Small Cap Value Report (Weds 7 Dec 2022) - OMG, MMAG, SDI, MOON, WINE, MSI, REDD, QUIZ

7th Dec '22 by Paul Scott

56 comments 8972 reads

Good morning from Paul & Graham. Today's report is now finished, we got through nearly everything on the agenda, it's a nice feeling when that happens!

Agenda

Paul's Section:

Oxford Metrics (LON:OMG) - FY 9/2022 results from yesterday don't look particularly good, but under the surface something interesting seems to be happening here - strong demand, and a big increase in order book, plus delayed orders (supply chain) suggest a much better year is likely for FY 9/2023. Over half the market cap is a huge net cash pile, from a remarkable deal disposing of Yotta. Overall, I think this share looks very interesting, and is still reasonably priced. It gets a thumbs up from me. Over to you - OMG looks worth a closer look.

Musicmagpie (LON:MMAG) [quick comment] - a series of profit warnings, collapsing earnings forecasts, and rising debt, led me to regard MMAG as uninvestable here in Sept. Shares have bounced strongly (in % terms) from the lows, so is there hope of a recovery, or is it a dead cat bounce? Today it says trading for FY 11/2022 has been in line with expectations. But bear in mind expectations have been lowered from 7.5p EPS to -0.1p EPS. Net debt is £8.2m (better than expected) out of a £30m facility. Record Black Friday sales, and it talks up the prospects for its mobile phone rental offering. I remain unconvinced this is a viable business model, but at least trading is not getting any worse. £28m mkt cap looks (mag)pie in the sky to me! [no section below]. EDIT: note that even the house broker doesn't think it will generate any PBT in the next two years.

Moonpig (LON:MOON) - We warned readers here in Sept that Moonpig looked to have overpaid for a large, debt-financed acquisition. That's very much confirmed by today's interim results, which show how the balance sheet has been wrecked by this acquisition, leaving a vulnerable consumer discretionary business that's facing tightening demand, and with a mountain of debt to service. Risk;reward looks poor to me, so I'd steer clear of this one for the foreseeable future.

Naked Wines (LON:WINE) - Interesting interim results, seem to show some progress has been made. The main problem is wildly excessive inventories, which have peaked at over £200m. It's taken a £8m hit against…

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John Gibson

7th Dec '22

Hi Ken,

Thank you for flagging up that investment trust situation, could I trouble you to throw out a couple of names to guide some further research?
For what it’s worth I’m currently very interested in the industrial and precious metals mining space. The Rio’s and BHP’s of this world are sitting at PE’s of 5, yields of 8-10% with enough cash to see them though a year or two of reduced demand and China concerns, but tightening supply, demographics and emerging market electrification and growth are going to have that demand roaring back soon enough.
I haven’t checked out any investment trusts in this space, but I think I will now, as buying them at a discount now provides a nice little tail wind when the discount (eventually!) narrows.

Camtab

Just come off the Company presentation. I just like their down to earth pragmatism. Holder.

Nanotrader09

thanks for the response. I wonder if the cash isn't easily accessible, hence the overdraft fees. I don't tend to go to AGMs but looks like one I should attend given the lack of info in the statements

TheFloatingInvestor

John, ticker GIGB would give you an ETF with a good spread of mining stocks if that's of any interest to you.

I'm slowly building a position in it on pull backs.

marcusb

This is very helpful, thanks Mjfgs.

illiswilgig

Hello David.

MS International (LON:MSI) - good returns for the patient. Indeed. Well put.

can it get to 600p. Good question. My thoughts?

Short answer. Yes. Not overnight. But in the short, short-medium term 1-2years. Thats assuming that profits continue to recover/grow and without assuming a significant re-rating of the shares.

There is signifiant upside beyond 600p depending upon progress. In the long term this looks quite likely.

Short answer longer.

With a quick finger in the air upgrade to my FY forecast based upon this mornings figures I'll go for profits 7.6m to 8m.

At 9x rating (BAE is currently 14.3x 12m forecast ) thats enterprise value of 68m - 72m add in an estimated 25m cash pile at FY end gives market cap of 93m to 97m or sp of 570p to 598p (based upon 16.2m shares on stockreport) or a sp range 560 - 584p using a more realistic 16.6m diluted shares. Either way that's close to 600p for FY23 in May without assuming significant re-rating or other progress.

I see three potential catalysts for further re-rating of the shares in the next year or two:

[1] At 100m market cap the company comes on far more radars

[2] Formal progress with the US sole source contract

[3] Part deployment of the growing cashpile to bolt-on acquisition(s) to the divisions

Of course that all assumes that everything goes according to plan. Almost never happens with my plans. So I am quite prepared for it to take a little longer say 2 years to get to 600p.

I might amend my thinking once I've had time to sit down quietly and process todays results, but I doubt it will change the destination, just the route to get there,

cheers

Mark

shopping365

Blackrock World Mining Trust (LON:BRWM) is an IT I hold in this sector. Only on a very small discount (1.2%) to NAV but pays a quarterly dividend. Another option is Blackrock Energy and Resources Income Trust (LON:BERI) which adds holdings in oil stocks to the mix, also pays a quarterly dividend and is on a discount of about 4.2% to NAV.

kendal

drink the wine before buying Naked - my experience has been quite poor.

planetx

Mark

Well done for holding .

It’s clearly a good company we’ll run with a great family running it who understand their business .

Nothing wrong with and one of the best AIM shares .

Just those 2 things put me off but at the time I was reducing to 6-8 holdings and it only just failed to make the cut .

I had also timed a good purchase and made a 25% turn in a week so too the short term dopamine hit of a quick profit .

Bouden54

Good to flag some of the value in investment trusts right now. The private equity funds also look very good value with many on 40% discounts such as Harbourvest Global Private Equity (LON:HVPE) Pantheon International (LON:PIN) and £APEO

Thank you all, I’ll look into those, cheers!

ken mitchell

Thanks John Gibson

I’ve just lost a detailed reply ….so here’s a much shorter one. So ask if wanting more info.

Best site for Investment Trusts is aic.

Here’s the link that takes you straight to the Commodity and Mining Trusts:-

https://www.theaic.co.uk/aic/f...

I’ve held Blackrock World Mining Trust (LON:BRWM) CQS Natural Resources Growth and Income (LON:CYN) and Blackrock Energy and Resources Income Trust (LON:BERI) since near the end of the Mining sector bear market which ended in early 2016. Mining sector goes its own way and that bear market was not only far worse than the 2008 Banking crisis crash but also happened during a general bull market.

Using the link above, just click on the red heading for each Trust to bring up a wealth of info. e.g TOP10 shares in their portfolio, discount or premium to NAV and dividend yield etc. Also click on Announcements heading for must read info like Monthly fact sheets, results etc.

If going for one only there’s a strong case for Blackrock World Mining Trust (LON:BRWM) as they have 40% or so in big Miners like Rio Tinto (LON:RIO) Anglo American (LON:AAL) BHP (LON:BHP) £VALE £GLEN.

Be wary of big discounts. Sometimes they show the Trust is a bargain but at others e.g Baker Steel, they reflect very poor performance. A snag with buying now is that it’s after big sector gains and CQS Natural Resources Growth and Income (LON:CYN) Blackrock World Mining Trust (LON:BRWM) and Blackrock Energy and Resources Income Trust (LON:BERI) are all up between 30% and 45% over 1 year and a lot more over 3 and 10.

Other sectors with Trusts on unusually high discounts to NAV include Private Equity and U.K. and Europe Commercial Property Trusts. e.g I hold Phoenix Spree Deutschland (LON:PSDL) on crazy imo near 50% discount, SREI on equally overdone 40% discount as well as Aew UK Reit (LON:AEWU) 8% dividend paid quarterly, Schroder European Real Estate Investment Trust (LON:SERE) Alternative Income REIT (LON:AIRE) and Ediston Property Investment (LON:EPIC) who pay dividends monthly.

Another sector worth checking is Country Specialist which includes Vietnam. That’s been a great place to invest over the years but recent falls there look a buy opportunity. I‘ve held VinaCapital Vietnam Opportunity Fund (LON:VOF) and VietNam Holding (LON:VNH) long term. I’m clueless on individual Vietnam or Chinese or wherever Companies away from the UK so relying on Managers with proven records who are often natives of those Countries via Investment Trusts is a great way of investing all round the World AND in some interesting UK sectors too.

Graham Neary

MS International (LON:MSI)

Thanks for answering those points to Nanotrader, Mark! With a range of subsidiaries each of them having their own individual cash position, it personally wouldn't worry me to see some of these subsidiaries occasionally using overdrafts and paying some interest. G

Ken, thankyou this is great information.

I must admit these REIT's are starting to appear on some value screens so I am getting interested..

Alternative Income REIT (LON:AIRE) is one in particular.

I am assuming the drivers behind the performance in these property REIT's are

1) Ability of management / track record?

2) Asset valuation under pressure from a reduction in property prices, new legislation on green credentials etc?

3) Market Sentiment generating the discount to NAV?

This is probably an over simplification, forgive me, but I can see that property pricing is reducing along with market sentiment, however at some point sentiment is likely to pick up and then property prices will follow thus accelerating potential gains....meantime a little divi as a sweetener...

Am I anywhere close

Thanks Again

Paul

TheFloatingInvestor.

It would take ages to post what you need to know about Property Trusts, but yes to your point3. A reason why the sector has fallen recent is because higher interest rates make the big dividends paid by many Property Trusts less appealing to big investors. But the recent share price falls mean anyone buying now gets a higher dividend yield.

When there’s a lot of selling Investment Trust discounts widen and sometimes dramatically so. To improve your knowledge the updates from the Trusts themselves are an absolutely key source. Ditto NAV updates and Manager comment on NAV. And how well is the dividend covered and is the current high dividend for many Property Trusts sustainable or even with increases likely. So always check out what the Trusts themselves say about their dividends.

Key must knows include rent collection figures and if disposals are above the price they paid etc. Also is the Trust focus mainly office or retail or Warehouses etc.

Though ADVFN bulletin boards are often poor or very poor quality (often matching the lack of quality of that Company) those on the individual Property Trusts and also “The Commercial Property thread” there are an exception so have a look there too.

abtan

Oxford Metrics (LON:OMG) (I hold)

Outlook

One snippet from yesterday's update that caught my eye was the following sentence in the outlook section:
"Based on order intake so far in the new financial year which, includes our largest ever single order, demand remains strong."
This new order is on top of the record order book at year end (£24m), which should bode well for FY23 revenue expectations (£36.7m).
Note that the order book at the end of FY21 was £5.9m, with final FY22 revenues of £28.8m.

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Historical Data

Historical figures pre 2021 include Yotta, which is now sold.
These accounts were not restated, so the numbers in Stockopedia should only really be used from 2021; anything before this is sadly not very useful (at least for me.)
It's hard to gauge any particular trends for the remaining Vicon business as we now only have 3 years of "clean" data, from 2019 to 2022 (and for 2019-20 we can only see revenues).
That leaves Companies House for Vicon UK only.
https://find-and-update.compan...
This isn't entirely accurate as there are material intra-segment movements between the UK and USA businesses. There were c£4m alone in FY22.
Nonetheless for any interested here are historical Vicon UK pre-consolidation numbers showing:
- Annual Revenue,
- Year-on-Year Revenue % movements,
- Gross Profit %,
- Operating Expenditure %,
- Operating Profit %

The following stood out to me:
- revenues grew every year except a slight 3.2% decline in FY15 (excluding the exceptional covid years),
- the relatively stable gross margin,
- possibly rising OPEX % - though hard to tell given the tumultuous last couple of years.

So there's a decent growth story over the last 10 years.

My main reason to hold today is:
- the very large order book,
- additional orders since year end,
- relatively stable gross margins,
- interest income boost for FY23 (I am forecasting £1.6m here vs £0.3m booked in FY22, all of which came in H2),
- the company doesn't appear to be burning cash on an underlying basis,
- hopes of increasing cash generation as future orders are fulfilled,
- the large cash balance should put a floor on any downside in these uncertain times.

Paul Scott

I've mystery shopped Naked Wines (LON:WINE) (twice), and Virgin Wines UK (LON:VINO) - in both cases, the introductory offers were attractively priced, and the wines were OK - nothing particularly special, or memorable about them.

Delivery works quite well if there's always going to be someone in, but I found it a bit restricting, knowing that a delivery was arriving, and then effectively being trapped at home until it arrived, as you wouldn't want to pop out and find one of the neighbours enjoying your order!!

Both WINE and VINO claim strong client retention though, so plenty of people must like their wines.

On balance, I think there's there's a ceiling to the market size, and hence the scale of both businesses, with a constant churn of customers, hence heavy marketing spend required. VINO strikes me as a better, run, safer investment than WINE. Although WINE does have recovery potential, if it can get the inventories down & avoid a profit warning.

Regards, Paul.

ettrader

They're an interesting company I've been a customer of WINE for over 5 years now I've certainly had my ups and downs with them during that period. They have a solid customer base where you pay £20 per month that accumulates in your account so when you order a case your account goes to £0 and you pay the additional funds to complete the order. So I pay £240 per year but I order at least two cases of their finer wines per year (total 24 bottles) as quite a few have a cellar life of anything from 6 to 15 years. I've tried Laithwaites and some others but WINE is definately the best of the lot in my opinion especially when you get to know your growers. They are small growers where they produce small quantities which creates a frustrating situation when you order - they sell out so you end up trying to find other wines to fill your basket. I think the UK they have 300,000 subscribers all fighting for the best wines. Once you get to know how it works you time your orders when your favourite growers release a vintage and you quickly fill your basket before they run out.

The customer funding goes to supporting wine growers they will typically be from the industry starting up their own vineyards, they need funding that is where the cash goes in advance before any wine is produced. They support the small holder wine growers, offer them advice etc.

Now the wine lake was caused by two situations from what can fathom out. In 2020 their staff all started working from home (Covid lockdown), they pretty much stopped all orders which seemed insane to me because wine suppliers were one of the few companies that could operate during the restrictions. They said it was to allow time to increase warehousing space. Next they started bailing out wine growers dotted all over the world who could not export their wines to restaurants because of Covid. This created a lake of wine. A lot of the Covid relief fund wine sold very quickly once they got the site up and running again for ordering online, it was slow the situation was that bad I had to order wine from elsewhere until they sorted it all out

The marketing they do tends to be in large hotels where there is a ticket price but if you roll up to them and order a case of wine the entrance is free. They get to meet the wine growers from all over the world they are very popular but I'm not sure they make money or even covers their costs from holding these events because from what I was told by an employee on the phone when I first ordered is the mark up is 30% on the wines that come (I can only assume this is the case). So a £100 case of wine is £30 of mark up. The staff seem to have perks where they have access to wine I'm not sure they have limits on this. These are the areas that concern me most - their control of costs. They have an extremely loyal fan base who frequently repeat order so the key yo their success is making that profitable, not to tempt new customers with a heavily discounted mixed case where a lot will say it was OK but nothing special. That's because they don't get to find the ones that fit their palate or style. So expanding is not key here it's making that loyal customer base repeat ordering produce more profit. Well that's a bit of background I hope it helps.

ridavies

Any you can recommend ken mitchell please

Thanks for posting that, ettrader, very interesting! Useful "scuttlebutt" that adds credence to what WINE says about customer loyalty, etc.

Small Cap Value Report (Weds 7 Dec 2022) - OMG, MMAG, SDI, MOON, WINE, MSI, REDD, QUIZ

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Paul Scott

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