Small Cap Value Report (Weds 22 Sep 2021) - TEG, TIME, ALFA, BMS, SAGA, SDI

22nd Sep '21 by Jack Brumby

66 comments 9098 reads

Good morning, it's Paul, Jack & Roland here with Wednesday's SCVR.

Agenda -

Paul:

Saga (LON:SAGA) (I hold) - interim results are as expected. The group is operating around breakeven, with healthy profits and cashflows from the insurance division funding the heavy losses from the mothballed travel division. The company has ample liquidity. In time, as travel recovers, I think this share could substantially re-rate, the valuation doesn’t make sense at all to me, hence I see a big opportunity with this share, for investors who are prepared to be patient - recovery could take a year or two, and is dependent on what happens with covid.

Sdi (LON:SDI) - a good update, which says trading is at least in line with market expectations. A smashing company, but I do have concerns over the valuation, and the potential impact of reduced earnings next year.

Jack's section:

Time Finance (LON:TIME) - met with Time Finance management yesterday to discuss its results. Notes of the conversation are below.

Alfa Financial Software Holdings (LON:ALFA) - positive trading and full year revenue expectations are nudged up by 4%. The outlook sounds favourable so it wouldn't be a surprise to hear more good news from Alfa, but the shares look expensive.

Roland's section:

Ten Entertainment (LON:TEG) - A strong reopening performance from this bowling alley operator. I think the shares are probably up with events but could continue to perform if the group resumes its previous growth trajectory.

Braemar Shipping Services (LON:BMS) (I hold) - A confident trading update has sent shares in this shipping business higher today. I think there’s still value here, with the potential for an ongoing re-rating.

Explanatory notes -

A quick reminder that we don’t recommend any stocks. We aim to cover 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 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…

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Resplendent Rhine in Autumn for Solos

It's on their brand new river cruise ship, Spirit of the Rhine, and I thought it would be interesting to try out a "solos" holiday for the first time. It's not exactly a bargain, costing £2,300 for 7 days, but that's all-inclusive, and on a new ship. Also the itinerary interests me, visiting places with a lot of WWII history, which I've been meaning to do for a long time.

I'll be WFS (working from ship) doing the SCVRs as usual in the mornings, with perhaps 1 duvet day during the week.

Will report back with pictures & commentary at the time. There's no better way to assess a company's products/services than to become a customer yourself!

Regards, Paul.

ijh9547

22nd Sep '21

Hi Paul, I have recently become a French resident and have been informed by my brokers (Barclays) that they will no longer allow me to trade. Do you know any brokers that will allow non resident UK citizens to trade on the London Stock Exchange?

Zipmanpeter

Re Saga (LON:SAGA) - for 2 alternative worries, what about the insurance side, now seen as the steady profit driver.

Firstly, whilst 3 year fixed policies give forward visibility are they not also hostage to fortune : we are seeing how events can overwhelm unhedged plans (especially as it has also been releasing excess funds from over provisioning.). Anyone know if/how much Saga re-insure its policies??

Secondly, Is there not a review coming/done that is seeking to push many other insurers away from offering big discounts to new subscribers (paid for by renewals). Will that not undermine the insurance division's USP

On cruising/travel, I am actually more optimistic as even if there is a further hiatus, eventually Saga's smaller, newer ships will be the prime choice when travel does re-open, no one is going to build anything new for a while and I think the desire to cruise is still strong amongst 'sailors'. So we must just wait.

I hold, more or less following Paul's logic but also because I think that, unfairly, many of the old are excessively wealthy and politically protected ie its where the money is !

But I do think there are more at-least-dark-coloured-swan events out there for Saga (LON:SAGA) than we might think.

Smudge

Thank you Michael. I don't think I would have spotted that for a very long time!

abtan

Ten Entertainment (LON:TEG) (I hold)

"the share price is probably only mildly cheap and not without risks"

I completely agree with this statement; there's lots to like, but I do have a small fear that it's recovered enough ground that it might be worth taking some cash off the table.

Some further personal observations for any interested:

FY21 Expectations

Management stated in today's presentation that the rest of year would moderate to "high single digit" growth.

I've assumed +8% for the rest of the year, which gives me full year revenues of £62.5m, well ahead of forecast of £53m.

For reference revenues for the remainder of the year would need to fall by 35% vs the same period in 2019 to hit £51.9m.

Customer Numbers

By my calculations customer numbers in the 17 week period jumped from 1.86m in 2019 to 2.43m in 2021 - a very large jump considering that there is only 1 extra site in the latter figure.

FY22 Expectations

Taking this further and multiplying the following variables:

average £ spend/head (£14.80)
average customers/site/year (145k - a blend of 2019 and 2021 figures)
#sites (+4 coming in 2022 = 50 sites)

gives me an annualised revenue figure of £107m.

This is vs £90m currently forecast for FY22.

For prudence, reducing spend/head and customers/site/year to 2019 levels still gives me £93m of revenue for 2022.

These are of course a very rough estimates from playing around with the figures, but hopefully they put a floor on what to expect (and hope for) in future years.

---

The company generated decent cash in the past and one hopes that they will do so again in the near future to justify the now elevated £175m market cap.

Cheers

davidjhill

Hi Paul,

Re Saga (LON:SAGA) I completely agree that the share price looks well out of kilter with its prospects but I think the potential forward profitability can be much higher

Insurance should make £140m for the full year

2 cruise ships (over time) are expected to make £60m after financing costs

Travel/ tours business can make £30m plus in normal times and there are multiple new products being introduced such as an equity release (with Just Group)

So with a "glass full" approach £250m pre tax appears feasible or 135p of eps post tax over 3-5 years (assuming Covid or some other pandemic doesn't take over again).

I think the share could re-rate to £18-£20 mark with patience but I very much appreciate this is the bull case. Strip that down to a travel business only making very moderate profits and insurance staying flat then an eps of 65p appears to be a highly conservative case. Risk/reward looks heavily favourably skewed to me. Even if the travel business underperforms (and that doesn't appear likely given current trading) I think Saga (LON:SAGA) is worth maybe twice current price. It is odd given how well other travel stocks have outperformed.

rmillaree

Ten Entertainment (LON:TEG)

Cheers Abtan

Most appreciated - knocks sports of my throw a thumb in the air approach i must admit.

I guess the excuse for hanging around here is the self funding franchise rollout format its generally a nice simple easy way to expand easily - where these work its easy to compound growth year after year ending up with a much bigger business without really having to much to worry about margins wise (just keep em the same and ensure you arent being undercut anywhere) or finding new customers - just keep doing what you are doing . As you expand your scale should one would hope make the business more efficient.

Just come across some Peel Hunt comment from June too which suggests there is plenty of room to expand and the quoted "embedded value/Ebitda of 6.3x," seems a reasonably modest number. That coment was before todays update so scope for thier price target to have been or be raised.
Peel Hunt Analyst Douglas Jack retained his ‘buy’ recommendation and target price of 300p on the stock, which fell 2.5%, or 6p, at 232p.‘The demand-supply dynamics of the bowling sector are very favourable,’ he said.‘There are only c310 bowling centres in the UK, of which the majority are small and c100 are poor. Given this and customers love of competitive socialising, the growth and expansion opportunities should be significant.’He said the group currently trades on a 2023 embedded value/Ebitda of 6.3x, which is ‘compelling’ versus the 9.3x rating enjoyed by peer Hollywood Bowl.

So this morning i was wandering if 300p may be a short term selling target price but i think i am deffo minded to hang around here at present unless the price spikes close to 350p or the news goes in the wrong direction - despite the fact i have plenty of interesting other options on the table at present.

Norfolk'n'Good

The Holy triumvirate - Paul Jack Roland - fantastic to have all of this input, and indeed output!

Keep yew a troshin

Helvellyn

£SAGA

""Secondly, Is there not a review coming/done that is seeking to push many other insurers away from offering big discounts to new subscribers (paid for by renewals). Will that not undermine the insurance division's USP""

With respect I am not sure you have this correct. If "other insurers" could not offer Saga's customers large discounts surely this is good for Saga ??

Also when that news first broke most insurance companies shares rose because it meant there would be less churn and I imagine the older you are the less you can be bothered with the hassle of changing insurer so again this should be good for the Saga demographic.

Richard

JohnEustace

Do you have a particular requirement for a UK based broker? I think I would look at degiro.fr in your circumstances.

Gostevie

To show my appeciation.

BurglarBill

Interactive Investors. There's an extra monthly fee for non UK residents.

Yes, I just hit refresh a few times and saw the reads tick up each time.

MichaelFBS

Yes comments don’t refresh automatically so one has to refresh the screen (f5 on PC) to see new comments or new content from Paul and that becomes a new read.

KevinS1

Great input on Saga (LON:SAGA) today from many people. I wasn't around for a lot of today, so only now catching up.

Saga (LON:SAGA) was my biggest holding, and has only been surpassed recently by the great returns from Serica Energy (LON:SQZ) which is making hay from the current gas prices.

I remain bullish on Saga (LON:SAGA) and feel that whilst it maybe a long journey we should start to see improving returns over the next 12-24 months. There remains the risk about unknown events rearing their heads, but society looks to be desperate to get back to their normal way of life and prepared to live with the risks of covid.

So many people want to get back to holidaying and getting out and about, I feel there is a risk of a major backlash against too many restrictions. Canadian friends currently staying with me are highlighting compulsory passport schemes to get into restaurants being implemented this week. Completely unenforceable and hugely restrictive on personal liberties. I rarely feel inclined to get involved in the politics, but the more the vaccine is rolled out the lesser the risk to people. Statistically we probably all have higher risks of being hospitalised (or dying) from many other activities we probably all undertake on a frequent basis.

There are a huge number of people aged 50+ who don't want to sit around, and I feel that the quality of the ships Saga have and the focus on customer service should see an increasing brand awareness, loyalty and positive feedback. All helping to create the right climate for a recovery in its fundamentals.

I hope to see the benefit of this in its SP and will continue to hold hoping for a multiple of 2-3 times where it sits today.

Regards to all.

Watchdog

23rd Sep '21

You could also have a look at Saxo Bank.

RDHOWARTH

All the following, Interactive Investors, AJ Bell, Swissquote, Saxo....

mercury61

re Saga (LON:SAGA) I don't see any short positions taken on this company. Do folks find this metric helpful?

kenobi

Just looking at this, do the debt figures Paul is quoting include the 250M pounds they recently raised in a bond issue ??

Having 175M in cash sounds a lot less impressive if only months ago you raised 250M from a bond issue.

mojomogoz

Time Finance (LON:TIME)

That's a big write-up from Jack on a company virtually no-one cares about and some others are exhausted or disillusioned by ;)

I am a sad and erroneous holder. I started buying at sub 40p dips few years back thinking this was cheap and irrationally shunned stock (value trap people told me) and I was clever buying on the sharp dips to 40p and below.

IMO the 40p level was broken down and through when old mgt (CEO) realised that despite good growth and margins (they acquired a lot but they did grow eps well too...so it wasn't rubbish dilution) they were not going to hit LTIP that had a linear payout in 2019 with share price in 60-90p ish range (can't remember exact range...but sp well below even though in terms of growth and quality stats it could have easily held the top end of LTIP range)...

So they seemed to decide to kitchen sink a little at that point (reset LTIP?) and go for a bit of reset and needed investment (delayed to hit LTIP?)...and that saw the sp trip down into 30s and high 20s. Again, being really smart, I bought some more on dips into high 20s. Note that their lending became very conservative pre covid due to fears around brexit too and that meant they probably gave out less loans than they had 'good' demand for plus they brokered on a lot rather than take on own book so reducing profit as well as risk (this probably also related to the kitchen sink as own book more profitable...and freeing cash resource for a bit of internal investment)...

Then covid came along and the swoon was deep and into low 10s. Very non smartly I bought a lot more shares down there. I thought people severely mispriced the risks for them around covid and underestimated the quality and diligence with which they manage their book. Of course a disaster could have happened...but that would mean for everything and not just Time (I similarly picked up S&u (LON:SUS) and Secure Trust Bank (LON:STB) in the panic...people mispricing risk badly IMO).

Today, I'm modestly up on Time. I agree with Jack that the short term term growth is a little unclear. The bad loan reserve looks too cautious to me tho I wouldn't say they are imprudent or unwise to keep it as things bumble along a bit (if you listen to what they say they don't really believe they need it). So unwinding it will provide a little extra oomph to future earnings at some point (note they have an excellent track record of recovering more than they initially write off too...leading to modest earnings and cash surprise).

I think this is well placed franchise that does something quite simple quite well and with moderate competition. Its hard to say that lending has a moat but staying the course, being reliable and managing risks always leaves you in a position to benefit from the good side of the cycle.

I believe a double from here is nailed on (as lending cycle will happen and so Time take part and the early part of the cycle is the easy part from a risk mgt perspective). I'm more bullish than that and think that recovery to 2019 level profits will occur seeing op leverage drive eps as will being more own book rather than brokered on. I believe I will be selling these shares above 100p (approx 13x 2019 profit get you to 100p....is that a high rating for a growing, >25% op margin biz?). I can't tell you when tho

Paul Scott

25th Sep '21

Hi slopsjon,

Paul didn't you have a Saga (LON:SAGA) cruise booked this year?

Yes, that's right. I'm booked on a SAGA cruise called

Small Cap Value Report (Weds 22 Sep 2021) - TEG, TIME, ALFA, BMS, SAGA, SDI

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Jack Brumby

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