Small Cap Value Report (Weds 26 April 2023) - PSN, NICL, BRCK, ELM, LTG, TST, POLX, EYE, W7L

26th Apr '23 by Paul Scott

51 comments 8252 reads

Good morning from Paul & Graham.

Today's report is now finished, at 13:44

(for any new subscribers, we first post a blank "placeholder" article at 07:00 every weekday, so that readers can add your initial comments on the day's announcements, which we encourage, especially if you add your own insights to any news. The main article then gradually builds throughout the morning, until usual finish time of 13:00, when the SCVR email goes out)

Explanatory notes -

A quick reminder that we don’t recommend any stocks. 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 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.

Summaries

(more detail in sections below)

Persimmon (LON:PSN) - 1289p (up 4% at 08:42) - mkt cap £4.1bn - Paul - GREEN

This Q1 trading update caught my eye, and has read-across for lots of smaller caps that are dependent on a healthy housing market. Q1 traded as expected, but the outlook comments sound rather encouraging for a housing market recovery. Hence I think the whole sector is worth a fresh look.

Nichols (LON:NICL) - £10.90 (pre-market) (£398m) - Graham - GREEN

Q1 update for AGM is in line. Out of Home business struggles, blamed on cost of living issues. CFO leaves. Adj. PBT of £25m is forecast for 2023. I like this company and hope for improvement in subsequent years.

Brickability (LON:BRCK) - up 4% to 68p (at 10:08) (£205m) - Paul - GREEN

Given uncertain macro conditions,…

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Harry Hindsight

26th Apr '23

UAE opened its third nuclear power station in OCT22 with a standardised design from KEPCO Engineering & Construction Co (KRX:052690) based on a US approved Westinghouse (Cameco (NYQ:CCJ have the IP I think) system. Cleaner, cheaper, provides base-load and energy security for 60 years.

Meanwhile in the UK we pray for inclement weather.

RDHOWARTH

re Sherborne Investors (Guernsey) C (LON:SIGC) (I own)... Navient results for Q1 are out. The call is at 1400. They look pretty positive to me without being blockbuster. Maybe something comes out of the call.... Nothing yet has been announced re a significant restructuring or strategic review... although Sherborne normally push for this. The discount remains huge at nearly 30%... staying patient is never easy but im still hopeful of north of 100 which is plenty from current levels.

JASVFS

I did mean 436 JimMcLad, I got over excited while typing!

Paul Scott

Hi Aston Girl,

Took me a while to get round to it, but I've just finished my review of W7L results. Looks excellent! As regulars know, I very much like this organic GARP share. Will try to interview the CEO again on my return to the UK.

Regards, Paul.

Thanks Sutters, not sure why by SDG results didn't come up on my trawl of the RNS.

I'll definitely take a look later this week, thanks for flagging.

Rhodie Jonners

I take a very different view.

The persimmon share price is at around a 5 year low, falling by around 57% in 2022. And a further 10% at the end of March, on slowing sales and a short term poor outlook. Despite the obvious headwinds for housebuilders in the short term, I do think as inflation eases and if we do enter a recession, demand will collapse significantly and so too in due course will interest rates subside and mortgage become easier to obtain and be available at lower interest rates. We may not need to wait too long for nascent buds of improvement but with the stockmarket being a forward locking mechanism, share prices will rise long before the upturn and in some cases substantially so.

Currently, Persimmon, trades at a PE of around 7x, has £800 million of cash on the balance sheet, no debt, they have a massive land bank and unending demand for new homes. A five year average return on capital of 23%, a return on equity of 25% and an operating margin of 26%.

On a quality and valuation basis, I think this share looks a very good prospect and in the meantime, while we wait for a share price recovery we are compensated with a yield of over 5%. I bought a position after fall in March and will buy more on any further short term share price weakness.

jamesalastair

Not really proxies as both own physical Uranium.

Most U near producers are valued as if U is already US$60/llb .... we ain't even there yet. The last time we had a screaming bull in Uranium, the equities were cents; this time around they are dollars.

mojomogoz

I don't understand the point you are making as it seems to be different from issue discussed...so as stated they are proxies to physical uranium which is what Yellow Cake (LON:YCA) holds which was the company first discussed by someone.

'Spot' uranium is a slippery fish as there is no immediate exchanged based market and then the forward market which is where most transactions occur is super opaque and loads of agreements (a utility with a producer typically) don't get reported at all. The 'market price' is really a reported price by two consultants. There are many issues and gripes with how they report. I'd say take the reported spot price (currently $52) as the minimum price that is transacted on...then I think transactions (forward agreements) are taking place at probably up to $70.

At the moment its assumed that contracting takes place near and above $60 at least. As that is the 'real' but opaque market that means we are already around $60,

'Downstream' uranium prices have spiked hugely since the Russian invasion (as near half of that capacity is russian)...that enrichment and conversion prices. As the processing takes c.12-24 mths depending on bunch of factors there is a lag on hitting the uranium price. So at the moment raw preprocessed uranium not moved so much....but tick tock and need to feed the fuel fab cycle.

Valuing the equity is very tricky. I'm happy to discuss that more but the cents v $$$ point is a nonsense...so if you want to make an actual substantial value statement/comparison then please do.

The biggest non producer (so development stage) company is Nexgen Energy (TSE:NXE) . Its US$1.75bn market cap and burning cash. A high risk investment. But with a very high grade proven asset with upside development potential its easy to make an argument that its super value despite a C$5 sp, with potential for meaningful multiples upside depending where place one's flag on assumptions (ie, annual FCF could be at or exceed current market cap...depending on assumptions). I'm not tipping it....just using the biggest development asset.

Wolf of Small Street

Interesting point Graham makes on Learning Technologies (LON:LTG) trying to sneak out a profit warning.

Couple of points Id make. Why would any private investor buy a company who use a broker refusing to publish on researchtree unless they're very good at reading balance sheets. Straight away you're at a disadvantage.

Learning Technologies (LON:LTG) says EBIT growth will be high single digits, the additional language used in the outlook statement is positive. Asked Bard, it gave 8 out of 10 and outlook positive.

Reality is EPS lower than forecasts, margins under pressure, EBIT forecast growth roughly halved. Peel Hunt cuts EPS by 13%.

Is it really worth the effort having to run around playing the game of find the forecasts, when the company (which we're supposed to be part owners in) can just include it in the RNS or use a decent broker.

alison ruggles

I am a holder and very pleased with all I've read today, plus what I believe will come about going forward

ridavies

Re £WZL I have been holding back on this to see how the Us is playing out. It seems to be going well beyond the Xmas present type distribution it was achieving. PS I ma impressed they have their own distributor over there, not attached to a long list of product being touted by another distributor. So great promise there.

Continental Europe seems ot be going very well indeed too, growing into the biggest section of the business.

They have people on the ground in Hong Kong, helping their penetration of the Chinese market and their production sourcing. The launch into Japan will be intriguing.

The distribution gains in the UK going forward are exciting, given that the real base for take off was the Tesco model which has grown well. There seem to be promise of future Tesco distribution gains there still, even now.

A very down to earth company, having made a clear out of the also ran product elements that can slow down every element of future growth. Focus, focus, focus on the 80:20 rule - focusing on the 80% from the 20% of the lines and they wont go far wrong.

Virtually doubling in price this last year, naturally the PE is high, but I believe we can expect high growth across a wide range of significant territories going forward, especially with value for money being the name of the game in our high inflation world.

What a gem...and I could listen to the management presentations all night -like a feature film, music to my ears. They make so much sense - but sense is simplicity carried supremely well.

PS Not doing very well with getting the £WZL company up there in blue. Using my normal route. Failing. Help!

Snazzytime

Warpaint London (LON:W7L)

That's because it is W7L notWZL

timarr

Cos it's a seven in the middle not a zed - W7L = Warpaint London (LON:W7L) :-)

Helvellyn

Hi Paul,

Thanks for your work on Warpaint London (LON:W7L) today.

I had done a lot of research on the company just before your interview of their CEO Sam Bazini in January, which was the catalyst for me to take a position, another thank you.

The investment case here looks fairly compelling.

gmtrader

I see Card Factory (LON:CARD) released a later (than 7am) RNS stating an acquisition.
I have followed this for a few years now and tbh it’s starting to look interesting for a long hold. Previously I’ve shorted this share as it looked like it wouldn’t survive but now I’m rather impressed.

Chris Brown

I bought into Persimmon recently at around the current price. It was a very basic thesis that the stock is back to 2014 levels after a 2/3rds decline from its peak. It hasn't bounced at all since October despite the stock market and economic outlook moderating substantially since then.

I'm looking to move house currently so have a very active interest in my local property market. Things seem quite strong at the moment, after grinding to a halt for a few months late last year.

Mortgage rates are only 4.5% which is very 'normal' if we look at the pre-GFC period. People have had very large wage rises and I think the economy is just fine, right now. It's been the most eagerly awaited and most 'certain' recession in living memory. But not everything is a 2007-09 or 2000-02 type event, and I'll react to a 'proper recession' if/when it happens.

I could easily envisage a quick pop back to 2,000p on Persimmon. That's what I'm hoping for, at least!

Rusty2

Hello Paul/Graham, the tags have missing apart from Warpaint London (LON:W7L) on today's report.

G Morris

Hold Card Factory as well. Local ones always seem quite busy and debt looks very manageble considering the high margins against running costs with the small outlets, very cash generative. Seem to have bumped prices up a bit recently but sending a card is a pleasure for many.

ANDERSHOW08

27th Apr '23

Hi Paul/Graham,
Polarean Imaging (LON:POLX) is an interesting one, I’m keeping a close eye on conversions and first unit sales. Main aim initially I believe is selling to the top of the pyramid with theory that the rest follow suit.

Important quarter for news so one to follow i agree.

Small Cap Value Report (Weds 26 April 2023) - PSN, NICL, BRCK, ELM, LTG, TST, POLX, EYE, W7L

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Paul Scott

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