet, however, and have added 20% to my shareholding since the AGM trading statement. I'll post more on this at the weekend.

Small Cap Value Report (Weds 12 May 2021) - REDD, VTU, RBG, JOUL, MACF, MER

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Paul Scott

72 comments

Macfarlane (LON:MACF) Thanks for the update. Actually hard to find much information. I brought at 80p so its a share that is doing well for me

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Small Cap Value Report (Weds 12 May 2021) - REDD, VTU, RBG, JOUL, MACF, MER

ZANE Zoom

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Paul Scott

72 comments

Macfarlane (LON:MACF) Thanks for the update. Actually hard to find much information. I brought at 80p so its a share that is doing well for me

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