Small Cap Value Report (Weds 2 Nov 2022) - NXT, CER, FOXT, AML, MGNS, MTRO

2nd Nov '22 by Paul Scott

29 comments 6741 reads

Good morning! It's Paul & Graham here as usual.

Small caps discussion - Paul Hill of Vox Markets ( a highly accomplished investor, and small caps specialist/analyst) likes to touch base with me every few months, and we had a really interesting discussion yesterday on video, covering lots of topics & small cap shares. It's also available on podcast format. Paul & I get on very well, so it's a nice relaxed conversation, which I hope you find interesting.

Agenda

Paul’s Section:

Next (LON:NXT) - I quickly review the main points from a reassuring Q3 update today. As usual, the sector leader seems to be performing fine, despite all the macro headwinds. Remarkable stuff, and on a PER of only 9.0, this does look an attractive share. I always try to report on NXT, as a benchmark for how a well-run retailer is performing. Now wait for all the excuses from competitors to explain why they're under-performing!

Cerillion (LON:CER) [no section below] - I'm interviewing the CEO/Founder, Louis Hall today at 13:00, the audio should go up around 14:00, I'll put a link in here when it's ready. EDIT - my audio interview is here (and on podcast). The main thrust of my interview will really just be one key question, namely - "Why is the business performing so well, and is that likely to continue?". There's a superb results webinar here from ShareSoc, so I won't be replicating this content. Hence I recommend anyone interested in CER to watch that presentation first, for background. This is such an impressive company, but the share price reflects that, with a hefty valuation. [no section below]

Morgan Sindall (LON:MGNS) - my first look at this sprawling construction/infrastructure group. It's not really my cup of tea, doing low margin, major projects. However, the performance and outlook seem resilient (in line with exps for FY 12/2022), and a huge order book. Also I really like that it reports average daily cash, thus demonstrating clearly that its cash pile is not window-dressed for the balance sheet date, but a true reflection of reality throughout the year. Worth considering, with a PER = divi yield, at around 6.8.

Graham's Section:

Foxtons (LON:FOXT) (£93m) (pre-market) [no section below] - I noticed some brilliant comments in recent days on the merits of buybacks versus other uses…

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john2

2nd Nov '22

To be fair to Aston Martin Lagonda Global Holdings (LON:AML) they unveiled the DBX, widely reviewed as the best vehicle in its class, in November 2019 and launched it in July 2020. I am not suggesting that if Covid had not happened the company would have been profitable, but their sales were undoubtedly hit by the pandemic.

Paul Scott

Ah yes, sorry I corrected that in the tag, but must have forgotten in the other bit. I'll fix that now, thanks for flagging! OK that's sorted now, and I added my own comment on OSI, as curiosity got the better of me after hours! Could be an interesting little speculation, but only after the next fundraise has been done. It's got convertible loans too, so the terms of those need to be scrutinised. As you say, just for gamblers at this stage, I agree. Thanks again for your input!

Hi JohnDoe2378, just a tip on getting the £TICKER to work - you put a full stop immediately after it, which stops it working.

I find that sometimes the £TICKER doesn't work, even if correctly formatted. Dunno why, it's just temperamental! This is the workaround which always works - put in £TICKER as usual, then immediately after it (no spaces) do carriage return. It always works, if you do this.

Then just go back in using EDIT symbol, and remove the carriage return.

Bit of a faff, but it works every time doing that, I find.

cheeky_minnows

Re Grahams comments on Foxtons (LON:FOXT) : does 69p look like a good sell target ? Two can play at that game :o)

Helvellyn

Morning Paul,

I am a fan of Paul Hill and usually watch his interviews, however the one you link came up yesterday but i didn't watch because i thought it was an old one . It seems to be dated 1-22-22 which i assumed he was using the American date form .

Just about to sit down with a tea and watch now, thanks.

JohnDoe2378

Brilliant, than you

Thanks, I've emailed Paul Hill to flag that the date is wrong! Glad it's not just me who gets dates wrong all the time LOL!

Harry Hindsight

Been wondering what Aston Martin Lagonda Global Holdings (LON:AML) intangible assets are - clearly a brand, racing technical expertise and innovation, designers, but can't see what unusual and undervalued.

They could introduce a cheaper family friendly hybrid similar to the Focus but think Ford already nicked their grill design lol. And it didn't work for MG (so sad).

Berksbee

Hi Paul, I am a big fan of Paul Hill so this is very welcome - disclosure I subscribed to his precision guided investments service about 10 years ago that contained several multi-baggers. BTW I am also a big fan of another Paul but I will keep his surname secret as it might make someone blush!

Bouden54

Thanks for taking an look at Morgan Sindall (LON:MGNS) which I've always been a fan of, but tends to get overlooked. They have a very prudent approach, and I like the fact they are well diversified across different sectors. Also worth noting that founder John Morgan is a significant shareholder which is always a big plus for me.

Snowbum

I know we don’t do energy stocks here but posting mainly for others who may have missed the RNS. Takeover bid to be knocked back at Hurricane Energy (LON:HUR) (I hold). Bid of 7.7p considered to undervalue the company. Major shareholder wants out, formal sale process initiated to look for fairly priced bid. Capital return to shareholders (up to 3.1p per share) to be initiated if sale process unsuccessful. Current sp ~8p , up from 6.8p yesterday.

As an aside, this is now my third holding this year to be approached / taken over. Contour Global (energy), Shanta Gold , and now Hurricane. This suggests to me that the U.K. resource sector is being targeted by foreign investors just now!

Aargh Aitch

Replying to Ridavies re £AML historically the marque has been a strong money loser for everyone from Ford to David Brown Engineering via Victor Gauntlet and probably even the original Mr Martin. Sadly this isn't unusual at this rarified level of car building, the list of evocative names that have struggled is too long to repeat here. A luxury car factory looks to be a charismatic way of making a small fortune: out of the large fortune that you started with, or worse. The Pesenti family watched the fortune they had sunk into Lancia turn into a £20m* loss in a decade, followed by a sale to Fiat for a token value.

I wonder if holding a few shares in Aston acts as a proxy for owning one of their cars, for some enthusiasts? Personal I'd rather just have an AML branded golf umbrella and invest the rest of my money elsewhere. Seen as you can now buy a used DB7 for Ford Focus money, a careful invester enthusiast could probably build up a nest egg via sensible shares and a fair wind, cash in their portfolio in a few years, part ex the family car to make up the balance and voila suddenly they own an Aston (With decent spares backup and alleged good reliability). All done without holding any AML stock!

*At 1969 prices. Gulp!

Wimbledonsprinter

The £2.7m 7.5% convertibles for Osirium Technologies (LON:OSI) are repayable 28 October 2024 do seem quite dilutive. In theory the conversion price is 40p - but this is rachetable downwards in quite a complicated manner (details on p66 of the annual report) to a 25% discount to the 90 day average share price or the most recent placing price.

MichaelFBS

Why is it that Ferrari (RACE) seems to be able to be continuely profitable; €901m on revenue of €4,911m (these for a car company are phenominal, of course some may argue it is not sustainable) and command a premium rating of, according to Stocko, 44.1 (that does seem absurd?) and enjoys a mkt cap of €42.15 BILLION!

Whereas Aston Martin Lagonda Global Holdings (LON:AML) cannot manage a profit and has a mkt cap of £739m. Even though in my subjective opinion they produce beautiful motor cars (I have never owned or driven one), are now in F1 and have had the tail wind of the James Bond franchise for 63 years (Goldfinger published 1959 and the film released in 1965). I can only assume awful management at Aston Martin and brilliant management at Ferrari is the main reason, as the ingredients for Aston Martin Lagonda Global Holdings (LON:AML) to be a successful company are there.

I do not hold either.

Regards

Michael.

Snazzytime

Good spot Wimbledonsprinter.

Latest share placing was at 6p. A 25% discount would reduce the option price to 4.5p which is similar to the current share price. However, there will be another fund raise soon so another placing would more than likely reduce this option price further.

Assuming a 100% conversion was taken up at an option price of 4.5p this would result in another 60m shares being issued. Current shares in issue total 46m. This would result in a further 57% dilution for existing shareholders.

Is there any way to establish whether management hold any of the convertibles? I can't see any information as to who the holders are in the Annual Report but assumed if management held any then this might be disclosable. Does anyone know the rules?

Remains one for gamblers only.

BnB

There are sure to be multiple reasons but engineering excellence, for which Ferrari is renowned but where AML has a so-so reputation, is a good starting point. But the building of the brand is at least as important. Ferrari and Porsche know how to capture the imagination of the young enthusiast and will happily let youngsters clutter up their showrooms. AML barely let the (then) 35-year old jeans-clad me through the showroom doors.

The Boon Fund

Metro Bank (LON:MTRO) could be a serious multibagger in the next few months IMO.

- reaching profitability early. In Sep, vs Q1 2023 as last guided

- Net Interest Margin still some way to grow. More than half of lending will see interest rate reset over the next two years.

- moving from loss making to profitable is always one of the key share price re-rating plays

- huge gearing. Costs are fixed mostly. Any increase in NIM goes straight to bottom line.

- various PE firms had been circling in the past. Arguably, Metro in better shape now.

- PB, PS valuations very low vs banking peers in the UK. I think PB is like 0.2x compared to 0.5x and above for peers (albeit larger, proven profitability peers).

(I hold in the Boon fund)

Cricketfan

Hi Paul

Thanks for the link to your/Paul Hill interview. A nice friendly format with some interesting reflections. In particular the thoughts on the house building sector resonated with me. Cheers.

Mark

Agree about Aston Martin Lagonda Global Holdings (LON:AML) and engineering excellence. I remember being told more years ago than I care to remember that an Aston Martin spent more time in the garage on the road (hopefully that is not true now) but I still feel that is the fault of management.

Good product doesn't always mean profits?

We've seen it so often in the markets. Amateur investors getting carried away by having a good customer experience of the product; yes, that is maybe the hygiene factor for a company to be successful. But not the only factor.

I think you probably have it right, that it is better management and operations at Ferrari that has made it financially healthier than Aston Martin...

Small Cap Value Report (Weds 2 Nov 2022) - NXT, CER, FOXT, AML, MGNS, MTRO

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Paul Scott

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