Small Cap Value Report (Weds 4 Nov 2020) - MTO, STVG, WIL, GATC

4th Nov '20 by Paul Scott

55 comments 9695 reads

Good morning, it's Paul here with the SCVR for Weds.

Timings - most of today's report is done (at 13:48), but I need to take a break for lunch now. I'll finish off the 2 last sections later this afternoon, which should only be quite short, as neither STOB nor WIL look particularly interesting!
Update at 16:14 - I've decided to abandon STOB, it's just too complicated, and I've done enough work for one day. Therefore today's report is now finished.

I finished off yesterday's SCVR quite late yesterday, so here is the link, in case you missed the new sections. Companies covered were:

ACRL, VCP, TCM, UPGS, WHR, OMG

US Election - Exciting news overnight, that the US Election is tight, with the betting odds having switched around, with Trump now the favourite. We're only interested in shares here, there are plenty of other places to discuss the politics. So as regards my shares portfolio, I really cannot see any reason to make any changes, or that the election result would make much difference to my portfolio at all. Hence I've not made any changes to my shares portfolio. It is an uncertainty factor though, so we could see a market bounce once the result is known, as people put money back to work in UK small caps, maybe?

EDIT: Note that the betting odds have now switched back again, with Biden in the lead (at 11:59). I only mention this because the volatility in the betting markets has given us a rough idea of how the futures markets are likely to react to the outcome, and the answer seems to be: very little. A few single digit percentage points on the main indices, nothing more than that, is what I've observed in recent days. That's reassuring, as I think it means we don't have to particularly worry about the outcome re our shares. Nothing like the massive gyrations we saw in 2016 anyway, it would seem. End of Edit.

Covid testing - I feel the outlook re covid is now getting to the point where we can start to anticipate the benefit on share prices of mass testing, which in my view is probably more important than a vaccine in getting control of the situation. So I'll be looking to increase my positions in the best recovery situations for 2021. Markets are supposed to…

Unlock with Email

Unlock with Google

Already have an account?
Login here

Housemartin2

4th Nov '20

Maybe the 'Blue Wave' is still in the not yet counted postal votes ?

GloucesterBob

With regards to Pauls comment about the recruitment/staffing sector, I have been tracking SThree (LON:STEM) for the last 3 weeks since it joined my screen process (basically Jim Slater with strong Stockranks and Stockrank Style added.

Shares magazine did a buy recommendation on it back in Jan (price then was 365, 256 today) and highlighted it has a presence in Europe and the US, though a recent news artilce said it was pulling out of Australia, so certainly not just UK based. Hardly moved above its march drop, but if we are coming out of this recession, is this small cap due a revaluation?

Anyone else had any experience of owning SThree (LON:STEM), but probably going to pull the trigger tomorrow.

Boon

Looks like there's a big overhang in Medica at the moment. Been slowly drifting downwards. Thought it was bad trading / profit warning coming. But this in-line trading update should have seen it recover to 120p, or more. Especially with a promising acquisition. Indeed the early trading was 10% up at 110p, but then drifted back down again even as the market went up today.

Both Aberfoth and Gresham House have increased stakes in Medica (LON:MGP) recently too.

With the top 4-5 holders now over 50% of total shares, it won't take much for Private Equity or other buyer to get Medica at a small-medium premium, for what should be quite a defensive business churning out good free cash flow.

(I hold).

Gromley

Hi gwilli68,

You can find some of the pensions information in the StockReport - if you go into the balance sheet section under "other liabities, total" you will find the pension deficit. (£64m at the last year end for STV (LON:STVG) )

However this only gives you part of the story, if you want to know the full detail, you need to go the the Report and Accounts. For STV you will find the latest here.

Just search the document for the word "pension" - there are 69 instances in the STV R&A (not unusal) so in fact it is best to search from the end of the document - as that is where you'll find the important info.

For STV it is in note 26 to the Accounts "Retirement benefit schemes" Page 102 (but page 106 of the pdf - why cannot companies understand PDF page numbering?)

Scheme Liabilities of £445.9m vs assets of £381.9m given the deficit mentioned above. There is actually though a tax asset on this deficit of £10.9m so net of this the deficit is £53.1m

Of second order interest, you can see various details of the assumptions and how the pension scheme funds are deployed.

You can also see here how much the company is paying into the scheme. (Last year £11.6m made up of £1.6m operating expenses and £10 deficit reduction plan).

Edit : Actually this last point does not quite stack up, the P&L & CashFlow statements shod £2.0m of pension management costs and £10.3m of deficit reduction payments. I'm not totally sure on the difference there, but maybe it relates to the tax impacts?

The presentation may differ from company to company, but you should always be able to find this information in the notes to accounts for any company with a Defined Benefits pension scheme.

Phuntt

The weird things you learn while researching shares. I never knew that passenger jets nearly always have some air cargo in the hold on routine flights - it’s normally relatively cheap (compared to proper air freight) and airlines use it mostly for ballast. There actually has been a massive increase in the price of airfreight over the past 7 months because of the passenger routes cancelled.

laurie

Air Partner (LON:AIR) Is the underlying business quite ordinary? The line of best fit drawn over a graph of normalized eps is going in the right direction at a reasonable pace [1-2p in the mid ’90s, 5-7p recently, while paying a reasonable dividend], although lumpiness is in evidence. Cash has been used to buy related businesses, which may even out the lumpiness and add income. This year there will be enough cash generated to account for at least a quarter (perhaps a half?—there have been no recent updates) of the current market cap, yet this company is trading at c. 10xs the average operating profit over the past couple of years, when the PE range has been 12-18 times.
Air Partner (LON:AIR) benefits from both emergencies (e.g. Ebola, COVID, unrest) and the good times (transporting football teams, orchestras, freight, the wealthy, the impatient, the discreet, etc.).
An enormous amount of freight is transported in the belly of passenger jets; it might be some time before that capacity returns. AIR is building up a substantial cash pile which can be used to buy more income-producing assets and to provide the dividends that help to keep us all cheerful.
I accept that this will not be the next super-compounder, but at a price of 60-some pence, with dividends in the recent past of 5+p, and with the promise of a bumper year or two, it isn’t a bad place to put some money.
Disclosure: I own some.

JohnEustace

That takes me back to calculating volumetric weights. There's a sweet spot for the weight per cubic metre that works best for each mode of freight - if you don't hit that then they charge by volume or weight, whichever is the higher cost.

shipoffrogs

Air Partner (LON:AIR) issued a flurry of very positive updates in the early summer which drove the price up and straight into a placing - which explains a substantial part of the substantial cash pile.
Its acquisitions of the last few years can hardly be deemed that successful. I hold some too, but nervously.

George20

Tks Grom, vv thorough

Logical David

Hi GloucesterBob, I bought SThree back in early 2019. The shares went sideways during the time I held them. When I joined Stocko in September last year the metrics were poor in my opinion and so I sold them for a very small gain. Looking at the Stocko graph, SThree has been going sideways since 2010. Its only my opinion but if SThree has mainly gone sideways for 10 years since the last recession, what suggests they will rise following this latest (and worse) recession??

Paul Scott

Exactly - Air Partner (LON:AIR) did a placing because its NTAV was negative. The cash belongs to other people, and its balance sheet is actually (still) quite weak. See the archive here. Not a bad business, but nowhere near as good as bulls imagine.

abtan

Medica (LON:MGP)

I remain a fan of the company (hence my holding) and continue to believe it is significantly undervalued.

Looking back at FY19 my own calculated "normalised" cash flow was c £8.5m (adjusted for 1 offs and excluding working capital movements + dividends)
The company has a decent growth rate (21% CAGR as per Stockreport)
They are in a niche that has a high barrier to entry, so I personally would apply a high multiple (15-20 Adj FCF)
The current EV is c.£100m

This year's performance is satisfactory, and one would hope the growth continues from next year again with even greater cash generation than in FY19 (£8.5m).

Like you, I'm surprised the price hasn't recovered more in the latter half of this year, and even after today's announcement, but I'm happy to wait until it does.

Cheers

I remember reading the world gold market was disrupted at the start of the pandemic because it's usually shipped in passenger aircraft holds. They had to get insurances arranged to send it by private flights so maybe Air Partner (LON:AIR) picked up some work there that they can't talk about.

They were even considering allowing "London delivery" to take place in Australia and Canada.

Air Partner (LON:AIR)

Hi Paul,

I agree regarding the need to be wary of one-off bumper years.
After accounting for this it comes down to:

surviving
things returning to normal in the next 1-2 years
the share price now vs what the new "normal" will be

1 - it will definitely survive. It has so much cash and looks like it will have at the very least a decent H2 based on those articles I shared today, which show that 2 of the 4 divisions are in a sweet spot right now (Private Jet + Freight).
I'm expecting all divisions to be profitable in H2.

2 - I believe things will return to "normal" for the company. Disasters will still happen, lots of events are taking place in 2021 and 2022, the world will start returning to its old self (can you imagine people/goods still not travelling/moving around in 3-5 years?)

3 - the share price when everything kicked off was c100p vs 65p we see today. Since then the company has made serious cash, done a fund raise, and has the ability to invest some of its cash so that when "normality" returns it should in theory be making even more money than before (when I thought 100p was too cheap - NB: I held then and I hold now). Then of course there's the stonking dividend yield, which, when it is reinstated, is c.9% at the current price.

Based on all the above, I'm a happy holder for now.

greensiax

Thank you Forsby ;)

gwilli68

5th Nov '20

Thank you! Really appreciate the thorough reply.

timarr

Agreed.

If we think about this in a slightly wider context companies in this space ought to be seeing a couple of tailwinds in 2021. Firstly, they've seen a reduced market this year as lots of healthcare provision has been pushed back to deal with CV19. The demand hasn't gone away and one of the clear aims of lockdown #2 is to ensure that the NHS can continue with business as usual.

Secondly, it's really hard to believe that public healthcare won't be a recipient of increased funding going forward - and part of that will be about the increasingly efficient use of medical technology. Taken all in all you have a sector where the earnings have been artificially and temporarily depressed but which is likely to see increased levels of investment going forward if you can look though the immediate challenges.

I think this looks like a safer way of playing the post-CV19 recovery - whenever it comes - than trying to figure out what will survive in the retail, leisure and travel sectors, where future demand is uncertain anyway.

The skier

Hi Tamzin

I love your webinars. I found it difficult to hear some of what Paul Jourdan was saying as there was a lot of echo and I assume he was in a large room? Perhaps a thought for the future?

Dojosan

6th Nov '20

The lazy way is c and p for u from Stv (LON:STVG) - its on the RHS of the page around the middle - see what it states Pension

Gattaca (LON:GATC) - doing some research on it and found this - I dont hold

https://research.equitydevelop...

Small Cap Value Report (Weds 4 Nov 2020) - MTO, STVG, WIL, GATC

Unlock the rest of this article with a 14 day trial

About the Author

Paul Scott

55 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...