Small Cap Value Report (Weds 13 April 2022) - WJG, AMAT, MRK
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
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 housing sectors The Group has strong relationships with institutional investors, and a reputation for successful, on-time-delivery of high quality developments.
We like the business model of WJG here at the SCVR. Developments are forward-sold to institutions, and there’s a long pipeline of projects, with good visibility. That removes much of the risk that other property developers suffer from. The building work is outsourced, and WJG has structured its activities so that cashflows are good, it has a strong balance sheet, and a divi yield of about 4% is paid. There’s lots to like.
My only reservation, is that the key people could conceivably up sticks and set up on their own, in competition with WJG - because the value in the company is really the expertise and track record of its top people. For that reason, massive insider selling in 2017-19 of over £60m does worry me somewhat, which is why I decided to sell my WJG shares some time ago.
The Group provides the following trading update for the half year ended 31 March 2022 (the 'period' or 'H1-2022').
Robust pipeline underpins confidence in full year delivery
My summary of today’s trading update -
Key point - confidence in performance for FY 9/2022
H1 revenues up, but profit down, as expected, due to higher proportion of (lower margin) land sales - doesn’t sound significant, as they’re confirming the full year outlook.
Cost increases being well managed - so far margins have been maintained, through negotiations with buyers - but has lengthened sales cycle.
Rising demand, strong interest from investors for WJG’s projects - a key point.
Development pipeline has risen from £1.4bn a year ago, to £1.8bn now - WJG gives a lot of information about its pipeline in investor presentation slide decks.
Net cash of £27m looks fine to me, WJG has robust finances, no issues there - I’ve just double-checked the last balance sheet, and it’s really good - in particular, a very healthy working capital position.
Cladding - mentions awaiting Govt decision on this, but I think it would have been useful to remind us what potential exposure WJG has, which is not mentioned today.
Dairy date - 17 May for interims, which will include an “in person” analyst meeting. Whilst it’s nice to see real life meetings returning, I think most people find webinars far more efficient, and of course PIs (private investors) often can’t get into London, or gain access to meetings. So continuing with webinars is vital for us, and needs to continue.
Valuation - is PER the right way to value a property developer? Some people prefer “build out value” - i.e. valuing a developer on its future projects. My view on WJG is that it has very good visibility with a multi-year pipeline, that PER is probably fine to value the shares. Also, it has established a reliable track record of delivering steady/rising earnings since it floated in 2016.
The StockReport shows a forward PER of 12.6, and forward divi yield of 4.0%, which strikes me as reasonable.
My opinion - I reckon this is a decent business, very well managed, and with a differentiated business model, which lowers risk considerably. So it’s a much better investment proposition than many other more conventional property developers.
As mentioned at the top, I do worry though that the long-term value of the company is really all about the top people being motivated to carry on, and the relationships with institutions that they have built. They know the property cycle better than anyone, so I think it pays to look at big Director selling, of which there has been a lot since WJG listed.
.
Jack’s section
Amati Aim Vct (LON:AMAT)
Share price: 152.5p
Shares in issue: 148,851,023
Market cap: £227m
Annual report for the year to 31 January 2022
For the past six months or so (possibly longer now), there appears to have been a divergence in index performance and the experiences of some investors. I’ve certainly written up some well-performing smaller companies whose share prices just don’t want to reflect operational progress.
There are some relevant comments in the annual report of Amati’s AIM VCT that suggests I’m not alone in this perception.
It has been a disappointing year for AIM investors with the Numis Alternative Markets Total Return Index falling by 3.5%. This was materially below both the Numis Smaller Companies (plus AIM excluding Investment Companies) Index which rose by 11.6%, and the Numis Large Cap index which rose by 19.5%.
The VCT’s total return for the 12 months to 31 January 2022 is -7.5%, compared to +38.9% in the prior year, and well below the FTSE 100 return. I’m not going to focus too much on the Amati AIM VCT too much, rather I’m interested in commentary that might have some readacross for private investors.
The chairman of this portfolio of AIM investments writes:
Following a rise of almost 8% in the first half of the year, the performance of the portfolio fell away in the second half to close the year down 7.5%, on a NAV total return basis.
That suggests a pretty poor second half, and quite a change from the preceding period.
Some of this fall was for company specific reasons, in particular Polarean Imaging and Frontier Developments, while some was due to a sharp deterioration in sentiment. This stemmed from inflation rising to much higher levels than forecast by central banks, bringing with it the prospect of higher interest rates, rising bond yields and the withdrawal of liquidity through the ending of quantitative easing. This has led to some significant de-ratings of many growth companies. On top of this, there was the deepening crisis caused by Russia's military build-up around Ukraine.
That’s a range of factors investors will no doubt be familiar, having tried to make sense of recent share price performances.
And from the fund manager:
This has led to market sentiment changing, with high growth sectors such as healthcare and technology seeing material profit taking, whilst out-of-favour sectors including oil and gas, mining and banking, have enjoyed a return to form after a number of fallow years.
This sector rotation, in my view, explains much of the divergence between index returns and the recent experience of some investors.
Outlook:
Since the aggressive attack by Russia on the Ukraine, we have experienced extreme investor sentiments which have led to a dramatic fall in the FT Indices after our year end. Our well-balanced portfolio has not been immune to derating along with the market, even for those companies with high elements of service and technical expertise. With inflation, interest rates and energy prices rising, there are ongoing headwinds. Our portfolio contains a diverse range of well-resourced companies, mostly with high barriers to entry derived from intellectual property and specialist skills.
We know about these risks, but the VCT’s strategy in the last sentence is worth considering. It strikes me as a very sensible way in which to build a resilient, long term portfolio (short term share price fluctuations aside).
Furthermore:
It might be expected that the more challenging market conditions allow us to make new investments at lower valuations, and we anticipate having opportunities to take this advantage and deploy our recently raised funds during the course of 2022.
I also agree with this - such markets tend to present opportunities.
Conclusion
I’ll leave it there for now as I don’t tend to look at VCT’s, but I think the commentary is worth sharing. It suggests that if you’ve underperformed recently, that’s alright, as it might just reflect a temporary downturn in sentiment. It’s how you react to that (or in some cases don’t act) that’s important.
I’m curious to hear investors’ strategies at the moment - I’m sure others are too. Are you holding through thick and thin, or moving to cash? If the latter, what about inflation? Or perhaps you’ve put on your buying boots and are looking for bargains.
We might be heading for a quiet period on the markets over the bank holidays before the news flow ramps up again in June. It could be a good time to take stock.
Marks Electrical (LON:MRK)
Share price: 98p
Shares in issue: 104,949,050
Market cap: £102.9m
Trading update for the year to 31 March 2022 (released on Monday 11th April)
This is a fast-growing online electrical retailer. A quick visit to the website shows the kind of products: TVs, dishwashers, fridges, vacuum cleaners, etc.
It’s a recent IPO, coming to the market in November 2020, so the share price slide since then could just be part of the wider sentiment. There’s a lack of liquidity due to a small free float and the group’s founder, Mark Smithson, owning 71% of the company.
Results look good. Full year revenue is up 44% to £80.5m and up 19% in Q4 to £20.7m. Signs of operational leverage, with adjusted EBITDA margin up to 9%, in line with expectations. That’s much better than AO World, and whether or not the group can keep that margin growth going will be very important to valuation.
Closing net cash of £3.9m and positive trading momentum in March 2022, ‘with an exit growth rate in the final month of over 25% year on year’.
Marks says it is winning market share in the Major Domestic Appliance and Television markets, with brand awareness initiatives driving improvements in website traffic and increased fleet capacity improving the group’s free next day delivery capability. Trustpilot rating of 4.8 maintained.
Conclusion
Marks and Made.com (LON:MADE) share a similar dynamic, in that they are digitally native disruptors taking share from physical retail incumbents. When you’re in a traditionally low margin industry, having your enterprise set up the right way so that you are a lower cost operator can be a key differentiator - for example, Marks’ focus on brand building, next day delivery, and warehouse efficiency. A physical retailer with a large base of leased shops might find it hard to pivot and compete with that.
I’m not familiar with the story here, but Equity Development covers the company, so that always makes life easier! The idea that this company has been steadily expanding its market share over time doesn’t seem to come across in the pre-IPO revenue figures though, I wonder why. And margins were previously less notable.
My main question here is around the longer term durability of margins and earnings. Credit must go to the team for identifying the market opportunity and differentiated business model. There’s probably scope to continue growing and taking market share. But competition and higher costs could become a risk at some point.
That competition could take a while to arrive and really heat up in a way that might affect Marks’ growth trajectory though. Smithson wants to grow the group’s market share to 10%, up from 1.5%-2% today. So that could provide plenty of upside potential. Perhaps worth a closer look as it seems to be performing well, but the liquidity could be an issue for some, and consumer confidence and disposable incomes are also a consideration.
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41 comments
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
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."
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.
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
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
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)
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.
Mentioned in previous posts over last couple of days Gore Street Energy Storage Fund (LON:GSF) IPO more than x2 oversubscribed. Retail investors scaled back by 60% if my allocation is a guide. Suggests investors see this as an important sector for the transition to a renewable electricity driven economy. Another factor may be that Gore Street Energy Storage Fund (LON:GSF) is still trading at a much lower premium than its larger trust in the same space, Gresham House Energy Storage Fund (LON:GRID) .
Primary Bid satisfaction survey
I don't know how many others here are signed up to Primary Bid but I've been asked to fill in a satisfaction survey for which I gave them a 5/10. My comments were:
1) Shame that I have to use the app rather than the website to subscribe to offers, which used to be possible.
2) Annoying when what appears to be a firm offer deadline is given and then the offer closes early.
3) Ever hopeful that the proceeds of an offer will transferred into an ISA or SIPP.
Perhaps if others reiterate these points they'll make some changes.
Otherwise it's great to have this more direct access to fund-raisings and IPOs.
Tracsis (LON:TRCS) H1 2022 results presentation by Chris Barnes, CEO & Andy Kelly, CFO. Paul wrote about them on the day of results here. Good results with rev +31%, PTP+15%. Significant revenue growth in Data, Analytics, Consultancy and Events Division. There seem lots of levers for growth across the business, UK rail transition to a new Great British Railways structure. Acquisition of RailComm opening US market (early days but exciting). Organic growth and product bolt ons from the existing businesses in the group. £25m cash making further acquisitions easily funded. Video and podcast.
Jack, re your question on strategies. If you’re in small caps/growth, you’re likely well down and moving to cash now is probably emotional and a bad move even if it goes lower in short/medium term. At some point the money in value will get restless and look for higher returns and the *quality* growth market will move. But not in my view before inflation is seen to peak. At the moment the peak and duration is unknown and that’s genuinely scary. In the meantime some shares will bounce once they’ve shown resilience but these are too hard to spot in advance of statements in my view. You’re likely to get as many wrong as right.
I do think that in order to win big you need to be brave and buy now on a two year view. Probably less tbh.
CPI 7% CPIH 6.2%, (so housing inflation is lower than general inflation over the past 12 months), RPI 9%. I wonder why £INXG has fallen - I had expected high RPI to feed through into higher RPI-linked bond prices.
Index linked bonds have fallen because gilt yields have risen and they are very long dated (so get absolutely whacked when rates rise). They are actually a very poor inflation hedge, although a lot of people don't understand how they work.
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 ?
Hi Jack, my current strategy is based round liquidity as it's an uncertain world at present. So I only invest in large caps, with small amounts and spread over many companies so if the s*** hits the fan I have a good chance of getting out. I use a 15% trailing stop and am about 75% in longs and 25% in shorts - the rationale being that if the market tanks the shorts will provide liquidity as the longs reach their stoplosses. For the longs I pick the best value stocks in Industry Groups that have positive momentum over the last 3 weeks and and the converse for shorts. I use both UK and US markets to give me enough stocks. I max out margin on the spreadbetting and am looking for a small return on a large amount of exposure but with the shorts protecting the downside (and, of course, reducing profits on upside). Have used this approach since May 2020 and it slowly grinds out a positive return.
Thanks for the commentary on Watkin Jones (LON:WJG) I must admit I've never considered the risk of top people moving on and setting up in competition. I'm not sure how easy that would be as presumably they have a big team of planners (not just a few people) , and I'd imagine it would take a while to build up a new landbank and pipeline, so they would need access to a lot of capital. Also, reputation is very important, so they would need to get institutional investors on board.
Quite easy to repeat the magic. Developers typically use planning consultants, independent architects and land agents. In house would be those who manage the consultants, estimating and construction management., etc..
Not so sure, big institutional investors such as legal and general, will be putting millions into these developments and may not be so keen on a start up with no track record. I think the barriers to entry are higher than you might expect. Would also need a fair bit of capital to purchase land (which would later be sold on once planning permission is gained).
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.
Figures just out via AJ Bell.
'Turning to producer prices, the annual headline rate of input prices jumped 19% in March, ticking up from 15% in February - accelerating at the fastest rate since records began'.
Being able to price your own goods is a key consideration, along with having limited or being able to control your input costs.
I heard this morning that lock downs in China and hold ups in ports are forcing manufacturers to look at sourcing in Europe - short term - to keep lead-times reasonable, but at elevated unit costs.
This from Tesco boss this morning
‘Clearly, the external environment has become more challenging in recent months. Against a tough backdrop for our customers and with household budgets under pressure, we are laser-focused on keeping the cost of the weekly shop in check - working in close partnership with our suppliers, as well as doing everything we can to reduce our own costs,’ said Chief Executive Ken Murphy.
If you supply a Supermarket...your going to get your prices screwed....maybe a read through to Supreme (LON:SUP) sell off yesterday, and Finsbury Food (LON:FIF) recent sell off I wonder?
points taken but Supreme (LON:SUP) (I hold) prices are already dirt cheap (£1 for 10ml vape liquid about a quarter price of similar E-liquid) so they might actually be at an advantage here at the low cost end of market (the quality is astonishingly good for the price btw - I can testify as a user / vaper)
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
So I think that answer to that Paul.S is no in the case of Supreme (LON:SUP)
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.
timarr
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
Jack, you asked what investors strategies are at the moment. Mine is pretty simple. I'm looking to invest in sectors that are working at the moment. 2020 was mostly about US tech/SAAS outperforming, 2021 was UK small cap recovery & 2022 is so far mostly about energy, commodities & to a lesser extent, financials. I'm only interested in making money, not sticking rigidly to a certain investment style that means I only invest in certain types of company. Find a sector that's working, pick a few decent companies in that sector with real tailwinds and you can't go too far wrong in my opinion. Just my tuppence.
Hi Joe, how do you identify sectors that are working?
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.
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...
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!
Watkin Jones (LON:WJG) (I hold)- I think that I am right in saying that a lot of the selling was by members of the family who used to own the business. Understandably they wished to diversify their interests.
RE: Watkin Jones (LON:WJG)
They know the property cycle better than anyone, so I think it pays to look at big Director selling, of which there has been a lot since WJG listed.
The vast majority of the selling was by the last member of the Watkin Jones family who wanted to get out of the business. Next to that was selling by the CFO, who left. The only sale by a current board member was to fund an exercise of options - so he ended up with more shares, not less afterwards:
https://www.investegate.co.uk/...
There have been no director sales since 2019.
timarr
Yep - exactly timarr
The family wanted to retire and so took money off the table. Nothing wrong in that; entirely reasonable. No chance they set up elsewhere in a competing business so that is a complete red herring
The switch over in day to day management appears to have been executed well with no change in underlying direction of the business since then. Given that was circa 3 years ago I'd say any risk in succession has been mitigated.
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.
P.
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.
That contact win for Shearwater (LON:SWG) is huge in relation to market cap
Dunns. (LON:)SWG. A contract about potentially the same size as its market cap fell to recently! 12 million over 3 years with a potential add on of 8 million. They must have been working on that for a while. Telecommunications seems to be their thing. Brookcourt had an 8 million telecommunications contract a couple of years back. Then there is potential for cross selling from their other companies. Yes Brookeda much welcome news! Bound to fall back again , like it does, but still cheap on a PE of 8 though and debt free at the moment. They are still looking for another acquisition. This win should go some way to fulfilling that ambition. As the CHM told me just before christmas, somewhat in bewilderment about the sp 'we are actually in the best financial position we have ever been in. ' Obviously . He bought 185,000 more shares!Year end results update due end of month
Shearwater (LON:SWG) (I am long) The long suffering shareholders of this cyber security company landed a huge order today (compared to its market value) of basically 4m a year for three years with a potential of a two year extension with "a leading telecommunication and media company."
After years of losses the company turned a corner last year making a small profit and seems ready to move into greater profitability. I am very hopeful this company is to be re-rated over time and finally get a rating more in line with the industry they are in. This could well breakout today .....at least I am hoping
Shearwater (LON:SWG)
This company perennially seems to be going nowhere (Therapy? were on top banana form last night). They looked an interesting prospect a couple of years back as they were expecting tro be morphing into decent profits had acquisitions lined up and were poimping up trheir prospects.
The reality is along the following lines - as per article from march
https://masterinvestor.co.uk/e...
Analyst Simon Strong at Cenkos Securities is estimating that the current year, ending 31 March, will show £34.0m revenues (£31.8m) and a fractional loss of just £0.3m (£nil).
He goes for £37.4m this year of sales and a recovery to an adjusted pre-tax profit of £0.5m,
Being frank if that is what the company hope for then it's all a bit of a joke unfortuantely - seems simple that whatever buisness model or plans they have this copmpany is anything but a profit making machine.
Ok am i being over cynical here - quite probably - we are lookintg forward after all - more positive comments below
At cash level business is actually making "cash profits" as there are hefty intagible write downs in as expenses - ignore these and there is profits
They have decent cash in the bank possible enough for an acquisition.
Todays contract win is a corker on top of some other decent contract wins.
Ultimately though unless the company comes out and says we will be making x bottom line profits i am inclined to ignore any of the positive murmourings here and presume this company will fail to deliver a decent % of sales as bottom line profits.
Note if the company does end up losing money year end 31/3/2022 - bear in mind what the company said on 25/11/2021
"We have seen both our divisions grow profits in the period under review with growth in our Software sales and a strong rebound in advisory business. The increasing quality of our earnings coupled with investment in our subsidiaries, enabled by our strong cash position, gives us confidence in theoutcome for the full year, especially with c.50% of second half revenuesidentified."
These words seem completely at odds with the reality that the company is making nil profits - not sure what planet these peeps are on if i am being honest.