Small Cap Value Report (Weds 17 Nov 2021) - CMCX, TAM, MCLS, SDY

17th Nov '21 by Paul Scott

75 comments 9661 reads

Good morning! It's Paul & Jack here with the SCVR for Weds.

Agenda -

Jack's section:

Cmc Markets (LON:CMCX) - figures as expected, quite a sharp decline following once-in-a-generation conditions in 2020, when people were forced to stay at home and handed money from governments. The shares have subsequently fallen and there are strategic growth initiatives in place so worth monitoring, although regulatory risks are always a concern.

Tatton Asset Management (LON:TAM) - good update from a high margin, growing company trading ahead of expectations. The share price has increased significantly, so further upside depends on sustained earnings per share growth. There are some attractive business characteristics and growth prospects here. Cyclical risks remain but shareholders have so far been well rewarded for holding.

Mccoll's Retail (LON:MCLS) - extremely risky special situation. Supply chain issues have deteriorated in Q4 and the financial position remains precarious despite a highly dilutive £30m fundraise. Bank support is key now, and further dilution is possible. A sustainable recovery could present quite a lot of upside but for now I'm waiting for more detail in the full year update on 8th December.

Speedy Hire (LON:SDY) - ahead of expectations. The share price has lagged some others in building materials, so there's scope for a rerating. Past performance has been fairly pedestrian and the group is working on growth initiatives to address this.

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…

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davidjhill

17th Nov '21

Suggests the de-merger was handled appallingly badly. And £11m out the door to advisors to boot ! talk about a kick in the teeth to their shareholders....shocking.

Bouden54

I must admit I struggled to see why Electra Private Equity (LON:ELTA) went to such a big premium before the demerger. Their valuation methodology didn't seem especially conservative and I didn't think a big premium was warranted. However, starting to look better value now following the drop so I may take a closer look.

well they are a very different business to the one 5 years ago. Management changed, culture changed, previous shareholders took charge to rejuvenate. This used to be a private equity type buyout company that got greedy and then underperformed. It is very different today but the new management recognise the need to rebuild trust and focus. They can't do much about you but they can ensure the new 50+ know their brand and feel looked after, which they are doing.

I would say though that if you ripped up every insurance providers letters you felt ripped off by then I assume you no longer get insured :) In my experience they were all very similar a few years back in that regard but the industry does appear to have changed somewhat. I remember my house insurance on auto renewal kept going up by like 25%+ and I had to constantly ring them up and negotiate a much lower rise. Recently it has been much more reasonable, falling last year and up a little this. Same insurer - changed behaviour. I think the threat of FCA action forced a lot of insurers to change their approach. To be fair to Saga (LON:SAGA) I think they had already done a lot of that change as it became clear the previous management culture had not worked.

shanklin100

I guess that's one reason for splitting up a business. Would anyone really want a spreadbet company, that has in the near past had little clue about how its currently trading, taking on their trade processing?

timarr

I've been exposed to this cardless future already. I recently paid a Tesco credit card directly via app to app transfer

Maybe - you'd need to check your account details to see the precise way you paid. The Tesco app is a front for the underlying payment method which could either be a card or direct to account. In both cases the payment works in a similar way. Santander obviously have a good user authentication flow via their app (a lot of banks don't, sadly).

The difference is that if it's a card payment then Tesco will hold your card details and will trigger a card not present transaction. Y

Or it could be Open Banking - so instead of giving card details to a merchant you're redirected to your bank (in your case via an app) where you effectively instruct your bank to send the money to the merchant.

There are pros and cons. With the card case you would have stored your card details with Tesco previously (so they could be compromsed). With Open Banking you don't have the same refund rights if things go wrong. Personally I'd always use a credit card for an online payment because you have better refund rights.

For the merchant the difference is that card payments cost up to 2.5% (much less for Tesco, mind) while Open Banking payments are close to free. If they sort out the consumer protection persuading customers to use the latter is a no brainer.

Chrisfarrell21

I've just been looking through the circular on the demerger, and the subsequent RNS from 2 November, and can see no mention of cash or debt for ELTA/Hotter/Unbound. The circular (and the RNS of 15 October 2021) details the debt that Hostmore will have, so the implication would be ELTA doesn't have any debt facility (yet). They repeatedly mention that Hotter/Unbound is cash generative, but no specific details of bank balances.

Unbound is planning to set up new businesses, or sales lines at least, which could soak up cash/require debt, but I would have thought they'd have disclosed plans to take on debt in the circular.

Silver Moon

I hold my Cmc Markets (LON:CMCX) in my ISA and have doubled-down.

Rusty2

Yes I hold their shares in an ISA but I meant using Cmc Markets (LON:CMCX) platform to invest on, not their shares.

stockdave

Why are comments greyed out at the moment, please?

Lochinver

Speedy Hire (LON:SDY) (Speedy Hire) - the helpful ticker tip doesn't appear to work on an iPad !

Thanks for your analysis and comments Jack

I’m wondering if the business should really be comparing 2021 H1 to 2019 with these numbers , given that the six months to 30 Sept 2020 were significantly impacted by lockdown. If you do that, it shows they are only treading water compared to pre Covid and in fact eps are significantly down.

This is after adjusting for the Middle East business they sold earlier this year ( which in itself is a bit of a mystery : selling a business that made operating profits of over £5m on sales of £20m for a consideration of only £14m seems strange, but obviously I am not party to the real reasons for this, which i do not believe the company have fully communicated).

The fact remains that the business is performing worse now than two years ago, despite the upbeat back slapping of todays update. And this during very favourable market conditions and activity in the property improvement, house building and large scale construction sectors.

The B& Q move seems to be a good one and, as you say, they have invested in various back office developments to improve the business and make life easier for their customers. But until this activity is translated into genuine performance upgrades, one wonders if the share price will continue to stagnate.

andrewdb

whose age demographic have perhaps been more likely to simply auto-renew.

... if my dad is average, he spends a _lot_ of time comparing prices online and then will call the renewal team explaining he is a poor pensioner. He never takes the renewal and always complains that they are trying to steal his money.

Richard Vasey

Great coverage of Tatton Asset Management (LON:TAM), Jack. You have the knack of covering the history and getting behind the key drivers and the ongoing risks with the minimum of fuss.

I hold and will continue to do so, but acknowledge that further progress may be more modest.

Looks to me like Unbound will be around £7m of debt. They did at one point have £12m but I know paid off £2m at least. They want sub 2* maintainable EBITDA. I think this year will be about £5m so I'd assume they will adjust that conservatively to £3.5m or £4m for "maintainable" purposes. So £7-8m makes sense.

Looks like they had finance charges of around £550k so suggests 7-8% cost of capital which is probably not far off.

Medium term they expect net cash : looks like 2 to 3 years to pay that down to net cash depending on market conditions.

so EV appears to be about £35-36m by my calcs and should be on 7* versus SHoeZone at maybe 10* though obviously the latter are heavily store weighted and Unbound is mainly online.

I wouldn't take any of that for gospel though - had to piece it together from capital markets day info and other historic info so I may have something wrong. Irritating it's not plain and obvious!

gmtrader

Electra Private Equity (LON:ELTA) I agree with others that this is getting silly cheap. Not saying it won’t drop any more as there are obvious risks and the de merger has been a sham quite frankly.
This is from the broker report:

It is also encouraging, in terms of profit, that overall gross margin rose from 53% to 63% in the half to July 2021 and that EBITDA for the seven months from October 2020 exceeded management’s pro forma EBITDA of £5.4m for FY20 by 8%.

Harry Hindsight

Saga (LON:SAGA) also into 'equity release'. Expect the FCA may be interested in that say 5 years down the line lol. Still plenty of time to sell their products to pensioners on their cruise liners - expect the salespeople to be lining up the gangplank.

Know its a pain my friend but it would really help to reference the company

peterg

I wouldn't complain too loudly. You've got a 260 bagger there, in about a week!

bryans1311

If that was me, I'd be selling straight away and heading off somewhere tropical!

Dojosan

That's really MORE!!!

gtrdave

18th Nov '21

Why are comments greyed out at the moment, please?

I get that bug occasionally too. I assume it's just poor programming by Stocko's techies, along with the fact that this is the slowest website to load up of any that I use regularly.

Small Cap Value Report (Weds 17 Nov 2021) - CMCX, TAM, MCLS, SDY

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Paul Scott

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