Small Cap Value Report (Weds 8 Dec 2021) - QUIZ, MORE, EQLS, DWHT

8th Dec '21 by Paul Scott

50 comments 9343 reads

Good morning, it's Paul & Jack here with Wednesday's report.

Poor Jack messaged me at 05:45 to say that he's not got a wink of sleep due to an alarm going off all night. Plus I have to dash off for an investor lunch, which means I'll only have a couple of hours, so today's report might be a little sparse. We'll do our best!

Agenda -

Paul's Section:

Quiz (LON:QUIZ) (I hold) - interim results show a convincing turnaround, despite the impact of restrictions on social gatherings in the first couple of months. Balance sheet is strong, with growing net cash. Current trading excellent. There's lots to like here, on a tiny valuation. However, any renewed covid restrictions remain a risk for the sector.

Hostmore (LON:MORE) (I hold) - inaugural trading update comes across positively. This company looks far too cheap to me, due to an overhang of sellers from the badly handled demerger. Details also provided of new site roll-out accelerating, for both its brands. Quite exciting I think.

Jack's Section:

Equals (LON:EQLS) - strong update reporting accelerating growth trends, with FY revenue and EBITDA to be ahead of expectations. The share price fell dramatically in early 2020, but was also falling in H2 of 2019 (before Covid). However, a strategic pivot towards B2B opportunities appears to be paying dividends, so worth re-appraising the group’s prospects.

Dewhurst (LON:DWHT) - solid results with record adjusted operating profit but a more cautious outlook. Shares are illiquid and thinly traded, so it’s more appealing as a buy and hold candidate, though even then, building a position might take a while.

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.…

Unlock with Email

Unlock with Google

Already have an account?
Login here

IncredibleMosesLeroy

8th Dec '21

The FT is reporting gov is about to implement plan B restrictions (in nakedly transparent attempt to distract form xmas party train wreck).

Hold on to your hats.

cmpeckham

Apparently under the new restrictions we will still be allowed Christmas parties but they will have to be re-branded as "Christmas work related meetings" to ensure that there is no transmission of the virus at these events. A successful trial of this approach was conducted by the government last year.

Phil117

Howard. Thanks for the comprehensive reply! There is nothing like having your rationale challenged. So thanks in advance! I hear you and can definitely appreciate how one could read some of the issues you mention cautiously / negatively. If you allow me let me come back on your points with a more bullish interpretation:

1. FX - My only point here is that FX (especially in the short term) tends to be pretty random. A tale wind in one year can come become a head wind in another and vice versa. I don't believe it should really impact a LT investment decision. We do know however that Games Workshop (LON:GAW) is making a growing proportion of sales from international customers. And over the long term GBP has generally been in decline against many important currencies - Note: not to get into a political / economic discussion but given the UK's persistently large (unsustainable?) trade deficit, fiscal deficit, etc, perhaps it's not that surprising. Hence, to the extent this trend continues and manufacturing remains in the UK whilst revenues are earned in 'harder' currencies this should presumably be broadly LT positive.

2. Carriage Costs - Can't remember where I read this (John Authers?) but one of the big driving forces of the supply chain bottlenecks has been the relative huge growth in demand for goods vs. services due to Covid. This makes sense. For example, that cancelled £'000 family holiday / short break buys a lot of equivalent 'physical stuff'. And the evidence is that as people have switched consumption from services to goods this has driven the supply chain bottlenecks. I would argue that as the pandemic effect fades and spending on services returns this will normalise. Although I appreciate this could also have a marginal negative effect on demand for GAW's products.

3. Staff costs - OK. But this factor is impacting all businesses. It's not a GAW only effect. And employment costs are still a much smaller proportion of GAW's costs than say supermarkets, restaurants, airlines, etc, etc. They start with the benefit of an exceptional margin position with which to help absorb this cost

4. Share price - I just can't get too hung up on this. The share price has gone up significantly because the business has outperformed significantly and its unique characteristics have arguably finally been discovered by the market. Take any successful company which has compounded over the years and at some point you could say the price was X and it's now 3X. To which I would say and what's your point if that increase is merited. As an aside I do wonder with GAW whether there is an added psychological element at play with the high nominal share price per unit i.e. £95 per share sounds more 'serious' in some way than 95p. Would a stock split open them up to more investors who prefer to buy 100 shares at X rather than 10 shares at 10X. Obviously I have no proof of this. But they are definitely an outlier in their nominal share price versus most other listed companies

5. Shareholder Engagement - I'm not unsympathetic here. Yes, it could be better. But then there are countless examples of companies that have great IR departments, glossy presentations and are still total dogs. I would much rather have the converse. Management focused 100% on delivering value added rather than sucking up to the analyst community. In the end the numbers will speak for themselves

I still stand by my earlier post. On financial metrics this is an absolutely cracking business. If you believe that automation will continue to lead to increased leisure time, as hours worked continues to fall, as flexible working continues to rise, etc, etc, and as unique content has ever increasing value in an ever globalising world then GAW is a genuinely unique franchise, at least on the LSE. In a world of insane unicorn valuations, jam tomorrow stocks you can have a piece of this 'real' unicorn for 25x PE. I will put my neck on the line and say that in 10 years time when a lot of today's speculative Cr*p has long fallen back to earth today's entry price for GAW will be seen as an incredible bargain. Cheers

portugull

I just wanted to add to yesterdays debate on Withholding Tax on US Stocks.

I bought Somero Enterprises Inc (LON:SOM) yesterday for my SIPP Account with HL having completed Form W-8BEN.

Today HL confirmed to me by secure message that as a result Withholding Tax would be reduced to NIL.

Thank you to the subscribers who brought this to my attention as I had in fact forgotten that on US Stocks you have to remember to buy in your SIPP assuming of course you have one.

This is another example of the benefits of Stockopedia due to the knowledge and wisdom of so many subscribers.

BnB

In a world of insane unicorn valuations, jam tomorrow stocks you can have a piece of this 'real' unicorn for 25x PE. I will put my neck on the line and say that in 10 years time when a lot of today's speculative Cr*p has long fallen back to earth today's entry price for GAW will be seen as an incredible bargain

Games Workshop (LON:GAW) is a good company which has performed extremely well historically, but its prospective revenue and eps growth at less than 10% is bog standard for most S&P500 members available on the usually pricier US market at a PER 10% lower. It’s fairly priced for the growth and a little bit better priced for the margins but it doesn’t have the operating leverage of software and data companies on richer multiples. A good company (and maybe a good investment) it is - but a bargain? Not any more.

JohnEustace

Re Hostmore (LON:MORE) I agree with Zipmanpeter. Confident management who are doing a good job don't need so much to hide behind the commercially sensitive excuse. Whenever I see that I tend to think it's management that is sensitive about their performance.

Howard Adams

Hi Phil117 (again)

Many thanks for a comprehensive and thoughtful response about Games Workshop (LON:GAW) . I do concur with you that I prefer Games Workshop (LON:GAW) s honesty over glossy PR speak. But too much brevity at their current stage of development might just be beginning to be an impairment. Obviously I can only speculate about this.

I think our respective views/posts have offered a reflective perspective of Games Workshop (LON:GAW) at the moment, and BnB has chipped in usefully with a post. Whereby that post concludes with this line which I think quite pertinent ....

'A good company (and maybe a good investment) it is - but a bargain? Not any more.'

I hope Games Workshop (LON:GAW) have a good Christmas selling season and with todays speculation about further Covid restrictions (Plan B, and now PLan B+ !!!!), then their sales could be strong and thus catalyse renewed interest from investors. I await their half yearly report 11th Jan with interest.

Many thanks for your posts/interactions.

Regards

Howard

GTrader

...and if I was running the accounts, that net realisable value might be at cost or lower (firesale) not at retail sale price. So every time I sell £1 of stock on book for £2 retail sale price I generate £2 of cash. £1 is recycled back into stock and £1 margin. If you value retail business stock as firesale, most would be uninvestable other than the likes of SCS who is groaning with cash and suppressing ROE at the expense of investors.

Westway001

I thought the headline of the news Brief for Hargreaves Services (LON:HSP) this morning (screen capped below) was really disingenuous, given the content of the trading update which started as follows:

"Whilst, as expected, Revenue will be lower than that which was reported for
the six months ended 30 November 2020, due to the disposal of coal trading
activities in December 2020, Profit before Tax ("PBT") will be higher. This
improvement in PBT compared to the previous period is reflected across each of
the three business units."

ACounsell

Surprised to see Solid State (LON:SOLI) price down close to 25% in last 3 weeks (I hold). I know Jack said at most recent trading update that price was probably up with events and there maybe short term issues re global semiconductor supply chains (that one again!). However, October 22 trading update and yesterdays's H1 interims indicated that managements's view on full year profitability were intact. Free research from House analyst, Edison, also seemed positive with 2022 H2 anticipated performance possibly ahead of expectations. Despite this general positivity the share price has reacted as though there was a medium profit warning. Be interested to hear what Jack and/or Paul think about Solid State (LON:SOLI) following the interim announcement.

Lord Gnome

A word of warning about W8-BEN declarations - they do expire.

I think from memory they have a three year life (please check) and need to be renewed periodically. I use ii and they did not tell me when my W8-BEN was out of date. The first I got to know of it was when my dividend arrived and it was rather less than I had expected.

yiannos1

Nice one!!!!!

This is what investing is all about!!!

I do not look at the accounts, I do not compare the valuation with its peers , etc , etc , etc . I just buy or sell simply because I like or I hate the product.

It’s like trying Marmite and then going short on Unilever.

davidjhill

It's all on tiny volume. The stock is illiquid so you've got a few retail investors selling post results, that's all. They probably bought anticipating an uplift a few weeks ahead of results and sell out after.

For me Solid State (LON:SOLI) is a good, steady medium/term business capable of generating 10-15% returns each year. Extremely well run, lots of management skin in the game and good at acquisitions. Management believe they can double over the medium term and I wouldn't bet against them having met the CEO previously (though not for a few years now).

Its not a fancy stock, management is conservative but it is illiquid so not unreasonable to expect 25% moves up and down as being par for the course.

Am expecting circa 60p eps so sitting on 15* now with a strong balance sheet and cash generative. Roughly on par with peers but probably merits a bit of a premium for me as it is higher quality than most.

Cricketfan

Hostmore (LON:MORE) (I hold, for the moment anyway)

Most recent Trip Advisor reports on the Guildford branch are mostly and sadly v. poor. Long waits, cold food, cold restaurant and dirty lavatories etc. Seems to have been ok until recently.
Look like the new management have an issue to resolve and need to do it quickly if reputation is not to be ruined in the important pre Christmas spend period.

Suita5

Re £quiz, Agree with rmilll and also what if the inventory doesn't sell. V easy in fashion esp with Boris winding Xmas work events down....

Lord Gnome the W8-BEN Forms do last 3 years but I noticed today that having bought Somero Enterprises Inc (LON:SOM) yesterday and having signed the W8-BEN Form which is valid to 31/12/24 HL updated my other US Stock Newmont to 31/12/24.

I rarely hold stocks more than 3 years.

Boon

Indeed! Have to watch out as there's no heads-up on stocko stock pages (that I know of) that W-8 is required and the hassle of withholding taxes.

Another share like this is Spectra Systems (LON:SPSY)

Yes, but only if the stock is now a write-off. It does happen, I agree, but not if a company is trading well and prudently.

An example of this situation I would point to is Pittards (LON:PTD)

At first glance they have a strong balance sheet, with lots of inventory (£13-15m if I remember correctly, last accounts?)

But the management have publicly stated that much of this inventory is leather they cannot shift or use for their products - they're trying to shift - and they also haven't taken a big provision against it. In theory it is worth something, maybe to the right buyer, but one now has to use a better estimate than what is publicly stated on the balance sheet, for this inventory.

Paul Scott

Hi Suita5,

What the auditors required me to to, when I was CFO of a similar business to QUIZ, was that inventories have to be valued at the lower of cost and net realisable value. That's on a line by line basis.

Therefore, the risk of inventories not selling has to be provided for in stock provisions.

Hope that helps.

Regards, Paul.

nicobos

9th Dec '21

Hostmore (LON:MORE) Agreed - seems strange not to publish LFLs on a regular basis.

I previously backed the sectors top two fast-casual brands imho (Wagas and Nandos) and tracking of LFLs is clearly a key KPI for the management team. Especially with roll-outs where you need to disaggregate LFL growth of the core estate, vs sites not yet mature and newly opened sites.

I don't buy into the 'commercial sensitivity' argument as most of the large brands feed their data into the "Peach tracker" which aggregates LFL data across the industry to show current trends https://www.coffercorporate.co...

They would always provide the LFL data of peers back to the businesses that contributed to the tracker as a way of 'keeping score' for management teams and Private Equity.

It's how I know that Wagamama had phenomenal LFLs (~+10%) for 3 years running pre-Covid vs competitors where LFLs were barely increasing above inflation (and so just offsetting increased cost).

LFLs data is increasingly important in the current environment where both wage, energy and food inflation means that if you are not increasing LFLs in mature sites (via volume ie better operational gearing and efficiency against fixed costs or price increases), you are effectively becoming less profitable over time!

Small Cap Value Report (Weds 8 Dec 2021) - QUIZ, MORE, EQLS, DWHT

Unlock the rest of this article with a 14 day trial

About the Author

Paul Scott

50 comments

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

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