Small Cap Value Report (Weds 14 Dec 2022) - TWD, FAN, STEM, BILN, CHRT, PROC, MIRI, LOOP, CYAN, GETB

14th Dec '22 by Paul Scott

52 comments 8647 reads

Good morning, it's Paul & Graham here.

Here's the written summary of last weekend's podcast.

Agenda

Paul’s Section:

Trackwise Designs (LON:TWD) - Horrendous news for shareholders, with a 92% discount on a fundraise at just 1p. More details below, to avoid cluttering up this section. No.1 priority right now - we need to avoid holding anything that has run out of cash, as existing shareholders are lambs to the slaughter, as demonstrated by this news.

SThree (LON:STEM) - one of my favourite value shares - a decent quality business, on an attractively low valuation, with a strong balance sheet and no debt. Although today's year end update does mention softer market conditions emerging in Q4, so I ponder whether we might have seen peak earnings for the time being? Thumbs up for the long-term, but shorter term, we might see a wobble in 2023 possibly?

Billington Holdings (LON:BILN) [quick comment] - shares are up 26% to 290p on a strong trading update for FY 12/2022. Trading has “continued to improve”. Adj PBT now “significantly ahead of the Board’s previous expectations”, on unchanged revenue. Order book & pipeline give confidence for 2023, also now expected to be ahead of expectations. Says it has made efficiency gains. This looks an impressive turnaround, I haven’t looked at it since a profit warning a year ago, so didn’t spot that things were on the mend. Good balance sheet, with net cash. Looks interesting, but I’m wary of the economic cycle, which could cause trouble ahead. Severfield (LON:SFR) looks similar, but larger.

Mirriad Advertising (LON:MIRI) [quick comment] - this has come up on the top fallers list, down 24% today on a trading update, so we just need to get a quick comment into the system here, for future reference. I can scarcely believe the numbers - guidance for FY 12/2022 is revenues c.£1.6m, EBITDA loss of £(15.5)m! Cash remaining is £11.5m (down from £24.5m a year ago). Costs to be trimmed by £2.5m in 2023. Unless something drastically changes for the better, this share looks to be heading to zero before 2023 is out. This is one of the worst things I’ve ever seen, based on these numbers.

Loopup (LON:LOOP) [quick comment] - a positive-sounding update, as usual from LOOP, but it glosses over the vital bits of information…

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Paul Scott

14th Dec '22

Hooray, we got the whole lot done!

rogerh

Re Harworth (LON:HWG) did you mean your friend is looking for land from Harworth/Hargreaves or the government? Harworth seem quite a solid company and are trading at 50% of NAV as Bouden54 mentions. Their CEO is experienced and moved from Town Centre Securities (and before that Manchester Airports). They come across very capably on the Investor Meet Company presentations. I have held their stock for a couple of years and am not selling.

Charles Mitchell

Fackelmann GmbH + Co. KG have been buying into £PROC. They have a similar business in Germany.

muckshifter

Sorry to bring a slight note of caution to the discussion of Harworth & Hargreaves, but there are a few things worth remembering with both companies.

The vast majority of the original landholdings of both are old opencast mines with a few much smaller areas of either deep mine surface enclosures or opencast disposal points and routes. The problem with the old opencast sites is that they were normally backfilled without compaction often to a depth of 100 metres or more. The state and depth of that backfill was also very variable depending on where coal seams were and differences in plant used (eg. huge dragline with bucket capacity of up to 40m3, motor scrapers which would provide reasonable compaction by their operating method or shovel and truck with rock size very dependent on size of excavator and truck - but trucks carrying 200 tonnes were common). Settlement periods to be reasonably confident for subsequent use of these areas without remedial works is measured in decades, and even then some investigative work is needed. It is worth reading in the ARs the costs associated with the work needed to fix Blindwells before sales began for housing areas.

Perhaps the negotiations about necessary investigative or remedial work costs are the reason for the "nightmare" comment. I would think that building a huge wind turbine on uncertain ground needs a lot more assurance than housing.

Hargreaves do not own or build any wind farms after they floated off the subsidiary they had starting up in that field a few years ago, and I haven't read their recent ARs to see what deals they may have achieved with WF owners. The size of areas "rented" by WF owners will be interesting as the really big opencast sites often had very substantial areas for soils and overburden storage, offices and workshops, which were never excavated and would be prime areas after being effectively compacted from normal state by an overburden heap perhaps 40m high.

Just as a matter of fact the "cost - plus" nature of the HS2 contract would have been absolutely the normal contract conditions, not negotiated ones.

The Boon Fund

£BILN was also on my shortlist for a while, but I held off investing because it is a big energy consumer, and from next April onwards, the govt support for business energy is gone. So there is uncertainty there, about a big jump in electricity costs.

Today, they upgraded forecasts for next year. Presumably, they include the assumption of higher energy costs? Or not? Hard to tell definitively. And no mention at all about mitigating inflationary costs of energy or steel prices.

Any thoughts from anyone?

Snazzytime

re Trackwise Designs (LON:TWD)

Hadn't previously looked at this one before but noticed that the CEO (who bought the company in 2000) is basically a clever inventor (per his CV on the company website).

Did he ever possess the skills required to be a successful CEO? Seems like a potential major red flag (in hindsight of course).

Snazzy

Tommy H

From memory Harworth (LON:HWG) had a lot of land along the HS2 route, think M42, M1 and M6 corridors, so looking at the big industrial park sites next to junctions type stuff, for which there was a structural deficit for a long time with outline planning on, so they were buying and then trying to get the planning and agreements.

From interactions with developers in this area over the years, they have to be very hard skinned as they are often taking on legacy sites and issues and planning on the 10-30 year period of how they can get remediation, re-zoning, planning approvals for land which sometimes has significant historic issues and is in the "too difficult" box for councils. Thinking of legacy British Steel, British Coal and such like, or even Teesside, or Stratford / Kings Cross for those south east based. Without getting into the other Statutory Undertakers and Authorities involved.

Should we also mention that everyone wants to get the best of the deal! So I can think of several reasons why a potential developer describe the existing landowner as "hard nosed" when trying to strike a deal, obviously I want to pay £x and they want me to pay £xx++.

Having worked at Ebbsfleet Station, how long has it taken the development in the former chalk quarries away around the station, when right next to a fast train to Kings Cross, slow train to Charing Cross and the A2 and M25? Just an example of prime development which got government zoning support and a government agency support and still took years and years!

Roland Head

@Berksbee,

My reading of today's RNS from Gulf Marine Services (LON:GMS) is that the company doesn't expect to be able to raise equity before the end of the year, so is preparing to issue the warrants instead. This is a fallback plan that's been previously agreed with its lenders.

In effect, the lenders are being given an equity option in place of a debt repayment. Exercising the warrants would give them a stake of around 11%, I think.

If the warrants are issued, the equity raise will then no longer be required. However, headroom under the firm's debt covenants will be more limited than it might have been, and debt service costs will be higher.

My sums suggest GMS is heading for a net debt/EBITDA multiple of around 4.5x at year end. That's not exactly comfortable, although it would be within covenants, I believe.

Much will depend on whether GMS can continue to trade well and repay debt on schedule over the next couple of years. There's certainly no room for disappointment, in my view.

Not a stock for widows and orphans...

planetx

Sureserve

One of my key holdings that was underperforming has staged a big recovery in the past three days .

Anything going on or just a recovery from oversold ?

Christopher Mills gave it a plug on a vox market interview with Paul hill .

Other than that nothing has changed, Still looks cheap but it looked cheaper at 67/68p.

Maybe some of the Crrestchic money is being reinvested into small cap value shares that were oversold and illiquid, market has been caught short with no stock and hence a strong bounce ?

Puzzled , but still too cheap .

Berksbee

Thanks Roland - they seem to be generating cash right now so perhaps no immediate concern - but as you say, no room for disappointment!

mevans6890

Well if you’re not happy with what anyone else is doing, as seems to be the case why don’t you do it yourself then you could decide exactly what is covered?

BnB

The point is not whether I’m happy. It’s that Paul has complained at how many grumblers there are. Check also the number of thumbs up to my post yesterday which started the conversation. You don’t seem to have picked up on that.

Furthermore, Paul asked me for specific names and this morning I gave him one of my neglected (by SCVR) mid-cap holdings together with a brief précis. The guys kindly picked up on it and give the name a deeper dive than it had enjoyed previously, coming out with thumbs up. So hopefully we’re all winners for a bit of polite debate.

Dragon

Volution (LON:FAN) is a 600m company which is within Paul's remit of <700m for the small cap report and has been covered before.

UncleG

Dear Paul, Graham, Ed, & The Stocko Team,

Just want to say a BIG thank you for all of the hard work you guys put into providing excellent thought provoking and inspirational content every day. Even during the hard times when the bear is mauling at our portfolios and the tide is low for all boats you are continually on the look out for good value opportunities for us. Most importantly you're brave enough to put them out there and share your thoughts with the reasoning behind them. Respect to you all for that and to all of the good people in the community that regularly take the time to post brilliant content and share their knowledge. It's very much appreciated.

All the best,

Volution (LON:FAN) is a 600m company which is within Paul's remit of <700m for the small cap report

Yet it hasn’t had a proper report in over 3 years, during which period it has doubled its profits and dividends without any share dilution. Thank you for highlighting my point.

Meanwhile we’ve had umpteen reports on shitshows like Joules and Made.com. Yes, they make entertaining watching but I personally feel a refocusing towards higher quality is in everyone’s interests. You may disagree.

NewInvestor1972

£etp interesting couple of RNS at close, directors selling to support a new II, Charles Stanley Group.

Bodes well

Johnnycomelately

15th Dec '22

I think there are lessons to be learnt from the reports on Joules and Made.com.

I welcome these reports, if only to learn what went wrong with them.

I welcome these reports, if only to learn what went wrong with them

So do I. But such was their preponderance that I’m willing to bet there are those here who got sucked in to their considerable cost. To be clear, I’m not blaming Paul or Graham for investors’ mistakes but they are arbiters of the forum’s focus. Meanwhile, you could have doubled your money on Volution (LON:FAN) and hopefully look forward to further attractive returns when current cyclical fears abate.

jamesalastair

Thank you muckshifter .... this is gold.

Rusty2

Far too much coverage on the retail sector, most stocks have gone wrong, Motorpoint (LON:MOTR), ASOS (LON:ASC), Joules (LON:JOUL), £BOO Why is Stockopedia spending so much time one sector?

Yet better performing companies get little coverage. No coverage of £YU for 3 years on SCVR. Maybe the emphasis is too much on value rather than momentum?

Small Cap Value Report (Weds 14 Dec 2022) - TWD, FAN, STEM, BILN, CHRT, PROC, MIRI, LOOP, CYAN, GETB

Agenda

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Paul Scott

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