Small Cap Value Report (Weds 13 April 2022) - WJG, AMAT, MRK

13th Apr '22 by Paul Scott

41 comments 7420 reads

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

Agenda - very quiet for news today, so we'll look back at one or two catch up items later -

Watkin Jones (LON:WJG) - an in line update, halfway through FY 9/2022. This is an impressive business, on a reasonable valuation, although I do have one concern about large Director selling in recent years.

Jack's section:

Amati Aim Vct (LON:AMAT) - a quick look at this well-regarded AIM VCT, more for the market commentary than anything else. It could resonate with a few private investors and nicely encapsulates the current investment landscape. Food for thought, hopefully of use and worthy of discussion.

Marks Electrical (LON:MRK) - trading update from Monday - market share gains and record revenue for this online electrical retailer. The group wants to grow market share from c1.5% to 10% over time, which shows ambition. How well margins hold up will be important, and that could be affected by supply chains, inflation, and competition if similar operators start popping up. But the group is trading well, and FY23 has got off to a good start.

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 (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:

Watkin Jones (LON:WJG)

254p (yesterday’s close)

Market cap £649m

Trading Update

Watkin Jones is the UK's leading developer and manager of residential for rent, with a focus on the build to rent, student accommodation and affordable…

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davidjhill

13th Apr '22

So I think that answer to that Paul.S is no in the case of Supreme (LON:SUP)

They have an rrp of £1 for the supermarket but some of them are choosing to sell at 115p so there is already a 15% additional margin baked in. The more likely scenario than the one you suggest is that Supreme (LON:SUP) raise their prices slightly and the supermarket will choose whether to stick at 115p or pass the additional 2 or 3p on to the consumer. Given the price inelasticity of demand on vapes I'd suggest probably the latter.

Batteies generally don't go up/down much and are staples but small in the context of supply to supermarkets. Unlikely you will see any supermarket squeeze here either

Norfolk'n'Good

Re £WJG

Well done Tim - on the money as per usual!

The other thing worth pointing out here, in my opinion, is that there is a huge barrier to entry. Companies with huge Pension Funds like L&G are not going to invest in companies in this space with no track record, so WJG are very well placed, hence their large and rising pipeline of orders.

It's actually very hard to repeat the magic Denzil and anyway the old Watkin Jones family retired, they didn't leave to set up a rival. I think this was a throwaway muse by Paul that has been seized upon as a risk when it just isn't.

Asset managers want certainty. In other words they want to know the project they are funding is going to get built on time, on or under budget and at a certain quality. The Watkin Jones (LON:WJG) brand is the cream of the crop when it comes to this. No Asset manager in their right mind will invest in a business involved in building/infrastructure that doesn't have a strong track record and isn't well funded itself. So the barriers to entry in this market are quite high. You would need to be at least 5 years in business and have completed 3 to 5 projects of size before an AM would touch you. To get there from a standing start would be difficult.

timarr

Completely agree. As the lowest cost vaping supplier by far, there's no scope for the supermarkets to demand price reductions because if Supreme walked away the substitutes would cost far more.

What I don't understand is how Supreme are the lowest cost producer, but does it appear to be the case.

Brookeda

Either right or wrong my strategy hasn't changed. I remain invested in companies that I believe will be bigger and more profitable in 5 years time. If something changes in one of those companies I sell them and buy another from a list I have. I am down about 6% this year so far but was down about 12% a month or so ago. When the indexes have gone down I have started to buy some vanguard ETFs on weakness and will buy more if they go down further.

Bouden54

Can't help noticing there are some terrific quality/growth companies which are looking attractive after huge falls (50% plus in some cases). I don't usually invest in this area of the market as valuations tend to be too rich, but am tempted to add some. A few quality names that stick out to me include Future (LON:FUTR) Pets At Home (LON:PETS) and Moonpig (LON:MOON) (appreciate these are not small caps but worth highlighting I think)

MichaelFBS

Apropos of nothing in particular readers may find the interview with Chris Bloomstran (of Semper Augustus - this was an extremely valuable tulip at the time of the Dutch Tulip Mania in 1634!).

He talks about Buffett and Berkshire (I hold) but also about his reduced expectations for the coming decade.

He owns only a small (£83.9m) bit of Berkshire but is I believe considered the most knowledgeable person, outside of Buffet and Munger, on Berkshire.

I have started reading his letters but they are monsters. The latest is 129 pages.

Regards

Michael

Simon Cannell

Michael - thanks. Here is the link (if you were referring to TIP podcast interview) https://podcasts.apple.com/gb/podcast/we-study-billionaires-the-investors-podcast-network/id928933489?i=1000556846453

It's very tricky navigating the market at the moment, particularly in small caps, because due to the dearth of liquidity it is the retail investor trades that are setting the price. Thats problematic for holders because there is a very wide divergence in the understanding of the macro economics and too many retail investors rely on mainstream media which, is inevitably designed to be sensational in our depressingly click bait led society. We need to remember that the macro environment has actually been quite easy to understand for many years and has remained quite benign so really the retail investor hasn't actually really had to factor it too closely into their investment decisions. Unfortunately with the "juniorisation" of banking post 2008 there are also now far too many desks that contain no traders who have been through multiple and different economic cycles either so I fear the professionals are not that much ahead in their understanding.

We are currently in a supply side shock inflation. Interest rates really only need to rise if labour wage negotiation power increases or as a mechanism for protecting the currency. Otherwise the resultant income squeeze should moderate the demand side. (ie I think rates go up but not by that much in the UK). The question really becomes one of reducing supply side inflation - this started with shipping freight costs which have now roughly halved from their peak so that should help but then rolled into energy. Problem with energy is that we've spent the last 3 years bashing oil and gas producers to the point that there has been limited capex so I expect oil in particular to remain at these more elevated levels for much longer. That isn't a major problem as long as they don't keep going up. Then we get the war in Ukraine throwing up raw input cost increases through a reduced supply and it is unclear right now when this moderates.

So my portfolio has been amended / positioned as follows

1) I've bought a few commodity plays. Interestingly there are quite a few that trade on 1 or 2* earnings, pay big dividends and have net cash. The likes of Anglo-eastern Plantations (LON:AEP) and Petrotal (LON:PTAL) or Gulf Keystone Petroleum (LON:GKP) spring to mind. The low valuations tell me that investors still believe that commodity prices come down quickly (ie in a few months) which I think is wrong. Remember inflation is a compound thing so if energy and commodity prices stay the same next year as this the inflation is zero. However, I am also long gold & silver and a few plays like £ATM or Ariana Resources (LON:AAU) or £ATYM where I think you have good medium term upside irrespective of whether the likes of tin , copper or gold trade sideways or a bit lower.

2) An income squeeze means people will spend less but I think post covid there has been a change in attitude to spending such that the likes of relatively low cost entertainment should continue to fare well. I'm thinking the likes of Ten Entertainment (LON:TEG) here and Entain (LON:ENT) or £IMMO as examples. All of them have got hit in the recent turmoil but I think investors are failing to appreciate the robustness of their propositions compared to others who may face more challenges.

3) Then I've kept my tech & B2B growth stocks where I think they have strong medium term prospects and have minimal debt servicing or strong net cash positions. eg Somero Enterprises Inc (LON:SOM) or Beeks Financial Cloud (LON:BKS) or Tremor International (LON:TRMR) or Mpac (LON:MPAC) or Kin And Carta (LON:KCT) all of which I think should continue to perform. And a few healthcare which I think will also be unaffected by any consumer squeeze. Open Orphan (LON:ORPH) or 4basebio (LON:4BB) or Oncimmune Holdings (LON:ONC) are ones I like in the UK. ie nothing that requires drug regulatory approval to be a success

4) Housebuilders I retain. Unlike previous cycles house builders have very strong balance sheets, pay good dividends and demand/supply imbalance won't be changing soon. Nor do I see rates rising to the point of a lack of affordability. In fact 5 year mortgage rates have started to drop again in the UK recently. Margins are being held but even if they drop a bit this sector is so beaten up in valuation terms then I see good medium term capital upside and they act a bit like bonds in the meantime with divis close to inflation. Taylor Wimpey (LON:TW.) or Watkin Jones (LON:WJG) or Palace Capital (LON:PCA) are examples for me.

So my approach has been not to throw the baby out with the bathwater since I am an investor rather than a trader but to think about whether my stocks fit into some short and medium term themes. I don't expect everything to go up at the same time though and suspect my commodity plays will prove to be the short term winners, but that's fine as I intend to recycle any profits there as and when the market changes.

Paul Scott

David,

Re Watkin Jones (LON:WJG)

No chance they set up elsewhere in a competing business so that is a complete red herring

You don't know that. Just because it hasn't happened yet, doesn't mean it won't happen. As I said it's a risk. Flagging up a risk is important, so dismissing it (wrongly) as a red herring I think is too dismissive. Even if there's only a (say) 10% chance of something bad happening, the risk still needs to be considered, and factored into valuation.

cmpeckham

Jack: "... if you’ve underperformed recently, that’s alright, as it might just reflect a temporary downturn in sentiment."

No doubt there is an element of change in sentiment, such changes are a permanent feature of the markets, but this is not "just" a change in sentiment. There has been a sea change in the economic environment. In 2 years we've gone from non-inflationary growth to (almost) stagflation and that has inevitably impacted on stocks. When people talk about under performance in this environment, what they usually mean is that they've been over exposed to quality/growth and under exposed to value. For example, from the report you give, that sounds to be the the case with the Amati AIM VCT.

It seems to me that the task for investors is to decide for themselves what they expect from the future investment landscape and what the implications of that are. For example, I've seen many people say things to the effect of: "inflation will now be much higher for years ... and I've decided to stick with my portfolio of high quality/growth stocks which is down by 30% because it will soon start to outperform again". Well sorry, but if inflation stays high for years, it is unlikely that quality/growth will outperform again any time soon.

Also, high inflation economies are much more prone to recessions and fast business cycles, unlike our experience since the 90s of long moderate expansions. If that's what we get then a strategy of buy and hold equities will be left in the dust by a very basic tactical asset allocation, switching between asset classes based on (e.g.) relative valuation.

I'm not saying that's where we're going, I'm saying that what I see is a lot of inconsistency between investors expectations and their strategies. Confusion and doubt is a perfectly reasonable reaction to recent events, but resolving it will take some hard thinking and questioning of assumptions by all of us.

Personally, in the absence of knowledge about the future, I think there is a lot of wisdom in the saying "do more of what's working and less of what isn't."

colin1862

Hi Joe, how do you identify sectors that are working?

JimMcLad

You could set up a screen to find what you need. Perhaps start with one posted recently, possibly Ed but not sure, Industry Leaders - New Highs and Volume Surge, which should be in the library of screens.

NeilS

Timarr they do their own bottling and labelling and the fluid is bought in in dirty great big drums. None of the others seem to have the scale to do this which links succinctly back round to huge volume through the discounters. Virtuous circle.

BTW £imp Imperial Brands have today had to announce that their blue (can’t remember the name) vaping system has been banned in USA

Rusty2

You can look at the sectors: https://www.stockopedia.com/se...

and which have the most stocks proportionally that are advancers. If you click industry groups you will get a further breakdown.

Thanks for that. I take the av momentum rank for each Industry Group every Friday. If it increases for 2 consecutive weeks then I consider that to be a hot group (and vice versa for 'cool' groups). I like momentum rank as it has element of prediction through use of brokers' forecast

I don’t know of a library but this is the screen: https://www.stockopedia.com/sc...

Tommy H

Apologies, as always this is a way after Market Close

So just thinking about strategy in response to Jack's very good question...

Well obviously with my Buy High, Sell Low, Buy Back Higher, Sell Even Lower strategy I sold a lot of things on 07 March 2022...

So in the being honest camp I will say that was the day that I was actually working at home so could switch the home laptop on during trading hours and bale out, and obviously that was a classic "Sell Low" and obviously it was the worse day to do that on but I held and just went no I want to sleep.

Being positive, there is no gearing, all accounts still have money in, there are some losses (I base on tax year) but I am not losing sleep. The money can always be made back tomorrow, next week, next month or even next year.

As for inflation, for myself and Big Sis we are both working, mortgage free and living within our means. So we save each month and buy big purchases (car, holidays) out of savings. So it is painful the cost of living increase (what pay rise I ask???) but in reality it just means we save slightly less.

So every day I say a pray to say thank you, I give every month to those who need a lot more than me through several small local charities. My glass is so full it is overflowing. Even if a lot of the time I naval gaze and thinking OMG I am down 0.08% today, what am I doing about it and why did I not buy/sell etcetera...FOMO is there but kind of in control, well it was today anyway.

As for my mum, I am just going stuff this week to go through with her when she gets back from holiday, so tripling fuel bill, adding 50% to food and petrol costs, then working through what she needs to live on this year. I had raised simplistically by 10% earlier this year, but need to rework. Though the 10% also included a trip to Australia to see her nieces but that is postponed until 2023 so that kicks £6000 to next year. Basically means about a 5-6% return to not touch capital I think, though also honest she is 79 so there is not a panic if she does draw down. How many more trips to Australia are there really going to be?

Right now, being honest I am heavy cash in the four main portfolios, Mum's Pension (ISA), My Big Sisters Early Retirement Fund (Mostly ISA) and My ISA & SIPP.

My daughters I continue with the monthly drip feed into their JISA (10 and 12 years until they can access with Fundsmith), my wife has a small ISA (Fundsmith) so just leaving, she is majority cash but thinks the stock market is a Casino so looking at buying her an investment property later this year when she is in the right place of mind having lost her mum last year. There are some new builds going up at the other end of town to us, so thinking 3 bed/2 bath semi with an EPC of B and just hold until she retires (hopefully 17 years).

For Mum, Big Sis and myself. I am slowly buying small stakes in companies that make a profit, pay a dividend, I can understand what they do, and the overall price chart (not that I fully understand this charting approach) is either level ish, or going upwards. I have a manual stop loss about 10%, this is either purchase or from recent peak. I am taking a small opening position (~1-2%) and then prepared to increase with a maximum size of 5% currently this can be buying at ~10% up on initial stake or a dip if I am lucky. Normally I would go up to 10% but right now I am going with sleep at night, I might miss gain, (says the person who sold British American Tobacco (LON:BATS) at £31) but also I miss loss too.

I sold up all my Vanguard funds and went to cash yesterday £VUSA £VFEM £VUKE £VMID overall a loss since started, but calm about it. I have left the cash in the account and plan to slowly start buying back on major dips rather than periodic lump sums when I have the cash. Now it is put the cash in, but buy when the chart is above the 50 day average, or on a big sell off day. But very much drip purchase.

I still hold a small portion of Fundsmith in my own name, this is basically a drip feed account with the month end savings going into it. Currently slightly down, but don't need this right now so is my growth exposure and overall <5% ISA.

So simply I am conservative, cash heavy, other than for mum inflation is not a problem. I have a job, I have a family and a house in a country which is not at war. Glass overflowing.

So thank you for reading, thank you for commenting and inputting.

Jack & Paul (and Rowland if you are covering today) you are stars.

Thank you

Tommy

The Phoenix

Interesting you would think inflation linked bonds would be where you want to be in inflationary periods but from what your saying you would actually want to be holding them at the point when interest rates start coming down again ?

14th Apr '22

Thanks!

Small Cap Value Report (Weds 13 April 2022) - WJG, AMAT, MRK

Paul’s Section:

Watkin Jones (LON:WJG)

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