Small Cap Value Report (Weds 21 April 2021) - JOUL, 95% Mortgages, CARR, AIR, SYS1, NEXS, HSP

21st Apr '21 by Paul Scott

54 comments 10255 reads

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

Timing - today's report is now finished.

I had a couple of nice surprises, when recently booking a hire car online for a trip to see family. It turns out that 3 of my driving licence points have expired, so instead of having 6, I now have 3 remaining! Or in shares parlance, "broadly in line with" a clean licence. Also, it turns out that I'm 52 years old, whereas I've been telling everyone I was 53. Many thanks to Thrifty car rentals for spotting this anomaly. So I've gained not only a more relaxed journey up to Cheshire, but also an extra year of life. Not bad for a few minutes work on the internet!

I think we're seeing a bout of profit taking - lots of smaller cap stocks seemed to drop back a similar amount yesterday in particular. That makes sense to me - prices have run too high in many cases, in my opinion. I trimmed back some of my geared positions, as it's not a good idea to go into a downturn highly geared. Also, I tend to go through my list of positions, and periodically top slice the ones that have done well, or look over-priced, or ditch them completely where my conviction is low.

The coffee can idea (in 100 Baggers book) is great, but it's not compatible with using gearing.

Agenda -

Paul:

Joules (LON:JOUL) - comments on the secondary placing yesterday - founder Tom Joule top-slicing his shareholding a bit. No discount, and an honest reason given for the sale - take a bow Peel Hunt!

Overview of the new 95% mortgage guarantee scheme.

Carr's (LON:CARR) - solid interim results. Outlook sounds positive. I like this - looks good value, for a resilient business.

Air Partner (LON:AIR) - issues a "Reach" (i.e. PR) update re its private jet division. Quite interesting.

System1 (LON:SYS1) - An upbeat trading update, has pushed shares up 25% today. Potentially interesting, although I have some quibbles with the way they adjust profit!

Jack:

Nexus Infrastructure (LON:NEXS) - good growth in the group's early-stage electric vehicle charging business, but work to do at its more established (and much bigger) civil engineering division.

Hargreaves Services (LON:HSP) - special…

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chrisgb

21st Apr '21

Kevin, I am puzzled by the fall as well but with 70% of the shares owned by 20 share holders it wouldn't take much for the shares to drop. I found the RNS difficult to read - although much better on the website with proper formatting. I think it says they haven't got financing for the processing plant in Hull, but if I read the production forecasts correctly they will easily be able to repay a loan.

rmillaree

Pensana (LON:PRE)

"Can't really understand why they are 9% down today unless investors are worried about the capital spend required and the need for raising more funds?

The first line says it all really

Pensana Plc (LSE: PRE) (“Pensana” or “the Company”) today announces the Company has adopted a business plan to seek to establish, subject to funding, Anyone can say they would like to do anything but if you are explicitly suggesting you need to magic this money up a later date under uknown terms i don't think you can blame shareholders for choosing to exit the building until the dust has settled.

proffittpar

Hargreaves Services (LON:HSP)

Hi Paul & Jack,

Many thanks for your as usual, excellent coverage and analysis on Hargreaves and indeed all the other companies.

spglet

The other thing to look out for is the rapid obsolescence of the current generation of Li-ion battery powered cars when cars with solid state batteries come on the market. I think low emission ICE cars are a better option at the moment. I'm also not sure why hydrogen cars like the Toyota Mirai haven't been endorsed more by the UK Gov as a green alternative.

Zipmanpeter

I am not sure. For the next 10 years or it seems likely that many richer electric car drivers will hugely over spec their electric car battery, insisting on 150-200+ miles range whilst daily travelling much less. This gives a lot of spare capacity to sell to the grid in peak or especially shoulder periods ie buy at a few p/KW at might and sell at 3-4 times that. These same people often have detached houses and an opportunity for PV and either an accounting sense for money to be made or want to virtue signal they are ahead of the societal curve. (These same sort of people made v good money getting on govt subsidies for PV but this time the pool will likely be much bigger IMHO)

How big will that market be - no-one really knows but I think sizeable enough for several AIM sized companies to specialise in and exploit. For example, £GOOD arguably has all the requisites. The market is moving rapidly - perhaps so rapidly that it will remain too fragmented for any one to make money from it.

In the longer run, who knows - except the energy market, post electrification of nearly everything will look v different.

JohnEustace

If I were to lease an EV then I might see an advantage in using it to sell back power to the grid, but if I owned it and was on the hook to pay for the battery replacements then I would stay well clear. And if I was the lease company I might ban people from depreciating my asset in that way.

peterg

Good point, but presumably it would depend on how much you were getting for selling back power?

marigold

Agree with your comment. Not sure why the government is so fixated on electric. Electricity has to come from somewhere and I would guess if everybody switched to electric cars and all the houses that are using gas switched to electric we would not cope! Hydrogen sounds like a much better idea.

muckshifter

Jack, your piece on Hargreaves misrepresented a few things, I feel, so I would like to comment on it as follows:-

Hargreaves was originally a coal trader for most of its existence, and got into actual mining, both deep mine and opencast, at a time when many major contractors were getting out of opencast, pure opencast contractors were going bankrupt, and deep mines were closing one by one, until they were all gone, together with the vast majority of coal fired power stations. Hargreaves venture into mining did not go well, and eventually as you say, it ceased last Summer.

The company has quite an interesting history, with many disasters along the way, such as the Belgian subsidiary which was closed after a £13m fraud (iirc) was uncovered, and the much lauded purchase of Blackwell which became a huge embarrassment.

The next “big thing” which you would find dominating Hargreaves news flow over recent years, was its huge land bank of old opencast coal sites from which it suggested huge profits would be generated, but this now seems to have taken a back seat, with Hargreaves spending something like £23m on preparing an old opencast near Edinburgh (Blindwells OCCS) over the last three or four years from which they have received so far just £3m+, I believe. I’m sure this, and one or two other sites, will be profitable over perhaps the next 15 years, but not the bonanza enthusiasts expect.

And the latest “big thing” was the sale of the residual coal stocks to HRMS, the German associate. Your description of HRMS was wrong jack, they have nothing to do with brownfield land development, they are mainly a coal trader, and have just invested in a coal pulverisation plant, with the intention that they will prepare the coal for the power stations, steel plants etc, generating better profits, and HRMS last year bought for 1 Euro, iirc, a struggling steel slag processing company which was next door to their new coal (and other commodities) pulverising plant. I would think that their customers are keen to minimise their published carbon footprints, so having the coal processed externally, and having iron reclaimed from slag externally, perhaps producing concrete additives from pulverised slag at the same time, should benefit the image of those customers in the power, steel and cement industries and so benefit Hargreaves, who own 85% of HRMS. In the past, Hargreaves have declared their profit share from HRMS each year, but then deducted it from the cashflow statement, so their sale of coal to the associate is a way of getting cash out of HRMS, but Hargreaves still “own” 85% of HRMS bank debt, which is not disclosed. They are therefore still very much in coal, for better or worse.

My point, apart from correcting your HRMS mistake, is that this company has a very checkered history, so RNSs and Annual reports need careful consideration, although it has to be acknowledged that Hargreaves have survived many a dreadful blunder.

i would presume it is exactly the oppposite , at present there is much more daytime demand than night time demand for electric. There is a great opportunity here to use the spare night time capacity (+ increase night time capacity if needs be cheaply) to charge electric cars making the most out of the available generation. Yes there will probably be extra capacity needed overall but morphing towards a more flexible grid fit for this century is a no brainer to me if we want to give ourselves the most available options and highest level of flexibility (both cost wise and minimising emmisisons) - i noticed only this week that octopus let you charge your car in the middle of the night at a fraction of the daytime rate - this suggests there is real extra capacity at night. It may also make existing generation more efficient if they can get extra customers during the night too , at present being active off peak times may not be worth the marginal cost of firing up. Obviously grid upgrades will take time so there could be an issue getting to the end point if we are not careful about relevant planning.

Jack Brumby

Hi Muckshifter,

You say:

I said:

Hargreaves Services (LON:HSP) was until recently a coal mining company (it ceased all mining activities in July 2020).

These two things don’t really disagree with each other, and, unless I miss your point, I don’t think it’s a case of misrepresentation. And I say further down:

Clearly, the company has a story to it and so historical results are presumably not indicative of the future trading profile. This type of special situation can present an opportunity, but you do need to put the work and due diligence in.

This isn’t a company I claim to know well, but is a special situation with what looks like a lot of history attached to it that could be worth a further look for those interested based on some positive quantitative signals and some recent director buying activity. I’ve been quite clear on that preliminary conclusion, I feel.

I take your point on the German JV not being the brownfield land part of the business - this is a separate business.

Apart from this I can’t tell what else specifically you are flagging in the coverage so I dispute the idea that I have ‘misrepresented a few things’.

But thank you for providing more of an insight into the group’s history.

All the best,

Jack

GrahamF

I’m no expert but it seems that batteries for storing electricity from solar PV can often do 10,000 cycles or more. I think Tesla Powerwall is unlimited cycles. Lifespan seems to be about 5 - 15 years.

I appreciate that the battery tech in cars may be somewhat different but it appears that the cycles may not be a problem once the tech has evolved a bit more.

Hello again Jack,

My post was not intended to offend you, so apologies if it did!

I think we agree on the need to understand the story and do due diligence on Hargreaves, which actually started out as a pure coal haulage contractor taking coal from opencast site to disposal points, iirc. It has a very varied history, dominated by coal, with, for example, its involvement in Hong Kong being work on a coal fired power station, and after years of involvement in the coal supply to Drax, Hargreaves did the conversion of Drax to wood pellet burning, iirc (at great cost to themselves, again, iirc).

The HRMS organisation did not undergo extensive work to cut costs as it consisted of just an office and some commodity traders (mainly coal) before building the pulveriser in 2019 approx. the cost reduction etc, related to the slag processing company bought for 1 Euro about 18 months ago, I believe. The real question that is unanswered relating to HRMS is how much debt did Hargreaves take on in Germany as the 85% financial owner of HRMS, in order to pay £24m from HRMS to Hargreaves in the coal purchase arrangement. Hargreaves remains involved in coal obviously.

The HS2 contract will almost certainly be profitable as it is the type of contract that has good contract terms, and if it was to be cancelled, history tells me that that would be even more profitable, but leave a big hole in Blackwell workload..

All the best to you too Jack.

Boon

So effectively they're the shovels, not the end owners and operators of the electric charging networks?

Wilbraham

Yes - hard to imagine anyone would promote this concept if it seriously impeded battery life. I thought it's accepted that Tesla battery life in the real world is well exceeding initial expectations - perhaps because power management is good. (fwiw, my olde worlde lead acid car battery is in its 11th year now - hope this doesn't jinx it. )

Obviously Gresham House Energy Storage Fund (LON:GRID) is a big noise in UK electricity storage. For those interested in alternative batteries, solid-state Quantumscape looks to have fallen from grace. While Faradion (sodium ion) was given quite a plug in Mercia's webcast yesterday https://www.faradion.co.uk/abo...

Spectra Systems (LON:SPSY) interesting announcement today of additional $1.2m revenue for immediate project. Probably landing within FY21, so 7.3% increase to broker forecasted revenue, probably 10-15% EPS upgrade given gearing?

Then up to another $7.5m extra revenue over next 2-4 years for sales of end product (sensors) after project. This is on top of the already $34m potential revenue over next 2-4 years, from this single client, which would be a massive earnings upgrade since FY20 was only $14.7m revenues in total...!

Problem is company is not giving rev and profit estimates, as well as order book visibility, for next year or two. In addition, the one broker has decided to only forecast concrete revenue, rather than take a view on the order book. Therefore unless something calamitous happens, it is quite a safe bet that the 11.8c EPS for FY21 is likely to be upgraded as the year progresses. You can see this earnings upgrade progression already, as FY21 EPS estimate already been upgraded twice in the last year.

Momoko Miyamoto

AJ Bell and Hargreaves Lansdown provide a perfectly satisfactory pension platform for 99+% of pension savers at reasonable cost. I don't see how Pension Bee is going to be relevant next to these industry behemoths. IPO will probably flop worse than Deliveroo (LON:ROO) .

ridavies

22nd Apr '21

Re Spectra Systems (LON:SPSY) thanks dahokolomoki for your comments on 21.4.21. I see that there is another positive RNS today 22.4.21 on new customer, and also increased service to an existing customer. Both are in the lottery field, quite separatefrom the extra business in the RNS on 21.4.21. Seems the company would benefit from better PR management, as well as more informative on the implications of the new business; eg EPS forecast update etc.

Indeed! Need another broker to cover Spectra Systems (LON:SPSY) IMO.

Also they need to provide standard metrics like confirmed order book, sales pipeline, etc. Give more visibility of the quantum of revenues to come, even if its a range, estimate, or pipeline.

However, I am holding because for me its a good defensive share that will hold value even if there is an economic shock. And if there is a boom for the next few years, then it will also go up due to all the new revenues feeding through. A bit of a win-win IMO.

(I hold)

26th Apr '21

All good, muckshifter! I got busy with some other areas of work hence the delay in reply here.

Sounds like someone could write an entire book on the history of Hargreaves Services (LON:HSP) - you've got a good handle on it, maybe you should throw your hat in the ring?!

Regards,

Small Cap Value Report (Weds 21 April 2021) - JOUL, 95% mortgages, CARR, AIR, SYS1, NEXS, HSP

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Paul Scott

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