16th Nov '22 by Paul Scott

25 comments 8189 reads

Good morning! It's just Paul here today, because Graham is tied up, preparing for his Mello Chiswick talk at 13:00. Today's report is now finished.

I'll be arriving at Mello Chiswick probably mid-afternoon today, and am participating in the "Stock Slam" (starts at 17:15), where about 12 of us will get 3 minutes to each pitch a stock idea. I've decided to focus on housebuilders, which I think are excellent value, and my favourite small cap builder, mentioned here positively before, MJ GLEESON (LON:GLE)

I'm hoping to meet lots of Stockopedia subscribers at Mello Chiswick, do say hello - I'll be carrying a fluorescent yellow rucksack - as you know, I like to fade into the background! ;-)

Agenda

Paul's Section only today:

MADE.com - John Pye Auctions is to sell off the inventories, expected to begin soon. Click here for details, where you can pre-register, and maybe pick up a bargain?

Card Factory (LON:CARD) - a positive update came out mid-afternoon yesterday. It's raising profit guidance, as strong sales in H1 have continued into H2. This makes me much more comfortable about this share (which still has excessive net debt, remember). The coast now looks clear to gradually reduce debt from cashflows, without shareholders needing to worry about dilution or the bank getting cold feet. Risk:reward has significantly improved I think, so for that reason, I'll give it a thumbs up.

Renold (LON:RNO) - a quick review of its interim results has impressed me. Strong H1 trading, a record order book, upbeat mgt commentary, and a balance sheet that's OK, although net debt has risen a lot due to a big recent acquisition (that's already performing ahead of expectations). I explain why the risk of a profit warning looks low, and the valuation seems modest, with decent upside. So a thumbs up from me.

dotDigital (LON:DOTD) - I review the results for FY 6/2022 (seems very late). I'm pleasantly surprised by the numbers, and valuation looks quite reasonable once you adjust out the excess cash pile. I'm not sure about the longer term prospects, but as things stand now, this share looks quite attractive, having de-rated a lot in the last year. So it gets a thumbs up from me.

McBride (LON:MCB) [quick comment] - AGM trading update says its trading in line with expectations for FY 6/2023.…

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Tortoise investor

16th Nov '22

Finncap has upgraded FY23 forecasts for Renold (LON:RNO) to 4.5p meaning this trades around a p/e of 5 this morning. I don't expect a high p/e here because of the debt and pension but that seems far too pessimistic for a business that is trading well - am I missing something?

shopping365

The VSA event is on Tuesday 29th November according to the link

ricardow

MJ GLEESON (LON:GLE)

I just had a look at the News tab for MJ GLEESON (LON:GLE) and yesterday’s item suggests that management are perhaps rewarding themselves over-generously …?

BRIEF-Proxy Advisory Firm PIRC Advises MJ Gleeson's Shareholders To Vote Against Resolution To Approve Remuneration Report At AGM

(Sorry - can’t reduce the font size on pasting in)

Hopefully Paul and others can consider this.
Ricardow

Silver Moon

As a long-time holder, long suffering loser in MJ GLEESON (LON:GLE) I will carry on for longer but am aware that my vote will make no impression on the Board of Directors as anyone can see from the proportion of shares owned by the PI. Unfortunately for PI's this is a scenario shared by most listed companies.

eParo

Anyone use services provided by Eenergy (LON:EAAS)? I would have thought their offering would be in good demand in the current climate, but SP says otherwise! Stockopedia doesn't rate them much on any metric.

Camtab

Enjoyed your weekly podcast AGAIN Paul. I have also enjoyed revisiting your interview with Robert Purcell this morning back in August. It will be interesting this evening to hear his comments on the fall in freight rates and whether they have become more predictable. Equally I am increasingly becoming concerned about the China situation and your recent comment on how reliant we are on them only increased my concerns. I am based in Cambridge which the Chinese have clearly identified as a place they want to be. But some of the Academics have in my opinion been naive about how they interact with well let's be honest not the Chinese but the Chinese Communist Party. The idea they would invest into sustainable cities along with our academics is all very nice but perhaps they are focussed on control and security which is at odds with our interests. China is also involved in building science parks etc here. Anyway I am rambling now so can only recommend people read Ian Williams "Every Breath you take". He is a respected knowledge on China, very interesting.

ridavies

Re Kromek (LON:KMK) I understand all the wonderful new contracts that seemingly come up form time to time, and the great products they generate to deliver to an untold number of customers in a huge number of countries. How is it that they continue to make a loss over such a prolonged period of time.

They came on the Stocko scene around 9 years ago at an SP in the 60's. Since then it has been continuous decline; the average number of shares have increased between 2 and 3 times; the revenue has barely doubled, yet they appear to be in the forefront of significant elements of technological surveillance and protection.

Despite this new contract, deliveries starting in December so revenue for 3-4 months before the year end, the year end forecast from Equity Development is UNCHANGED. 'Running fast to stand still come to mind?'

The target price on Stocko, presumably from Equity Development is 233% vs current. Yes, 233%. For a company that has never made a profit, never paid a dividend from what I see over 9 years in the Stocko data.

What are they doing here on the market? Surely, they are uninvestible except for those who get enjoyment from self-flagellation on a huge scale?

Or am I missing something? Are they on the brink of something outstanding? Please help, especially the 9 people who have given the thumbs up to the preceding contribution/announcement.

Mmm interesting choice, Paul.

Until the mini budget and its consequences, I have been fully behind the MJ GLEESON (LON:GLE) story.....but the picture has changed considerably.

Mortgage rates shot up and wont come back down fast;

cost of living rising very fast (although varies according to every person/family situation, hitting the poorest most);

building costs rising and likely to continue after the support package on energy comes to an end in the spring;

wages rising faster in the private sector, but surely many prospective first time buyers will be workers in the public sector and they will be getting significantly less, even when they aren't on strike in the coming months!

So heart says get back into MJ GLEESON (LON:GLE), head says wait for a while. In the meantime, get rid of some anger and morally support the vote against the remuneration package of the bosses just for the hell of it!

SundayTrader

re Kromek (LON:KMK), I have the impression this is a company run by a founder/scientist, who directs development spend more on the basis of what is interesting, than on the basis of the ROC that can be achieved. As a result, cash flow always runs behind capex. I have seen a few others like this in the past, the share price usually goes down until the institutional investors force someone with more commercial attitudes to be put in the driving seat. I don't think Kromek (LON:KMK) will be going anywhere until this happens here. I hold, which probably doesn't say much for my judgement.

Cuddlesticks

Interesting interim results from Renold (LON:RNO) today. From a cash flow perspective they seem to follow some themes consistent with others:

Renold (LON:RNO) generated £8.8m of operating profit or £14.4m cash after adding back non cash depreciation/amortisation/equity share plans.
It invested £7.6m in working capital and £2.2m in capex leaving £4.6m.
£6.7m was paid to various creditors, specifically £1.3m tax and £5.4m to service £116m of liabilities (borrowings, leases and pensions).
Shareholders were left with negative free cash flow of £2.1m.
It also spent £17.2m cash on M&A.
Net debt increased to £34m from £13.8m at year end.

Based on these cash flows alone, I’m not sure what the attraction is to prospective shareholders, unless you’re convinced that working capital investment has peaked and will unwind or that successful M&A will make it all better tomorrow.

Supply chain (Covid, geopolitics), energy costs and inflation have brought a covalency of unexpected challenges. But I also think these stresses highlight fragility in both the business and financial models of many companies.

Renold is not alone. Recent results e.g. Volex (LON:VLX), UP Global Sourcing Holdings (LON:UPGS) and Sigmaroc (LON:SRC), have shown otherwise “solid, well managed businesses”, in my view, to be in a similar category i.e. negative or only slightly positive free cash flow with debt levels rising, albeit partly to fund essential M&A to bring much needed growth.

This gives me two new concerns when trying to calculate the value of these businesses:

Invested capital requirements have increased just as interest rates are increasing the cost of capital.
What further pressure will a recession bring to cash flows, debt and returns on capital?

Is there more downside to come and, if so, is it worth holding your nose and sticking it out through a recession?

Helpful chart courtesy of Ed Conway at Sky on second hand car price inflation. Not good news for the likes of Vertu Motors (LON:VTU) and other car dealers so wonder if we might start to see profit warnings there?

davidjhill

Kromek (LON:KMK)

Fundamentally this business is far more valuable in someone else's hands than on the public market. We know this as its only competitors got taken out on significant premiums. The problem is that this type of IPR "value" obviously rarely gets recognised by investors unless there is a bid, and you don't invest for that potential alone. However, staying independent is actually good for business as most customers don't want to see Kromek (LON:KMK) in the hands of a competitor (particularly now they are the only independent).

The business should be cash profitable this year which is a step in the right direction but they need to make similar revenue growth next year to get meaningfully re-rated I think.

I do hold some but it's a tricky one.

yiannos1

This is old news as Vertu Motors have updated the market about 6-9 months ago that their profits will be about half of the year before.

Kromek is not going to be cash generative this financial year as it will need an extra £6m on capex. Also the company’s net debt will shoot to around £4m and it will certainly need another fundraise at some point. There are much much better investment opportunities around these days.

Aargh Aitch

Renold (LON:RNO) Pleased to see a business I hold doing well, although you are far ahead of me Paul, I won't get chance to go over their figs until the weekend. In my opinion they've been quite a volatile share bouncing up and down between 20 and 30p this year (Five for a £, I love a share that's cheaper than buying carrots!) but this volatility works in your favour if you are a regular investor. The price only needs to go slightly over 40p and Renold will be a double bagger for me due to pound cost averaging; the share price will have less than doubled from today's price but the value of my holding will have.

I wanted also to offer some educated guesses in response to Patrick L about why the market looks to be discounting Renold's value. I think businesses that make "Actual things" as opposed to a service or better yet something that can be done via an app are terminally unfashionable. Renold has also evolved from a household name (There was a time when they were OEM chains for virtually all British bicycles and motorcycles and were the replacement chain of choice, stocked by places like Halfords), into an industry component who's continued existence generates a "Howard Hughes" reaction, friends are surprised that Renold lives and trades on the AIM and that I invested. Additionally very few people now work on assembly lines or in maintenance and so there is little comprehension of how much unseen work is done by chains, couplings and industrial clutches and by implication how important that market is.

WarrantStar

I don't expect DotDig share price will go up until they issue an RNS which gives us reason to believe that Eps will start improving.

17th Nov '22

ridavies, I listened, I have placed my vote.

Silver

GloucesterBob

25th Nov '22

I see Renold (LON:RNO) are issuing a Preference share dividend of 3p.

Who are these lucky people and is it normal for them to get a dividend when ordinary shareholders miss out.

timarr

RE: Renold (LON:RNO)

Yes, that's why they're called preference shares. To be precise:

Preference shares, more commonly referred to as preferred stock, are shares of a company’s stock with dividends that are paid out to shareholders before common stock dividends are issued.

https://www.investopedia.com/t...

peterg

Just to add to what Tim has said, the prefs pay a set 6% pa. The company would be in default if it didn't pay.

Small Cap Value Report (Weds 16 Nov 2022) - CARD, RNO, DOTD, MCB, CGS

Agenda

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Paul Scott

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BRIEF-Proxy Advisory Firm PIRC Advises MJ Gleeson's Shareholders To Vote Against Resolution To Approve Remuneration Report At AGM

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