Small Cap Value Report (Weds 2 Oct 2024) - SNWS, TPT, WYN

2nd Oct by Paul Scott

91 comments 7930 reads

Good morning from Paul & Graham!

Interesting news from the BRC today, saying that shop prices are falling, down 0.6% for year to Sept 2024, a slightly steeper fall than -0.3% in the year to Aug. This might possibly help the Bank of England cut interest rates from the current excessive (in my opinion) level -

"Helen Dickinson OBE, Chief Executive of the BRC, said: “September was a good month for bargain hunters as big discounts and fierce competition pushed shop prices further into deflation. Shop Price inflation is now at its lowest level in over three years, with monthly prices dropping in seven of the last nine months. This was driven by non-food, with Furniture and Clothing showing the biggest drops in inflation as retailers tried to entice shoppers back. Food inflation edged up slightly as poor harvests in key producing regions led to higher prices for cooking oils and sugary products."

Explanatory notes -

A quick reminder that we don’t recommend any shares. 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 (usually) between £10m and £1bn. We usually avoid the smallest, and most speculative companies, and also avoid a few specialist sectors (e.g. natural resources, pharma/biotech, investment cos). Although if something is newsworthy and interesting, we'll try to comment on it. Please bear in mind the "list of companies reporting" is precisely that - it's not a to do list. We typically cover c.5 companies per day, with a particular emphasis on under/over expectations updates, and we follow the "most viewed" list of readers, so if you're collectively interested in a company, we'll try to cover it. Obviously with the resources available, we can't cover everything! Add you own comments if you see something interesting, and feel free to discuss anything shares-related in the comments.

A key assumption is that readers DYOR (do your own research), and make your own investment decisions. Reader comments are welcomed - please…

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Timothy Smith

2nd Oct

Cannot believe Card Factory (LON:CARD) is now down at 99p just how much further can this drop?

FREng

Thanks - are you able to tell me the reference in the Tax Manual? The guidance in the Pensions manual says (as I recall) that the definition of income isn't the same as HMRC's definition for income tax, but that normal accounting usage should be followed.

My wife used to do our company accounts, so she's good at detail. We keep bank statements on paper and annotate gifts to distinguishe "out of income" from Potentially Exempt Transfers (PETs). She has a spreadsheet that records expenditure monthly from bank statements and credit card statements, using the (small number of) headings in the IHT forms. She records our annual income and (as we have joint accounts and give gifts from income jointly) allocates 50% of income and expenditure to us each and shows the excess of income over expenditure.

It should make it easy to fill in the IHT forms when the first of us dies, and to explain the figures if HMRC challenges. Our.IFA agrees.

But please take your advice from someone qualified to affer it. We are not accountants or IFAs and this is just what we do and not general or specific advice - it may be wrong!

The skier

Schedule IHT403 (publishing.service.gov.uk)

This is part of the IHT 400 form and sets out the type of expenditure HMRC are looking for.

AimingHigher

Totally disagree on the 50/50 success statistic when it comes to listed businesses that are serial acquirers / rollups.

Off the top of my head, JDG, KITW, KWS, DPLM, FAN, ELIX & HILS have all made multiple acquisitions over the last 5+ years and continued to perform well.

Success depends on many factors, however experienced listed management teams have a much better than 50/50 record, primarily because they will know what they are looking for and how to execute.

MPAC don't have an experienced CEO, however the FD has been there for 6.5 years and successfully bedded in Lambert (acquired in 2019 for £15m and had 160 staff, £17m turnover) and Switchback (September 2020, $13m turnover). Both businesses have continued to trade under their own brand names, so have retained their identity. I am sure that is a large part of the reason CSi agreed to sell to them.

K533405

IHTM14231 and the following sections provide further information, there are also links to other relevant sections within the tax manual, such as income from discounted gift trusts. If you are in any doubt as to whether your income would qualify you may wish to contact HMRC. I hope the above helps

The section which references purchase life annuity is IHTM14250

planetx

I think pretty pointless exercise listing a selection of 7 companies as some sort of proof that acquisitions are succesful in listed companies .

I think 50/50 is pretty generous and. Its probably much lower .

“Well, according to Harvard Business Review, between 70% and 90% don't quite make it across that elusive finish line. Imagine all those dreams dashed, market share hopes crushed under the weight of reality!

You might wonder why this happens so often; after all these are calculated moves by seasoned business leaders who surely know their art & science. It turns out there is a great deal more at play here than just number crunching or gaining operational efficiencies.”

i rest my case

According to the Harvard Business Review, the rate at which M&As fail to achieve their expected value stands at 70-90%.

Spender71

I hope not much further. I bought back into today!

sevenccc

Aiming Higher and planetx. Do either of you have a qualified source to back up your assertions on success or failure of takeovers? I don't and may have a faulty memory from Business School days but I'm fairly sure that our Lecturers were broadly of the view that the acquirer usually overpaid. Perhaps that was poorer quality management from the 70s and before.

Personal experience puts no greater confidence in large companies than small. For example Ronnie Halstead at Beechams bought a series of adhesives businesses, many household names at the time, and lots of cosmetics brands like Yardley. He didn't last long as they proved to be vanity projects and the 'strategy' highly questionable.

Beechams then successfully sold off their soft drink brands to the formative Britvic. The buyers paid through the nose to add Quosh and following the demise of that brand not long after had to pursue another expensive acquisition of the Robinson's brand from Colman's. 35 years later it may have worked out well....but I don't have the means to run the analysis as it wasn't always in the public domain as a single entity.

The easiest evidence to spot is on the new issues market where many suggest IPO stands for it's probably overpriced. Not the same thing I appreciate and I'd be very interested in any academic or financial institutions that could provide a quantitative and impartial assessment.

You certainly provide a interesting and more current list AH but it is selective and not quantified, IMO.

Bouden54

Card Factory (LON:CARD) It was trading between 90p to 100p for the best part of a year (before it rallied after Telios sold out). Can't stay I'm that surprised after the lacklustre H1 results and the risk they don't meet FY guidance.

topvest

Wynnstay (LON:WYN) It's a cyclical business so after 2 bad years, it will likely improve. Forecasts are down from c30p to c25p EPS are they not, so its down a 1/6th not a 1/3rd? I'm tempted to add a few more as its a reasonably high quality business. Feed margins are low but effectively cost plus so always profitable. The fertiliser business is very volatile. The stores are fairly steady. Anyway, the dividend is still well covered, so there should be a very small increase again this year. Balance sheet is rock solid.

WillBarraclough

With respect, a decision to "close" existing sources and not awarding new licenses are not the same thing.

But a policy to invest in solar, wind, and nuclear, plus reinstatement of our gas storage facilities etc seems to be an extremely sensible idea.

I did quote the Harvard business review .!

3rd Oct

No statistics from my point of view, I just fundamentally disagree with taking a broad brush approach to M&A. I think assessing small cap M&A is similar to stock picking, whereas large cap M&A is infinitely more difficult due to the level of complexity involved.

This is the HBR article being referred to https://hbr.org/2011/03/the-bi...

Reading that article you can draw several conclusions;

1. LBM (Leverage my Business Model) M&A is far riskier; this is effectively buying a company to gain access to a resource which will make the existing business better & killing off the rest of the acquired business. This is rarely successful, due to some of the reasons outlined earlier by Lochinver.

2. RBM; "But a company can buy another firm’s business model, operate it separately, and use it as a platform for transformative growth. We call that a “reinvent my business model” (RBM) acquisition. As we shall see, there is far more growth potential in purchasing other companies’ business models than in purchasing their resources."

The MPAC deal is almost certainly an RBM deal, just as their 2019 acquisition of Lambert was. It's complimentary to their existing operations & intended to help the group fulfil turnkey projects, something they can't do at present.

If you want an example of an LSE company that in my opinion does LBM deals then look no further than THG. They went on an M&A spree in 2021, buying brands for their prestige & then almost certainly taking operational / strategic control from head office.

Every deal is different, the skill is in doing the DD & assessing the risk reward. I.e. Had MPAC funded their deal with debt rather than equity, I think the market would have taken a different initial view (as it did with the Iomart deal announced on the same day). However, Iomart also paid 17x Adjusted EBITDA whilst MPAC paid around 6x. Straight away those two facts tip the scales in terms of likelihood of success...

Marcus Deva

Hi Jonno. I can only see that Charles bought 100,00 at 280p not 300,00 shares. See RNS dated 02/09/24. Am I missing something?

Paul Scott

Hi topvest,

No that's incorrect. As I mentioned, Shore reduced its forecast EPS by 34% -

M48

The consensus forecast on Stockopedia was showing as under 30p so the brokers (only 2 of them) must have been miles apart which seems odd for this type of business?

Equity Development

8th Oct

AO World (LON:AO.) - "Synergistic acquisition of musicMagpie" - link to research note: https://www.equitydevelopment....

AO has announced a recommended cash offer for consumer technology re-commerce leader musicMagpie. We believe this is an exciting opportunity for AO, given musicMagpie’s expertise and trusted brand in consumer technology re-commerce, with over 9m customer contacts. AO is offering 9.07p per share, equating to £10m cash and a c. £24m Enterprise Value which, in our view, represents good value at c. 0.2x EV/LTM Revenues and 3.4x EV/LTM EBITDA. Whilst we do not, at this early stage, forecast the consolidated profit impact of musicMagpie, we expect the acquisition to be value-accretive in the medium term.

AO is retaining musicMagpie’s senior management team, including its CEO and co-founder Steve Oliver and will work with the team to leverage synergies across the combined group. This will include benefits from a larger combined customer base and from enabling musicMagpie to leverage AO’s trade-in volumes of mobile phones and other electronics. AO will undertake a 6-month evaluation process post-acquisition, and we anticipate the acquisition will be value-accretive in the medium term.

Small Cap Value Report (Weds 2 Oct 2024) - SNWS, TPT, WYN

Explanatory notes -

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Paul Scott

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