Small Cap Value Report (Weds 14 April 2021) - RNO, WJG, KOO, FOXT, TMG

14th Apr '21 by Paul Scott

73 comments 10348 reads

Good morning, Paul & Jack here, with the SCVR for Wednesday.

In case you missed it, I added some additional sections to yesterday's SCVR in the afternoon. So here's yesterday's full report.

Timing - TBC - probably early to mid afternoon finish time today, as there's a fair bit to get through.

Agenda -

Paul -

Renold (LON:RNO) (I hold) - in line trading update for FY 03/2021. Order intake recovered, and has ended the year up. Renold has proven itself to be resilient in FY 03/2021, and net debt greatly reduced. Big pension deficit though, which sucks out £5m p.a., hence why market cap is so low. Too low, in my opinion.

Watkin Jones (LON:WJG) (I hold) - I go into quite a bit of detail on the business model (which I think is very good). An in line update for the half year to 31 March 2021. Judging from the company's previous results presentation slides, I think existing forecasts look far too conservative, because there's a big pipeline of Build To Rent projects for the next 3 years. One for long-term investors, not punters!

Kooth (LON:KOO) - readers have flagged this one, in the comments section below. It's speculative, and I don't think I can add any value by crunching the numbers in detail, as it's still loss-making. Hence I won't write up a full section on it, instead having replied in the comments below, and several subscribers have written up interesting posts about it below, so this note here is to draw your attention to the comments section below. I'll add a tag for KOO so that we can search and find this post easily in future. Thanks to all.

Foxtons (LON:FOXT) - upbeat Q1 trading update. (For the avoidance of doubt, I no longer hold this share personally).

Jack -

Mission (LON:TMG) - Improving results for this cyclical marketing small cap. Negative NTAV but net debt is down and the pipeline is strengthening.

Paul’s Section

Renold (LON:RNO)

(I hold)

21.8p (pre market open) - mkt cap £47m

Trading Update

Renold, a leading international supplier of industrial chains and related power transmission products, today issues a trading update covering the year ended 31 March 2021 (the "Year"), ahead of the preliminary results announcement…

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barnetpeter

14th Apr '21

Paul writes "if we stick to a market cap limit, then we stop covering the best companies as they grow too big, and keep reporting on the laggards, which doesn’t make a lot of sense, does it?!"

Excellent point. Novices often grab a profit on a stock and keep the ones they are down on....so end up with a portfolio of losers. There are a number of tiny stocks a year ago that are now well over the limit.

Personally I don't care on the size. If a stock is cheap I want to hear about it. What is a "small cap" anyway? A previous large cap that has blown most of its investors cash? How about changing the idea to something like "value report" and letting the writers just report on any undervalued stock that they want to at their discretion?

Dojosan

£APF (ex-holder) I cant help thinking - you buy mines when no one wants them. You certainly try to avoid buying them when everyone is talking about commodity supercycles. IMO, APF forced themselves in a corner after repeated announcements of their transition to green resources.

Another random thought - I recall Justin (ceo) or Kevin (another director) mentioned that the longwall changeout may re-occur again this FY in Q3 or Q4 which may impact royalties in that Q.

greensiax

Here are my SCVR heat maps for today (prices as at ~12:45pm).

I share these heatmaps with the intention of giving a visual indication of what is going on in the SCVR world: who’s reporting (and it's impact on the share price); and what’s moving more than 'normal'. There are no associated recommendations, implied or otherwise, just information. How, or indeed if, you choose to use that information is up to you.

Please read my [heat map thread] for keys to the heat maps contents, more (non-SCVR specific) heat maps, and an explanation of how I use heatmaps to guide me with my research.

I have added a MarCap category to the heat maps, along with a high spread indicator. The key to the symbol heat maps is now:

As an experiment, I've sorted the heatmaps alphabetically by EPIC today. Which I'm hoping will make it easier to find a particular instrument in the heatmaps.

Small / Micro Caps reporting today:

Big movers today in the SCVR world (moving more than a 20d EMA of the ATR against either yesterdays close, or today's open):

Warm regards, stay safe, and best of luck!

The longwall changeout at Kestrel.

Also @SundayTrader - I thought they have stopped their buyback programme a few months back?

Gromley

I think Kooth (LON:KOO) were trying to teach you mindfulness.

Leebod

Cheers Paul. I think the move to offer services to companies is very smart (KoothWork). Mental health/wellbeing is such a big part of life and perhaps even more so corporate life these days that I can imagine all FTSE350 companies needing this form of service. They offer 24x7 365 day a year appointments which does make me wonder about expertise though - I mean if you book a session for Midnight I can't help wondering if you end up with a chatbot followed by someone from a call centre in Bangalore - maybe that's a bit harsh. I found a freedom of information request that showed Jersey paid £52k for 14 months use of the service which is primarily a mental health redesign program enabled review of existing children and young people's mental and emotional wellbeing. Jersey isn't exactly huge with around 100k pop and about 16k children pop so you could apply a similar figure to a FTSE company for the service I would of thought? So back of a fag packet £50k x 350 is a potential revenue of £17.5m. If you are in charge of HR this type of service sounds lie a no brainer to get in - especially with the shift to home working? It is expensive but who knows!? I guess other private health care providers can muscle in on this if they aren't already but this service should I'm guessing be free to all employees as opposed to a BUPA type scheme for exec staff only.

jimrog64

LOL

Paul Scott

Saga (LON:SAGA) (I hold) - nice little update from Travel Week, saying that 4 out of 5 of Saga's inaugural round-UK cruises, sold out in c.2 weeks of being announced.

https://travelweekly.co.uk/new...

ridavies

Yes Lefty 99, K3 Capital (LON:K3C) have a revised, revised situation in te last few months. All upwards, all good. Lets hope that the profile cntinues to improve. This was a featured Small Company Sharewatch feature earlier this year. Showing a nice 30% rise since I bought.

mojomogoz

I agree there is potential ...I’m lacking the imagination to see it at current valuation. I feel I’ll get a look in again whether higher or lower price I dunno

davidjhill

You know my thoughts on this Mojo. I discount the Uvisan product to zero though that’s harsh given the progress it’s made, but with the opening on the economy and pent up demand to pretty much go to any destination attraction operable I see them doing very well with their core product. the home AI launch in the US could be very interesting in the latter part of the year but I know you can’t quite share my enthusiasm on that.

Nonetheless I stand by my personal price targets but can see a raise if the share price gets to 7.5/8p but probably sub 10% of equity which is ok if it funds growth.

davisj99

Hi Charles10

I've had problems with Primary Bid recently. Tried to apply for recent offer of Jarvis treasury shares without any luck. Using an Android 7 phone the app got stuck in a perpetual loop asking me to review my application and I was left not knowing whether I had applied for 750 shares or 15,000 (I tried about 20 times!). I have a fairly large position for me in JIM and would have been more than miffed if the dilution had been much greater than 2%! Can anyone tell me how to exit that loop?

Kooth (LON:KOO)

Few points:

They promote gross margin at 61% from 51% YoY. But in the text they do not make it clear that there's any stickiness to the rise and it may be entirely covid cost reduction related
Positive adj ebitda needs capitalised development of £1.5m knocked off so it is negative ebitda, earnings and cash flow
As capitalised development is platform build its possible this earnings boost through recognised wage cost reduction sits in the CoS for the group and so flatters gross margin (could be wonky accounting by me! But for sure it boosts the bottom line through cost saving by £1.5m)
Admin expense increased by c.£4.5m....as did YoY revenue. -> All the gain was eaten in costs? Clearly there may be some recurring revenue benefits that endure. Wage increases was at least £2.5m of that (adjusting for capitalised dev too). Its notable that employee cost rose much more %age wise than number of people suggesting that the adds were expensive (qualified medical people) and/or that billing from existing employees rose (piecemeal work)
Costs are likely to prove an issue. They are operating off of NHS budgets and practice. Like the NHS they will be expected to do more for less....this is likely to see balancing costs on patient counselling etc hard.
Treating children (big part of their client base?) must be particularly costly/intensive (more question than statement of fact!)

Colour me sceptical that mental health as a service has very good scaling in economics. I think the costs will always run high relative to the revenue. I do not doubt that it can be a useful and innovative service that has medical scaling ability that is attractive.

This could work but I think I'll get the chance to see more at a price similar or less than quite racy current on a more mature business with a clearer reveal on underlying economics.

They will probably raise whether they get to 7.5p or not given all the projects they have going and needing funded. Plus they will want to fund further destinations. They may get some asset/revenue backed sort of financing for that but the best way to grow is if they can fund it without complex financial negotiations.

Yes they will have surge, that's beyond question. But they will have lower numbers due to restrictions and some extra costs.

>7.5p is seeing market cap at c.£32m. This seem heroic. What revenues are they going to print 2021? They are also a relatively capital intensive business that hasn't reached self-financing scale. What size is that? Its gone up a little due to new products to finance and volume restrictions on existing (eg Madalay Bay)

Surrey Steve

I Chair the trustees of a "small" (£100m) defined benefit pension scheme.

Rising bond yields will reduce the pension scheme liabilities - the discount rate goes up and the present value of the future pension payments comes down. Typically the discount rate used to calculate the accounting liabilities is higher than that used in the triennial valuation which is negotiated between the employer and the trustees.

The other part of the equation is the pension scheme assets. In both cases (accounting and triennial valuation) these are valued at market value although the effective dates may differ. Trustees have flexibility how the scheme assets are invested but the bulk are typically in equities or bonds. In more recent years, many trustees have shifted the balance more into bonds (or bond like investments) as these provide a good hedge against the liabilities. As DIWReynolds points out, bonds tend to yield less than equities. A pension fund that is heavily invested in bonds therefore will see its deficit remain more predictable as interest rates move around, In the current environment with equities performing strongly and interest rates increasing, a scheme with a heavy weighting to equities should see its deficit reduce over and above that caused by contributions.

The pension scheme deficit is the excess of the liabilities over the assets. Any triennial valuation deficit will lead to the agreement of payments by the company to the scheme to "repair" the deficit over a period typically not exceeding 10 years.

I have not looked at the Renolds scheme in detail, but to understand the impact of the current market movements, you will need to understand how the scheme assets have been invested. Their Annual Report, note 18 gives useful information including the sensitivity to interest rate moves. It shows that on an accounting basis there is a large deficit so the deficit repair payments are likely to be greater than this amount.

Investors should treat the pension fund liability as a creditor which reduces the overall value of the company to shareholders.

Boon

Also it was one of those annoying trading updates. Why do companies like to be coy and not just come out with some numbers, even a range?

In any case, Vianet (LON:VNET) has been on my watchlist for a while as a beneficiary from COVID reopening.

But for me I still have big questions on how much faster their Smart Zone install base decreased in FY21. It was already in decline pre-COVID, but obviously pub sector taking a big hit over the past year. How many more closed up, or can't afford now to upgrade?

Meanwhile Smart Machine install growth slowing, which was meant to replace the declining Smart Zone revenues. Will they recover, or the new flexible WFH means less viable vending sites going forwards?

Annoyingly, Cenkos the broker released a note. But it has nothing useful! No FY21 or FY22 estimates.

Too many unknowns for me. Valuation looks about right, and IMO chances of a 30%+ upside are almost nil at this point. Which is my minimum threshold for even considering buying a share. So back to the watchlist it goes.

On the theme of outsourced medical services where the NHS are the client, this reminds me of Medica (LON:MGP) (I hold).

Kooth has £16m ARR and a £109m market cap, gross margins of around 60%

Medica have £58m rev pencilled in brokers for CY2021, £190m market cap, profitable, gross margins of 48%. And also growth potential via overseas expansion (US, AU, IE). And been listed for a while, so has a good track record.

Clearly mental health and B2C app is of course more hot/topical at the moment. Does go to show that the right story can add multiples to a valuation.

jules2k6

That happened to me and I emailed primary bid with my displeasure. They replied with a link that allowed me to make a payment from my computer for my subscription. Great customer service. I think it was a tempoprary issue with their payment processors.

Thanks for sharing SurreySteve - it is really useful to get insight from someone quite intimately involved with the defined benefits issue.

Overall it is an issue that I find somewhat frustrating.

Trustees are IMHO by and large doing absolutely the right thing by protecting their members and putting the companies, who implicitly made "deferred salary" promises on the hook.

However, by switching to bonds during a period when they are arguably more over-priced than at any time in history, they are denying the sponsor companies any chance of recovering the shortfall from any future market moves.

I was trying to work out the winners and losers here :

Pensioners & deferred pensioners : Neutral - they will still get what they were promised.

Sponsor Companies : Losers - they are being forced to lock in losses, when those losses are potential at their max and been denied any opportunity to get any benefit from the next phase of this particular cycle,

One party losing and one party neutral - I was struggling to find the winning party, but I think I have worked it out :

Past shareholders of sponsor companies. In 1986 legislation was introduced by the Thatcher government forcing pension schemes to pay back any surpluses and ensuring that companies could not fund pension schemes that were in surplus.

The narrative we were all fed more recently was that Defined Benefits were unaffordable because investment returns are lower than the were in the past, but that seems questionable to me - DB pension funds were not allowed to keep (& grow) gains at the 'top' of the cycle which would have allowed them to survive the 'bottom' of the cycle.

I have hugely digressed here from the point I was working towards, which is that not all pension deficits are 'equal'(ly challenging) ; however I will post anyway, because if we can avoid too much polarisation, there might be an interesting discussion here.

15th Apr '21

Hi Gromley

You make some very interesting points that I think are worth exploring further. I have somewhat summarised your points - apologies!

Trustees are pushing for lower volatility in pension deficits

While trustees are not rewarded for taking additional risk, they do have the benefit in many cases of being able to take a long term view. It is often companies with the pressure imposed by regular reporting who are keen to "derisk" the pension scheme investments. Certainty is often seen to trump cost.

Interest rates are low

This has been broadly the case for the last c10 years. It is very difficult to time the turning point in the market. It may now have happened but we cannot yet be certain and Central Banks keep promising "lower for longer".

The movement from return generating investments (equities) into heading assets (bonds) is very much a one way street at the moment. This is in part driven by the regulatory environment.

Winners and Losers

Companies that have a high proportion of their pension scheme assets in return seeking assets are likely to see more volatility in their pension scheme deficit than those with a high proportion of hedging assets. Who the winners and losers are will depend on the performance of the investments and the direction of travel of interest rates.

If a company fails with a pension scheme deficit, pensioners will typically be protected by the Pension Protection Fund. Non-pensioner members who have higher pension entitlements will often experience a "haircut".

Legacy issues

Many, but not all schemes, are now closed both to new membership and to future accrual. In the majority of cases these changes happened nearly 20 and 10 years ago respectively. With normal levels of staff turnover this means that a minority of senior management are now members of the defined benefit pension scheme in such companies, if they are represented at all. This makes it something to be "managed away" rather than something that management want to actively participate in.

Small Cap Value Report (Weds 14 April 2021) - RNO, WJG, KOO, FOXT, TMG

Paul’s Section

Renold (LON:RNO)

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