Small Cap Value Report (Weds 24 Nov 2021) - UNG, AO., SAA, IGP, APP, HARL, WYN, MUL

23rd Nov '21 by Paul Scott

63 comments 10665 reads

Good morning, it's Paul & Jack here, with the SCVR for Wednesday (first few sections prepared last night by Paul).

Agenda -

Paul's Section:

Universe (LON:UNG) - bumper payday for shareholders here, with a >100% premium cash takeover bid, from a trade buyer.

Ao World (LON:AO.) - very poor interim numbers, with growth low, and fleeting profitability during the pandemic having vanished. This is a very poor business model, in my opinion, as the figures clearly show. I also have concerns about the heavy reliance on commissions from extended warranties, etc.

M&c Saatchi (LON:SAA) (I hold) - another upgrade to expectations. Not cheap, but forecasts keep rising, so is the company now in an "upgrade cycle"?

Intercede (LON:IGP) (I hold) - nothing spectacular in these interim results, but it's tracking in line with full year expectations. The balance sheet has been transformed, with net cash now 18% of the market cap. It has the best blue chip client list I've ever seen for a micro cap, and under the surface a lot has been done to (hopefully) lay the groundwork for fast growth, in this 3-year turnaround. The valuation can be justified on a PER basis too, very unusual for this type of company.

Appreciate (LON:APP) - I'm still quite sceptical about this gift voucher company. But we'll keep it on the radar, as there's a possibility of a turnaround with the digital strategy. I need to see more evidence though, nothing doing so far.

Harland & Wolff Group (LON:HARL) - a blast from the past, for those of us old enough to remember the industrial strife of the 1970s. Can this Belfast shipbuilder rebuild profitability with wind farms, and apparently tightening capacity constraints at competitors? You can be the judge of that, I have no idea!

Jack's section:

Wynnstay (LON:WYN) - trading ahead of expectations and managing inflation well. Reasonably valued with a great dividend track record, so worth considering for longer term investors, although the shares are very illiquid and the company's fortunes depend upon farmgate prices.

Mulberry (LON:MUL) - turnaround of British luxury lifestyle brand could be gaining traction. The share price remains down on historical levels and there has been no equity dilution. But the group has struggled to generate revenue…

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psin

24th Nov '21

Crushed. Could not agree with you more, Jack. The MM's are truly extracting the Michael.

Santa won't be able to make everyone happy this Christmas.

Helvellyn

And in a lot of cases on pretty light volumes.

Maybe MM's trying to shake out the new (Covid WFH) breed of trader ? You dont want to be holding anything that has a T/U , or is reporting any results unless they are stella ATM.

Richard

Silver Moon

To expand on FREng's explanation, my DB company pension was closed by a completed take-over by a company and the new-style pension put in place for existing the workforce. The DB pension scheme had already been sold on to a company specialising in these things and which is now in talks about dealing with the deficit with another manufacturer who has recently bought the company from the first buyer. The Trustees of a pension scheme need to stay very alert, in the passing on of prior-made agreements during take-overs things could go very wrong for pensioners like myself.

NeilS

Thanks for that observation davidjhill, I have, in truth, been so amazed at the share price growth that I was focussing on Schwann getting out at the top not the possibility of new investors joining the broomstick for the ride. Back to greater fool theory!

Logical David

Wow Richard, you certainly like your acronyms, four in one sentence!!!

grandmA

I bought Wynnstay (LON:WYN) August 2020 as a speculative buy at 334p it's been one of my better choices. thanks to Stockopedia.

rmillaree

"What are pension contributions exactly? Why does a company has to pay historical contributions to its employees? Is this something that is no longer applicable these days?"

Silver moon and FREng - have hopefully clarified suitably.

My take is that you need to check every company you may invest in too see if there is historic or even current pension issue. It was traditional to have defined beenfits (DB) but they are very rare now. The problem is even when these schemes are closed for future entrants you are still in Hock for what your past promises were (and future stuff too posibly).

Ref De La Rue - at March 2020 they had current obligations owing to pensioners of over £1 billion. They have a matching pot of funds invested give or take (the defecit or not).

However if the investment pot doesnt generate expected returns or the pensioners live longer than it is estimated they will live onow r if inflation is too high or if anything else goes wrong - then the company is on the hook for the shortfall compared to what they have put aside. Like a giant bank of mum and dad that should never run dry.

On a scale of 1-10 ref size of pension obligations pot compared to profits made (simple measure of risk) i would say De La Rue is probably 9.5 out of 10 - ie very risky.

With £1 billion pot if they had 2 % shortfall each year either with bods living longer than expected or investment pot not making sufficient returns that would cost the £20 mil quid a year.

Note practicably speaking i may be over egging the risk somewhat i am no specialist here but facts are as per quoted figures today - they will have as things stand cash cost of £24 mill year that they need to fund from ongoing "cashflow" that will be out of business profits unless they take more drastic action to find that cash from other means.

• Agreed contributions of £15m per annum (for three years to March 2023 then £24.5m thereafter to FY 2028/29) under the Recovery Plan pension contributions agreed in June 2020

Richard Goodwin

25th Nov '21

It's firms which have defined benefit pension schemes ie they have backed a scheme which has promised workers a certain level of benefits on retirement. If that scheme has insufficient funding to meet present or future benefits levels then the firm (in the first instance) takes the hit. The reality is a lot more complex as it is a whole area of specialist accounting and actuarial work based on schemes liabilities and assets forecast many years into the future. The situation wasn't helped by many companies awarding themselves money back from the pension scheme or contribution holidays for while when times were good 30 years ago.

These days most firms do not now have these types of pension schemes open to join but the old members still have guaranteed entitlements.

Sometimes companies pay the insurance sector to take the whole issue off their hands (and balance sheet/P&L).

Zoiberg

Did they not find the skeleton of a young boy inside the hull or was that a half remembered nightmare?

I can't even find my way to the bathroom when these guys are analysing the RNS's!

Clarity in the murky pool of pensions! Well done !

Paul Scott

Everything is getting crushed! I agree. Today's losses are tomorrow' profits. If we keep focused on the fundamentals, it should be great. I can see a 10% divi yield from things like Scs (LON:SCS) (I hold). Salivating at some of these valuations for smashing businesses!

(although we have to be serious - if something is badly wrong, then it deeriorate)

I've got to take issue with you on this -

For Ao World (LON:AO.) low margins aren't particularly an issue for a company with a very low equity ratio (shareholders funds/total assets). Shareholder's funds are only £97m and it has revenue of £1.7bn. Even a 5% net margin is £85m and a 87% ROE.

AO is nowhere near a 5% margin. It's actually at a 0% or below margin. See the interim numbers issued today.

It's a rubbish business, that loses money.

The lunatic running it, needs to be kicked out.

I would say the equity is worth nothing.

Good luck - you'll need it!

Paul.

Hi Spongbob,

I was very interested to read your experiences in the pub and restaurant business and wondered when you had more time you could give more detail .I also have had a variety of different businesses over the years ,not all winners .

I must congratulate both yourself and jack for your daily contributions as to write on any subject daily needs a great deal of focus and dedication, please keep up the good work.

Oh my goodness, it's too painful. Why not? Just constant cash outflows. So whatever entrepreneur seems credible. The initial maybe £40-50k cash investment is the first. Then they want more, and more, and more. I had to pay £5k just for for fckuing cuttlery - because the locals were stealing it.

My advice - NEVER OPEN A PUB OR RESTAURANT.

lOVE, pAUL.

There's one sound, against my window! Doodle dibble! Aganist the pillow, where his head used to lay!]BOOOOHHHH!!!!!! I cant stand the rain!!!!!

oh woah the pillow!!!

I cant I cant stand the rain!!!!

OOOOOOOOOOOHHHHHHHHHHHHHHHHH

Hmm! I have that effect on people LOL :-D Whoop Whoop!

Belfast whoop whoop! Lovely

My past employer did in fact take 7 years of pension holiday straight in the good times. There was some kind of excuse enabling this but of course employee contributions did not enjoy the same holidays. The Unions representing the various groups of workers resented it but seemed to be unable to successfully challenge these decisions.

Thornabian

6th Dec '21

Rather childish reply but looking past that...

Every single retailer gets their inventory in August time for the holiday season so gross margins flat in Q3 is nothing surprising. They had flat margins last Q3 and positive for the next three. Q4 is the main trading obviously.

Aside from that, I wasn't saying I owned it or it was worth buying (I rather said the opposite above) but I was pointing out your analysis that a low margin business is a 'poor business model' is wrong as many businesses; like banks, have extremely low margins but low capital and high volumes/revenue comparatively.

Small Cap Value Report (Weds 24 Nov 2021) - UNG, AO., SAA, IGP, APP, HARL, WYN, MUL

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Paul Scott

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