Small Cap Value Report (Weds 25 Aug 2021) - SPE, COST, CLG

25th Aug '21 by Jack Brumby

36 comments 7796 reads

Good morning, it's Paul & Jack here today, with the SCVR for Wednesday.

Agenda -

Jack's section:

Sopheon (LON:SPE) - product lifecycle software company with some good blue chip clients and an encouraging track record of investment back into its products. Growth has been slow, stalled by its transition to a longer-term SaaS-based business model, but there are good signs of growth in this latest update.

Costain (LON:COST) - the scale of this business is large in comparison to the market cap, so there is scope for a rerating if trends are favourable and infrastructure activity picks up. But this is a low margin business with large and complex contracts. There's not much security if things go wrong.

Clipper Logistics (LON:CLG) - impressive full year results from an in-demand e-fulfilment logistics operator. It's well placed for further organic growth in the UK and Europe and appears to have carved out a strong market position in what can be an unforgiving sector. The valuation is quite pricey but the fundamentals are strong so a premium looks to be justified.

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 sectors (e.g. natural resources, pharma/biotech).

A key assumption is that readers DYOR (do your own research), and make your own investment decisions. Reader comments are welcomed - please be civil, rational, and include the company name/ticker, otherwise people won't necessarily know what company you are referring to.

Jack’s section

Sopheon (LON:SPE)

Share price: 980p

Shares in issue: 10,499,613

Market cap: £102.9m

Sopheon is an international provider of software and services for product life cycle management. Its Accolade® solution supports strategic roadmapping, idea development, product portfolio management and the creation, commercialization and replacement of products. It’s got operating bases in the…

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JimMcLad

25th Aug '21

Howard

I have seen that over the recent past more and more trusts are investing in early stage UK-based companies, committing to hold for the longer term

FWIW, I can support your observation from a company perspective. The CEO of Angle has said that two of their biggest institutional shareholders would not support a takeover bid and are prepared to hold longer term to help the company grow. Time – and money – will tell.

Rusty2

Tim, you are showing the UKX index which is only the FTSE100. If you look at the £MCX index (FTSE250), since 1995 it is up nearly 7x. Yes the large in the UK are not growth companies, but they do pay around 4% dividend. Cheap depends what you compare it with, some of our mid caps on p/e of around 50 compared to US stocks where the p/e is over 200. The £ has declined since Brexit which will also make our companies cheaper to foreign companies.

Howard Adams

HI JimMcLad

Many thanks for that observation about Angle (LON:AGL) institutional shareholders, interesting to know.

I know the 5 years minimum holding is a foundation investing principle across many of Baillie Gifford's investment trusts with their conviction holdings.

Cathie Wood of ARK Invest in US with her innovation active ETFs also uses the same principle. She will trade a holding but will generally maintain their stake in their convictions.

Regards

truegent

Great trading update from James Latham (LON:LTHM) just now (12pm)...will you cover this Paul ? I hold (since 600p).

shanklin100

FWLIW, yesterday I saw a fairly large Clipper Logistics (LON:CLG) lorry being expertly reversed into the depot area of our local Waitrose. The store has a lot of stock outs, so I do wonder if Clipper Logistics (LON:CLG) are currently doing rather more for Waitrose than has been announced to date.

Tortoise investor

Lots of discussion on this blog about supply chain difficulties. I thought this chart from CBI was interesting. Something to think about for our portfolios and maybe some buying opportunities later in the year as earnings get dented by (hopefully temporary) supply chain difficulties.

timarr

Hi herbie

Tim, you are showing the UKX index which is only the FTSE100. If you look at the £MCX index (FTSE250), since 1995 it is up nearly 7x

That's true, but in market capitalisation terms it's only really the FTSE100 that has a serious effect on a global basis. I'm pretty sure including all of the other UK stocks wouldn't really move the dial on a global comparison.

That said, as a smaller cap UK investor I haven't noticed any deterioration in returns, A lot of the "UK has underperformed" has to be seen in the light of how the larger cap index has struggled.

On the other hand there seem to be a lot of bids for midcap stocks right now, so overseas buyers clearly see value there - presumably some of that will be because PE's will be aiming to load these companies up with debt based on their cashflows.

Great trading update from James Latham (LON:LTHM) just now (12pm)

It's not great, it's extraordinary.

This revenue and margin increase together with our control of overheads has resulted in profit before tax for the first four months of this year being approximately the same as we achieved for the whole of the last financial year, namely a profit before tax of £18.6m.

They make the point that this is a perfect storm that they are managing well:

The Board are very mindful that the timber industry has seen market conditions that are unlikely to ever be repeated, and more normal trading conditions will return, but at this stage we are cautiously optimistic that demand will be strong for the rest of the calendar year, but that margins will come under increasing pressure.

They list an increasingly familar litany of problems - increased costs of supply, reduced supply, lack of lorry drivers. It can't be long before we start seeing weaker companies producing profit warnings.

johnmhughes

I see that Morses Club (LON:MCD) is introducing a new company called U money PLC and are offering 1 new U Money PLC share for every Morses Club PLC share held, subject to shareholder approval.

Any thoughts on this please? (I hold)

Rambo

Hi John, I hold Morses Club (LON:MCL) for the best part of nine months and see this restructuring as a good move for the reasons given in the RNS in this link: https://www.morsesclubplc.com/.... A summary paragraph copied below.

"Morses Club is proposing a reorganisation of its business and corporate structure which will involve the introduction of a new, AIM-quoted, holding company for the Group, U Money PLC ("U Money"). Following the reorganisation, there will be two distinct business divisions, home collected credit ("HCC") and digital ("Digital"), which will operate through separate operating subsidiaries of U Money; HCC through Morses Club and Digital through Shelby Finance Ltd ("Shelby Finance") under the brands Dot Dot Loans for online lending and U Account for online e-money current accounts."

There is also an excellent video by the CEO that guides you through the restructuring that you can access from the same link.

Regards...

JohnEustace

I see Amazon UK are offering £1,000 signing on bonuses to attract new recruits for their warehouses.

I tend to view Amazon as the employer of last resort for those roles so perhaps not surprising they are struggling in the current climate.

davidjhill

Interesting take Timarr and I suspect you are right.

Augean (LON:AUG) I hold negotiates a 280p bid and then within a few short weeks gets an offer 15% higher. Strikes me that management don’t have a sufficient grasp on just how valuable their moat in waste management should be viewed. I was pretty dismayed at 280-300p and at 325p I’m marginally satisfied but still think it’s leaving a lot of value on the table, but at least I’m up 60% over 2 years so I guess that’s a good annualised return.

gus 1065

Another one bites the dust …… Bacanora Lithium (LON:BCN) (I hold) has finalised terms for its recommended bid by its JV partner Ganfeng International. Original indicative bid at 67.5p per share has been sweetened with an additional distribution of Bacanora Lithium (LON:BCN) ‘s 34% shareholding in Zinnwald Lithium (LON:ZNWD) which adds an additional 6.1p in value to the original bid. Most of the conditions to the original bid appear to have been met so this should probably proceed from here quite smoothly.

https://www.investegate.co.uk/....

Gus.

Harry Hindsight

Morses Club (LON:MCL) - a loans company called Shelby Finance. Do they own a racehorse (sorry).

And of course the great british 'spread' which stops traders of course. No bad thing for good companies and what you can do when control the float. Timber frame is the common form of construction and clad with brick/render/stone and presumably cheaper to transport. Maybe time to start building our forests again lol.

Richard Goodwin

5 years is still short. Many of the these businesses need 10-20 years for their potential to out.

Boon

On Costain (LON:COST)

Pensions - the £29m surplus looks like an accounting surplus, not an actuarial valuation surplus? Or am I getting that wrong when they mention it is IAS19 methodology?

Cash - a bit of a red herring. They need it sitting around because otherwise they can't get contracts. The reason they need it is because the people on the other side of the contract, want to know if Costain has the money to pay for cost over-runs, remedial works (for defects), etc.

This leaves me to my third point - the huge risk with Costain is that they need to pay up for remedial works, defects in works later on, etc. They had to do this in 2018/2019 I believe, with some contracts. Given they make such a small margin, even just one or two claims every 5 years will wipe out profits and also the cash. Which is why they had to raise more cash.... and dilute shareholders...

26th Aug '21

Thank you very much for taking the time to respond with this.

UK_Investor_8888

"I tend to view Amazon as the employer of last resort for those roles so perhaps not surprising they are struggling in the current climate."

Speaking of which, would the hit and run J Sainsbury's driver who knocked down the light bollard in my street on Tuesday (on CCTV) ... kindly like to retrieve his mudguard from our grounds.

27th Aug '21

Late in the day RNS from Morgan Stanley on Friday evening re. the competitor bid for Augean (LON:AUG) .

Non committal “we’re considering our position” but have suggested holders take no action at this time suggesting they haven’t (yet) ruled out making a higher offer. Market price on Tuesday’s open will give an indication whether a higher bid is thought likely.

Small Cap Value Report (Weds 25 Aug 2021) - SPE, COST, CLG

Jack’s section

Sopheon (LON:SPE)

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Jack Brumby

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