Small Cap Value Report (Weds 29 July 2020) - NXT, PFD, YCA, SWG, WGB, APTD

29th Jul '20 by Jack Brumby

68 comments 10089 reads

Good morning, it's Jack here taking on SCVR duties today.

Paul has flagged up the Next (LON:NXT) trading update - the company is well-known for is thoughtful and considered commentary so it's worth moving out of small cap territory to take a quick look at what Wolfson et al are saying...

NEXT PLC

Trading Statement

Full price sales in the second quarter were down -28% against last year - 'much better than expected' and an improvement on the best-case scenario given in its April Trading Statement.
Online warehouse picking and despatch capacity is now back at normal levels.
Full year profit before tax, based on our new central sales scenario, is now estimated at £195m.
New central scenario year end net debt is forecast to reduce by c.£460m.
The group has modelled three new scenarios based on FY sales being down -18%, -26% and -33%,

I'm not going to spend too long on this statement, but the narrative is encouraging. Next is a famously high quality retail outfit though, so I can only hope there is positive readacross for the rest of the industry:

our experience over the last 13 weeks has given us much greater clarity on our Online capabilities during lockdown and the state of consumer demand, and we are now more optimistic about the outlook for the full year than we were at the height of the pandemic.

In summary, the Company is in a much better position than we anticipated three months ago: consumer demand has held up better than expected and our Online warehouses have achieved much higher capacities than we thought possible. Costs have been well controlled, and we have taken steps to ensure that our balance sheet is secure.

Whilst much of our time has been focussed on managing the business through the pandemic, we have not lost sight of the fact our sector was already experiencing far-reaching structural changes as consumers increase their expenditure Online. If anything, these changes are likely to accelerate as a result of the crisis. So, we have continued to move the business forward, actively investing in the systems, Online capacity and business ideas that we believe will be important in a post pandemic world.

The fact that online is booming suggests Next is being rewarded more for its own strategic initiatives and underlying operating strength than…

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mojomogoz

29th Jul '20

bsharman - agreed

Pls share the material. Maybe make a new discussion.

Back to Yellow Cake (LON:YCA) renting out some of their uranium pile....Cameco call says they are restarting their Cigar Lake mega mine (been shut due to covid) in Sept.

Altogether they expect to produce 5.3m lb of uranium for 2020. In Q2 Cameco bought 14.7m lb on spot so as they can fulfil their long term contracts. They made the decision back in 2018 to reduce production to keep the value of their assets in the ground and buy cheap spot....which they then pass on into higher priced long term contracts. Great capital management!

And they suggest they are going to buy more spot for 2021...as the price stays low

bsharman

The Yellow Cake (LON:YCA) swap is something to do with giving liquidity to a supplier I think.

jonno

Really nice overview of Walker Greenbank (LON:WGB) Jack.

The William Morris collection is possibly the best surviving archive of arts and crafts interior design.

https://www.stylelibrary.com/morris&co/

I admit to a little bias being a holder, but hopefully my bias is based in reality, rather than whimsy.

Thank You

rmillaree

Shearwater (LON:SWG)

So, Shearwater holders...did you know you were buying a turnaround and restructuring story? Or did you think you were buying a seccccuuuurrriiiiddy mega growth story?

I think any investor would need to be pretty naive/stupid to not realise that the latest published accounts prior to today showed losses - stockopedia was expecting a negative EPS for the year end so the numbers today should not surprise anyone i would have thought.

I kind of guess the whole attraction with this share for holders is that it is a turnaround situation in that the future is not expected to be the same mess that was in the past. I don't think though any holders can complain if the story turns out to be jackanory. Buying future profits with cold hard cash now is always a risky game to play.

So I do share your reservations ref this company and would say Jack has done a fantastic job in summarising the company today highlighting that this is not really a company that has proved itself as being good at anything in terms of making money as of yet.

and why if all all okay and cash generative did they raise cash recently?

the company told us exactly why it was raising funds - their words are posted below - i will leave that for others to choose whether thats transparent or not. Note directors stumped up over 200k at 240p shareprice as part of the placing.

together with the RCF, improve the Group's liquidity position; and

provide funds for further acquisitions as part of Shearwater's ongoing buy-and-build strategy.

they also said the same day

"Board" or the "Directors") confirms that it is exploring a number of near-term bolt-on, strategic acquisition opportunities with revenue ranging from approximately £2 >span class="cw">million to £20 million, as well as the possibility of larger acquisition opportunities

Snowbum

Opened a small spread on AML at ~30p as I agree with the latter part of this post. Also should add that F1 team Racing Point will be rebranded as full works Aston Martin team from 2021 with key support from Mercedes. Toto Wolff also has a stake in AML. I think it is worth a punt on tight risk control.

shanklin100

Hi Jack

That would be great. As previously discussed its great to see you added to the SVCR roster :-)

Cheers, Martin

Gromley

I agree a very good review by Jack and good to get the perspective of someone looking at it for the first time.

Just to fill in on Jack's question as to what went wrong for £WGB (and jonno - you may have more insight than me on this, having re-alerted me to the potential merits with your write-up nearly two years ago) Essentially they have been decrying the poor consumer market (especially in the UK) and not only will that have knocked margins to some degree but also has meant they've clocked up restructuring costs over the last couple FYs, probably taking a bit more than a percentage point off reported operating margin.

Towards the middle of last year, it seemed to me that the mood music was starting to change. That prompted me to buy and track my selling criteria I wasn't holding (thankfully) at the time of the lockdown, but once I worked out just how resilient they were I bought back a few weeks ago. I will be updating my sell criteria tests on that thread latter on (spoiler alert : I haven't sold!)

banterex

For once I let my heart rule my head over LON:AML so took a small punt, this was bolstered by the entry of the Stroll team and the firm conviction that, in order to conserve cash, future dividends will be paid out in Aston Martins!!!!!!!

peterthegreat

Hello Jack,

with reference to Aptitude Software, I would suggest that significant increases in revenues, earnings and cash might indeed be described as a "stellar" performance taking into account that the period in which this occurred included the worst of the pandemic.

Yellow Cake (LON:YCA)

So...I decided to sell it today after the Cameco Q2 call. I believe that uranium spot prices will go higher...but the market didn't like news that Cameco's big Cigar Lake mine is going to re-open in September so Cameco's share price down up to 15%. Quite irrational IMO but that's how stuff roles...shows that sentiment is very choppy and spivvy in uranium stocks.

I put 1/3 of my YCA cash into buying more Cameco today. The other 2/3 I will see what happens...Cameco the 'quality' place and will generate the genuine cash flows from uranium price strength and they manage their capital so well buying in spot market rather than mining their own valuable resource when price is too low and selling it into longer term higher priced contracts (although the rise in spot is squeezing time spread pick up)

I wont rush into the juniors with the other 2/3....generally down c.10% today...such a speculative market that I might get chance to buy more much cheaper and if not then they will run ahead of Cameco and I'll just put more money there.

I think uranium related investments one of the best opps in the world right now. But hard and volatile until the cycle turns some more and everyone acts like there's a supply shortage relative to long term demand and so prices do their bit to solve supply shortage.

DYOR (its a mad area....expect very big volatility)

For those with an interest in Premier Foods (LON:PFD), today's analyst conference call may be of interest...

https://www.premierfoods.co.uk...

There was a fair bit covered in the Q&A which was not in today's RNS.

kgb1953

Why sell when there is a discount? What Im curious about is there are net sellers of this company - there must be as company is buying back 30-40,000 shares each day. This is surely a share where you have a view on the uranium price. And you are probably a bull.

I can get more concentrated bang for buck and Yellow Cake (LON:YCA) has done its 'safe' job. I think I can get better return elsewhere.

Uranium stocks inc Cameco can be very volatile. None of them make money at current uranium prices apart from Kazatomprom. I bought Yellow Cake (LON:YCA) as the covid bear was running fierce. I also bought a bunch of uranium miners (I had a couple already inc Cameco and I bought more Cameco and then a small piece of 7ish other juniors). Cameco is the 'quality' play whereas the juniors are like long duration options. If uranium prices don't rise further then many of them will fold or dilute shareholders with raises....so like an option there's theta decay...apart from Cameco and Kazatomprom). Very uncomfortable space...YCA was letting me take part with more comfort.

My plan was always to move out of YCA at some point even though I think it will go up 2-3 times from here (NAV plus discount closing). The upside to Cameco is more as they are leveraged to price upside. If sentiment turns negative from here then both YCA will see its discount widen and miners will fall...I'd rather have cash and buy miners on falls now that we are beyond covid armageddon. If YCA moves up a lot as uranium prices move up a lot then there is zero chance of miners not at least pacing the move. The Cameco call and negative price reaction to it by the miners made me think its time to move.

The other 2/3rds....like I said....I'll see what unfolds from here but if the juniors fall significantly more then I'll top up my basket. If things stabilise then I can deploy into Cameco or laggards I like. I want to take more risk than Cameco as some of those options will really pay out...but I don't want to chase. Uranium has attracted interest recently and been a bit hot and valuing options (ie resources in ground with no near term production) is hard.

Before today I had 12% of my portfolio in uranium very diversified. My biggest non uranium position is about the same size so I'm treating uranium as a basket that equates to approx a full weight position. After today with price falls and selling YCA and not fully deploying I'm down to about 9%. I'm happy to get to about 15% from deployment of new cash. Given uncertainty and volatility I don't want to rush in.

smatthews1

This is an interesting one to keep an eye on, agree it has some heavy hitters in the driving seat now that will be able to steer it in the right direction, although I think its very unfortunate with their timing and have taken the helm in the middle of a pandemic.

What does interest me though is the F1 involvement. This can be viewed 2 ways. First of all F1 have announced a fairer playing field by introducing a budget cap ~ £140m per team and a more evenly distribution of points money through the field (compared currently to Mercedes and Ferrari currently on budgets around £350-£400m a year) Racing Point, the team who will be behind the Aston Martin brand as of next year, are currently experiencing a significant increase of performance on track due to running a lot of Mercedes parts.

So this is either.... a really great play on marketing, as when Aston Martin rebrand with them, with continued success they could be suddenly competing with the top teams. Huge brand exposure from a lot less investment into the sport as some other teams have previously been used to.

Or as his son drives for the team, is it a great way to divert their marketing budget into F1 to fund his success?

For me its no accident Stroll's previous success has come from luxury brands as well, but driving larger profit margins out of cars must be a lot more difficult than clothes and handbags.

Berksbee

Not sure I would short it. The Divs are a confidence signal in my book. On the move to veg, think the world as a whole is moving to more meat so I am less concerned.

Big bounce since we spoke this a.m. so I feel a bit vindicated. do you hold DVO? Been with it for a while and its been slow to please!

PriceOwen.Trading

I have no position in DVO currently. Big bounce indeed. I wouldn't short it just yet if I was going to, Let the half year result breath. I do however have concerns about this company, it's debt levels and it's sneaky accounting practises. This is in plain sight, what's it doing behind closed doors?

What were your reasons for buying when you did?

Nick Ray

30th Jul '20

Seeing Mr Contrarian's mention of Online Blockchain (LON:OBC) I looked up its stock report and was surprised to see that it has a Quality Rank of 50 despite horrendous ROCE ROE and Op Mgn values. When you drill down into the Q score, it seems to be being propped up by very high Beneish M and Altman Z1 scores.

I have mentioned before that a very high Altman Z1/2 score is actually a bit of a red flag. For Online Blockchain (LON:OBC) the Altman Z2 is 64.8 according to the Stock Report. A value which is entirely due to this test:

Market Value of Equity/Book Value of Total Liabilities = 75.1

This large value happens because of a disproportionate relationship between Equity and Liabilities and can indicate a company not doing enough with its resources.

[FWIW my cutoff for Altman Z2 is approximately 55. i.e. I look for Altman Z2 <= 55]

I doubt that too many people were about to leap into Online Blockchain (LON:OBC) on the basis of its Quality Rank anyway. But it is certainly a good example of how sometimes a summary statistic can be misleading if it is averaging very low and very high values together, and the very high value is really a red flag pretending to be a green flag (if you see what I mean!)

Jack Brumby

I’m just going to use tickers as otherwise this would get a bit messy.

You’ve mentioned GAW and PFD. The below is a mix of both companies I hold and companies I’d currently like to look at.

a) I’m primarily trying to find stocks that can compound and have a chance of going from micro or small cap to mid or even large cap. Companies do it all the time I think, you just have to run your winners. So there’s that side of things
Here I’m looking for cash generation, high returns, and safe balance sheets - but sometimes turnarounds as well.

Some that fit these themes: G4M (missed the boat there), BOTB, ARC, CRL, GDWN, BILN, JDG (I know some people question where the growth will come from on this one, but I’m hoping the management are of the ‘under promise and over deliver’ variety. I appreciate valuation is also a concern). CLIG and TPFG as well have obvious COVID exposure, but I would back management over the long term as long as the valuation is appropriate. VLX and KETL. SOLI looks like a potential GARP candidate.

b) Then given the current remarkable conditions I also think there are some rerating opportunities in terms of good companies with strong balance sheets that will at some point, with a fair wind, bounce back and return c50-100%. HEAD, WGB (above), WYN

c) Monetary policies etc - Gold… I hold AAZ but want more gold exposure (plenty of options here, including SHG and POG), and other metals and resources are worth further research too, although I don’t yet have a macro view on many of those markets. YCA and a few other miners. Some of them came up in Ed’s SNAPS. I also have SLP.

Some other misc companies I’d like to look at more closely: UPGS, ERGO, CER, DOTD, IMI, SRC

I’ve probably missed some things out. Video games makers for example. The valuations here can be off-putting but there's often no substitute for top tier IP.

Tommy H

Hi Cleeve

There was an article on the BBC linking drinking in a Bar to a Covid Outbreak

https://www.bbc.co.uk/news/uk-england-stoke-staffordshire-53577728

This was one of the debates I had about holding Revolution Bars (LON:RBG) and Marston's (LON:MARS) and I chose to sell both.

This feels either two ways, hold and ride for the long term outcome e.g. life goes to normal and the price goes up to what you bought and more. Or sell and cut your loss and watch it either go down further in which case a pat on the back for being a genius, or a kick up the butt for being a numpty as the price jumps back.

Or you could look at this as now Revolution Bars (LON:RBG) is AIM so a lot lot cheaper to trade, sell and buy back again lower if you think it is a good long term holding...

31st Jul '20

As a former employee of Devro, I would like to add that the company is generally more profitable in times of economic downturns.

Their key market is supply of meat casings & people tend to eat cheaper meats like sausages instead of steaks when economies begin to suffer.

I think they keep the Divis artificially high to benefit the management & long term staff of the company as it originated as a Management buy out from Johnson & Johnson's in the 90's with Directors and staff throughout the company getting decent shareholdings out of it.

Just my 2 cents, good luck all.

Small Cap Value Report (Weds 29 July 2020) - NXT, PFD, YCA, SWG, WGB, APTD

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Jack Brumby

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