Small Cap Value Report (Weds 18 Nov 2020) - BOTB, WYN, BEG, HFD, SDY, FCAP

Good morning, it's Paul here with the SCVR for Wednesday.

Agenda - today I’ll be covering;

Best Of The Best (LON:BOTB) - Trading update & update on FSP (formal sale process)
Wynnstay (LON:WYN) - positive trading update
Begbies Traynor (LON:BEG) - Trading update
Halfords (LON:HFD) - Interim results
Speedy Hire (LON:SDY) - Half year results
Finncap (LON:FCAP) - Interim results

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Best Of The Best (LON:BOTB)

Share price: 1400p (pre market open)
No. shares: 9.38m
Market cap: £131.3m

(I hold - but only a small position)

Trading update & update on FSP

Best of the Best plc, (LSE: BOTB) the online organiser of weekly competitions to win cars and other lifestyle prizes is pleased to provide an update on trading for the interim six month period to 31 October 2020. The Company will announce the date for the release of its interim results shortly.

Trading update -

The Company is very pleased that trading for the period has remained as strong as previously announced on 16 September 2020 and that momentum remains within the business. The Group's online strategy has continued to gain traction.

Looking back to the 16 Sept 2020 AGM trading update, my notes are here. Even though BOTB said it was once again trading ahead of expectations, the broker forecast doesn’t seem to have moved. Therefore, I speculated whether c.100p per share EPS might be on the cards for this year, FY 04/2021. So it will be interesting if the house broker updates its forecast today or not, because it didn’t seem to update its forecast on 16 Sept.

Outlook - sounds good;

The early signs are that the second half of the year will be strong and the Board remains confident about the prospects for the business in the second half of the financial year.

There must be some extent to which BOTB benefits from lockdown, since some customers may have more disposable income available, given that we can't eat out, go on holiday, or go to the pub.

Update on formal sale process (FSP) - still ongoing, with several parties;

The Company, together with its advisers, remains in ongoing discussions with interested parties from a number of sector verticals and including private equity.

My opinion - the broker forecast of 69.8p is already lagging behind the positive Sept update. Today seems to be saying the same, but not a further upgrade. Therefore, I wonder if EPS this year might be heading for say 80-100p? That’s guesswork mind you.

The share price has drifted down to 1400p, so looks attractive on a PER of 14-17.5 (based on my estimate for earnings), which strikes me as very good value, considering how well the company is performing.

As regards the FSP, I’m not convinced management will want to work for private equity, so I think it would take a blockbuster bid to persuade them to recommend any such deal. As regards a takeover offer from another company in the gaming sector, that is possible, but with the market cap at £131m, a bid premium might take it to £200m, and at that level surely it would make more sense to simply replicate what BOTB has created, with a very large budget to do so?

So I’m not convinced a bid is likely to happen, but nobody knows except insiders. The fact that talks are ongoing, suggests there’s serious intent from buyers (and BOTB management).

Personally, I’d like to buy back into BOTB properly at some point, as I banked most of my profit earlier this year, to load up on other things where I see greater percentage & more immediate upside.

Overall though, today's update looks share price neutral, as nothing has changed with either trading, nor the FSP.

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Wynnstay (LON:WYN)

Share price: 352.5p (up 14%, at 08:56)
No. shares: 20.05m
Market cap: £70.7m

Trading update & organisational change

The Board of Wynnstay, the agricultural supplies group, is pleased to provide the following update on trading for the financial year ended 31 October 2020.

Good news -

Overall trading since June, when the Group reported interim results, has been stronger than anticipated, especially in September and October. This is across both the Agriculture and Specialist Agricultural Merchanting Divisions. As a result, the Board now expects that underlying Group pre-tax profit* for FY 2020 will be significantly ahead of current market forecasts.

Outlook -

More generally, the Board believes that the outlook for agriculture and farm commodities in the UK remains positive despite uncertainties around Brexit and that the Group is well placed to take advantage of the opportunities that are expected to present themselves.

Restructuring charges (not quantified) will be incurred as 3 depots are closing.

A management restructuring is underway, full details will be given near the end of Jan 2021, with the full year accounts for FY 10/2020.

Valuation - note that broker forecasts had been reduced, so being “significantly ahead” is probably just recouping the previous shortfall.

EDIT - I've just seen a broker update today, with EPS forecast for FY 10/2020 raised by 21% to 33.5p. Therefore at 352.5p the now historic PER is 10.5

End of edit

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As we’ve had confirmation of trading being ahead of expectations, then we should be able to rely on the forecasts (it’s difficult at the moment, as so many have been withdrawn). The valuation metrics are a sea of green;

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Although the share price is up 14% today, that should be offset by increased broker forecasts, so these numbers should still be in the right ballpark (they’re updated daily, overnight, so you have to manually adjust them if a share price shoots up or down a lot intraday).

My opinion - it’s frustrating that the update doesn’t contain any numbers, and that there are not any broker notes available freely. The company needs to be more open, and engage with private investors a bit more, and provide us with the information we need. After all, we’re the people who create the liquidity & set the price, for small caps.

I can see the attraction of this share, for income investors. In a time of near-zero interest rates, probably forever, then I find reliable dividend paying shares very attractive, and a time could come when they re-rate, as people can’t find yield elsewhere. So a possible double benefit, providing income, and a future capital gain too, maybe?

WYN seems a solid, but boring, and ex-growth company. However, it’s forecast to pay out divis yielding about 4.6%, almost twice covered by earnings. That’s a decent proposition. Even if it pauses divis for now, they’re likely to resume, given that trading is ahead of expectations.

Worth a look, for income-seeking investors, in my opinion.

Stockopedia loves it, with a super-high StockRank.

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Begbies Traynor (LON:BEG)

Share price: 89.5p (up 3%, at 10:42)
No. shares: 127.9m
Market cap: £114.5m

Trading update

Begbies Traynor Group plc ("the group"), the business recovery, financial advisory and property services consultancy, announces an update on trading for the six months ended 31 October 2020.

Trading has been good -

The group is pleased to report a strong financial performance in the six months. Group revenue in the period grew by c.10%, with adjusted profit before tax growing by c.25%, having absorbed the downside impact of lockdown in the first few months of the financial year.

Liquidity looks good too. Bear in mind that insolvency practitioners typically have an extended receivables book, as they often get paid at the end of long-running jobs. So having net cash is very good. I wonder if any creditors were stretched, e.g. under VAT/PAYE deferred payment schemes? This should have been confirmed either way in today’s update, but wasn't. Bit of an oversight there.

The group has maintained its strong financial position with net cash at 31 October 2020 of £0.7m (30 April 2020: net debt of £2.8m, 31 October 2019: net debt of £2.3m) and significant levels of headroom within our committed bank facilities.

Full year guidance - reassuring, with some possible upside, by the sounds of this -

Overall, the board expects results for the full year to be at least in line with current market consensus*, which would represent a further year of growth….

* Market consensus for adjusted PBT of £9.8m (as compiled by the group)

Many thanks to the company & its advisers, for helpfully including a footnote as to what market consensus is. Why can’t all companies do this? It’s so simple, and helpful, a complete no-brainer.

Other points -

• Increased market share, and larger cases, has partially mitigated weakness in the market.
• Govt covid financial support schemes have led to a subdued insolvency market (a good thing for everyone else, if not Begbies!)
• First time contribution from prior year acquisitions (no figures given)
• Strong recovery in all parts of the business impacted by covid
• Property advisory division is trading well

My opinion - the decision to diversify into other advisory services, looks to have been a good one, smoothing out the peaks & troughs of the insolvency market.

The current year looks to be on a forecast PER of 14.5, which doesn’t look demanding.

If you’re worried about the economy tanking in 2021, and lots of insolvencies emerging, then this share seems a good hedge. I like it, at this valuation.

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Halfords (LON:HFD)

Share price: 250.5p (down 5%, at 13:00)
No. shares: 199.1m
Market cap: £498.7m

Interim results

Halfords Group plc ("Halfords" or the "Group"), the UK's leading provider of Motoring and Cycling products and services, today announces its interim results for the 26 weeks to 2 October 2020 ("the period").

Here are my notes from 1 Oct, when Halfords considerably upgraded its profit before tax expectation for H1, to be “in excess of £55m”. With an uncertain outlook for H2.

Today’s actual profit before tax is only slightly higher, so I take that as effectively being in line with expectations;

A very strong H1, with Group revenue growth of +9.6% and profit before tax of £56.0m2. All product areas and businesses returned to growth towards the end of the first half.

This is 116% up on last year’s H1, so a superb result. The popularity of cycling seems the main driver, and with electric bikes & scooters also now growing, maybe this strong performance could continue? Less so over the winter of course, as this is seasonal business.

Current trading - some impact from lockdown 2, although stores remain open;

Trading for the first five weeks of H2, to 5 November 2020, continued to be relatively strong, with good growth and increased market share in cycling, alongside resilience in our motoring products and services businesses.

Since the 5th of November we have seen some impact on trading as the second national lockdown came into force. Cycling has continued to grow; we saw an immediate upturn in our Mobile Expert business; and we have seen another shift towards our digital and home delivery channels. However, sales of motoring products have been impacted, with Government data showing car traffic last week at 70% of pre-Covid-19 levels. Unlike the previous lockdown, we have been able to plan and mitigate against some of this risk early.

Outlook - due to uncertainty, no guidance is provided for H2.

Government support - many thanks to Shanklin100 and doublelutz for your interesting points in the comments section below. These two subscribers discuss the issue of Halfords reporting a huge increase in profits, with Govt support fuelling some of that. From the RNS;

Business rates relief and furlough income totalled £24.5m, but these benefits were partially offset by increased costs of operating under Covid-19 which, to date, amount to £11.4m in our retail business. This includes PPE, additional store payroll, digital fulfilment costs and over £2.4m of initiatives launched to support colleagues including a Frontline Colleague Support Fund and the Here to Help Fund.

Should Halfords return some or all of the furlough monies, at least? Some companies have done so already. Is it right for companies to take Govt money, after it transpires they didn’t need it? Maybe the furlough scheme should have had a clawback provision, or would companies have then just made everyone redundant instead? All good discussion points.

When the business rates suspension comes up for ending or renewal, or adjustment, at end March 2021, I feel that the Govt should refine eligibility. For example, it’s crazy that supermarkets in particular, and DIY retailers, that have done a roaring trade in 2020, should have received hundreds of millions in taxpayer subsidies (esp. business rates) during a period that has been buoyant for them. Let’s hope taxpayer support is provided where it’s needed in future, intelligently targeted.

Balance sheet - quite weak. NAV: £408.4m, but worthless intangibles are £393.4m, so NTAV is only £15.0m - next to nothing, for such a big business.

There are large lease commitments, which could make it difficult to exit from loss-making sites possibly.

Cashflow statement - note that inventories are down £27m in the 6 months, due to very strong sales in October, but trade & other payables are up £79.3m - when they should be down! This seems clear evidence of creditor stretch (VAT, and payroll taxes), but I did a search for “VAT” and it is not mentioned in the RNS at all.

For this reason, I suspect the company may have gained considerable cashflow benefit, on a temporary basis, from stretching creditors, but doesn’t seem to have disclosed this. Although I haven’t read through all the text, so please point out if I’ve missed details of this.

For these reasons, I think we have to treat the £109.6m cash pile as being an aberration, boosted by short term factors, rather than a long-term position.

My opinion - I can see why people may think the cycling boom could continue. Electric bikes in particular look interesting, as they’re much easier to use if you don’t want to arrive at your destination drenched in sweat, and a great way for older & less fit people to get out and do some gentle exercise. I used to enjoy riding electric hire bikes in London, but haven’t really felt like doing any exercise this year, so must remedy that.

There’s no interim dividend, which is good as it would have been distasteful if HFD had paid shareholders, after receiving generous taxpayer support. Its weak balance sheet means that paying divis would be foolish anyway. The strategy should be to build up its balance sheet strength, so that it can cope if cycling demand ebbs away. After all, once you’ve bought a bike, you don’t need another one for a long time, although accessories and repairs might continue to provide revenue for Halfords. Internet competition concerns me too.

For me, the price looks high enough, so it doesn't appeal, when there are so many other interesting recovery shares shooting up almost indiscriminately, why park our money in this?

Stockopedia disagrees, with a very high StockRank.

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