Small Cap Value Report (Weds 4 Jan 2023) - HEIQ, CNC

4th Jan '23 by Paul Scott

47 comments 6961 reads

Good morning from Paul (hardly any news, so Graham's doing other stuff today). There's hardly any news today, so this report is now finished.

We're braced for a very busy month, with lots of 2022 trading updates about to hit us, some of which are bound to be profit warnings, given current tough macro conditions.

Agenda

Paul's Section:

Hospitality sector - the Propel daily news email today contains alarming news for trading in Dec 2022 for late night bar operators - a flash survey of 200 nightclubs and bars shows that revenues were down 20% on pre-covid (Dec 2019). That’s going to leave many struggling to survive in 2023. This whole sector looks really grim at the moment, with reduced demand colliding with much higher costs (especially wages and energy). It’s difficult to see much changing any time soon - the days of generous Govt support measures seem to be over, and disposable incomes seem likely to remain under pressure. So I think we need to brace for many bars going bust in 2023, and the ones remaining just hoping to gain more market share in a smaller market. It's far too expensive to eat/drink out these days, in my opinion. Hence I'm very worried about this whole sector.

Heiq (LON:HEIQ) - a nasty profit warning from this innovative fabrics group, which has missed its 2022 numbers by a long way, citing a plunge in demand in Q4. We've never liked this share here at the SCVR, and now the company is loss-making, it's difficult to see any bull case at all. On the plus side, the balance sheet looks robust overall, with net cash. Although inventories & receivables look too high, so there might be some nasties lurking in those. It's just a punt now really, on a possible recovery, so might be of interest to traders? For me though, I'll continue avoiding it, so a thumbs down I'm afraid, on fundamentals.

Concurrent Technologies (LON:CNC) - a rather underwhelming update for 2022, with both H1 and now H2 only being just above breakeven. The cash pile has depleted a lot too, although credible reasons are provided (inventory build due to supply chain problems), hence that should reverse in future. The main interest here is a bulging order book, so a much better performance is credibly expected in 2023. I think the valuation looks solidly…

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Bouden54

4th Jan '23

Happy new year to everyone and let's hope 2023 brings a bit more cheer. 2022 was obviously very challenging but pleased to have generated a positive 4% return (having been down 20% at one point). I held a few UK property companies and retailers which obviously got hammered. But this was offset by my diversified portfolio of investment trusts where I regularly switch positions to capture the best discounts. Sterling weakness also helped as most of my funds are global. My energy names (Glencore, BP and Shell) also did well

Looking ahead I'm very optimistic given current valuations, although expect things to remain volatile in short term. I'm currently invested in the following areas where I think there is tremendous value on a long term view:

Life insurers - such as Phoenix group (LON:PHNX) Legal & General (LON:LGEN) Aviva (LON:AV.) very generous and secure dividends, and a beneficiary of higher rates - the whole sector just looks too cheap in my view.

Property companies - these clearly face headwinds but this is more than priced in and balance sheets look rock solid to see them through the tough times. Holdings include MJ GLEESON (LON:GLE) Morgan Sindall (LON:MGNS) SEGRO (LON:SGRO) Forterra (LON:FORT)

A few deep value names trading below NAV or on very low PEs - Vertu Motors (LON:VTU) Hargreaves Services (LON:HSP) Smiths News (LON:SNWS) SCS (LON:SCS)

A variety of energy and resource names where I am still bullish £BP Shell (LON:SHEL) Central Asia Metals (LON:CAML)

Cheap investment trusts - mainly in the private equity space where discounts are still around 40%

Litigation - this area has been very disappointing for several years but am hopeful they could finally deliver in 2023 - I hold Burford Capital (LON:BUR) and Manolete Partners (LON:MANO)

Also very good value in bonds now so hold some through ishares ETFs - these should also act as a nice hedge if equity markets continue to tank (this wasn't the case in 2022 but this really was an outlier and think bond will be a lot more resilient this year as inflation starts to ease).

portugull

Thank you Paul for your reminder on how to set up the tickers.

No need to apologise over Boohoo (LON:BOO) or Hostmore (LON:MORE) as I have only myself to blame. I had always avoided Fashion but was convinced that Boohoo had bought so many iconic names very cheaply they would become iconic themselves.

With Hostmore I did not do enough research and I allowed the Podcasts from the two top guys at Hostmore to persuade me this was a better business than it has turned out to be.

Boon

Yay! You're in the rare "Positive 2022" club!

I also hold Phoenix group (LON:PHNX) but have also been tracking Aviva and Legal & General. I chose Phoenix because of their strength in consolidating closed books, as well as acquiring DB pensions, which I expect there to be more activity going forwards. But purely on the insurance category, which of the three do you have the most conviction on?

I am also actively monitoring property companies. Different names to the ones you quote - the usual big housebuilding suspects like Barratt, Taylor Wimpey, etc. Do you see specific property sectors as attractive rather than the whole, hence your more specialist picks?

FWIW I think there is still alot of trading pain to come for the big housebuilders in the next few months, but the market seems to be too efficient in marking down their prospects already, that the bad news looks priced in. Still, what is cheap can get cheaper with further bad news, so I am waiting for that final capitulation, as the housebuilders have been retailer investor favourites for a while, and their capitulation usually gives some good share price dislocations.

Bonds - corporate or government? UK or any specific overseas countries?

FREng

Marks and Spencer (LON:MKS) in Tunbridge Wells has been very busy for months and remains so. The food section is remarkably good value.

drvodkaquickstep

Well done Mark

filiporoger99

Good morning Paul - you promised a 'mystery share' in your 31.12 podcast...did I miss it not sure? Is it Rotala (LON:ROL) ?

Well only positive on a nominal basis - still someway behind inflation and hoping this year will be a lot more fruitful!

On life insurers, Legal & General is probably my preferred pick as I think it has the best growth prospects, including a strongly performing fund management business. It also has its own capital division which develops a range of assets (everything from renewable energy infrastructure to housebuilding) to back its liabilities - I think this gives it a bit of a competitive advantage, although I still like Phoenix and Aviva and happy to hold those too.

Yes I see value across the whole property sector, everything from REITs to housebuilders, as well as things like brick manufacturers. I think all the housebuilders look good value, but I chose Gleeson due to their focus on discount homes (which in theory should make them more resilient, although whether that works out in practice is another thing).

I think industrial property still has good growth prospects, hence recently buying Segro on a 40% discount. However much more cautious on offices and retail property so continue to avoid those areas.

Bonds - I think investment grade corporate bonds give the best balance between an attractive yield but with low default risk. Not so keen on high yield as I think defaults there could rise. I hold the ishares US corporate bond ETF (the GBP hedged version as I think the USD looks very expensive now - the ticker is LQGH).

docj

SCS (LON:SCS) (I hold) Hi Paul and Graham. First post after 1yr Stockopedia subscriber. Was gobsmacked when an advert for SCS popped up on the TV offering interest free credit on purchases. Does this mean they have abandoned the thrifty policy of customers paying up front for furniture purchases?

I believe in that situation the finance company would pay SCS upfront instead of the customer, so shouldn't make any difference.

davidallen77

yes to Rotala (LON:ROL) i hold and could not buy more earlier!

BnB

Simon Thompson from IC recently did a 22 page detailed note on the company in November last year

Very helpful to know but I’ve been through all the November 22 issues and found no mention of hVIVO (LON:HVO) at all. did you mean Nov 21?

timarr

Very helpful to know but I’ve been through all the November 22 issues and found no mention of hVIVO (LON:HVO) at all. did you mean Nov 21?

It was on Alpha, Nov 17th.

Lochinver

Can I respectfully ask if there is a current issue on Stocko with regard to News items on selected companies no longer being e mailed to my account automatically, as they have been previously ? Had a similar issue pre christmas which I brought to the attention of the team via the green blob , following which it was shortly rectified. Now back to no e mails again.

Ah. That’s why I missed it. Thank you. Cancelled my Alpha sub last October owing to endless screens I could do for myself and not much else going for it - apart from that article. Poor timing on my part! Generally I avoid the small cap tips because of low liquidity at my position size but hVIVO (LON:HVO) looks surprisingly liquid for a sub £100m cap. I like the CRO space and hold Iqvia Holdings (NYQ:IQV) and Medpace Holdings (NSQ:MEDP) plus Ergomed (LON:ERGO.

Michael C

Further to comments including mine on PROCOOK (LON:PROC) ) I bought a copy of the most recent accounts for the large minority shareholder, Fackelmann GMBH, which is in he same line of business and has built a stake. After reading these accounts I am not convinced that they have the firepower to buy the whole company, assuming that the controlling family would want a lot more than the current market cap, and in the end I decided that it is well-nigh impossible for a private investor to do more than guess at the outcome here. I also think the next trading update could be bad news. Therefore I have sold for a small gain.

Ah. That’s why I missed it. Thank you. Cancelled my Alpha sub last October owing to endless screens I could do for myself and not much else going for it - apart from that article.

If you're an IC subscriber Alpha is currently free to access - at least it still is for me ...

Silver Moon

Hello Rutland, I hadn't noticed the absence but there it is. But I was getting weary of the number of RNS by companies buying back their own shares so won't be missing them for now.

Alpha is currently free to access

Found it thanks. But sadly no access granted

Paul Scott

Hi filiporoger99,

Yes that's right, the mystery share for the last week of 2022 was Rotala (LON:ROL) - it's a special situation, and very tiny/illiquid. I think it looks interesting after the big property disposal has transformed its balance sheet, and the valuation seems attractively low. Although it's the type of share that could languish for years, as obscure micro caps often do!

Regards, Paul.

GN100

I receive e-mail RNS notifications from the LSE website (FOC) for all my holdings. The deluge of little importance ones daily gets a bit wearisome but it's easy enough to just skim and delete these and hopefully find the important ones. I wouldn't be without it and view it as just another of the active investor chores.

Small Cap Value Report (Weds 4 Jan 2023) - HEIQ, CNC

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Paul Scott

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