Small Cap Value Report (Weds 9 Sept 2020) - SOM, WIN, QUIZ

9th Sep '20 by Paul Scott

67 comments 8132 reads

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

I wrote yesterday's report in two parts, covering Scs (LON:SCS) (I hold) , Ten Entertainment (LON:TEG) (I hold), and Luceco (LON:LUCE) in the morning. Incidentally, I think all 3 are good investments, worthy of a closer look. I'm particularly interested in looking for companies that are securely financed, and should be able to comfortably beat broker forecasts for 2021, and then resume generous dividend payments. In particular, the broker forecasts for ScS look ridiculously low next to very strong trading reported since re-opening. We know people are spending on revamping their homes, and by my calculations, buying ScS now could lock in a future dividend yield of almost 10%, if former levels of divi payouts resume. And it's loaded up with cash, and no debt. What's not to like?!

I see Headlam (LON:HEAD) in a similar way - very securely financed, with tons of freeholds, and with trading recovering, it should be able to pay out big divis again. Why the market hasn't priced in this yet, I have no idea. Unfortunately, both ScS and HEAD can be difficult to buy, due to lack of liquidity. Hence I've only managed to take small positions so far, and am hoping they drift down again, so I can buy more.

The second part of yesterday's SCVR I wrote in the afternoon, and covered;

Alumasc (LON:ALU) - quite good, but very large pension deficit,
Flowtech Fluidpower (LON:FLO) - primed for an H2 recovery but overall it's not performed well in 7 years as a listed company,
Gaming Realms (LON:GMR) - speculative, but for me the market cap is too high, although I like the growth and impressive clients,
Michelmersh Brick Holdings (LON:MBH) - solid performance in H1 considering the covid impact, looks a decent company, priced about right in my view.

Here's the link for yesterday's full report, to get you started today.

Today's agenda;

Somero Enterprises Inc (LON:SOM) - interim results

Wincanton (LON:WIN) - trading update

Quiz (LON:QUIZ) - Retail store portfolio & trading update

Covid - my latest thoughts

Obviously I'm writing about this from an investment perspective, and not being a…

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QARPY

9th Sep '20

Hi Paul, thanks for the analysis on £WIN. I am not actually interested in the company but i am interested into the pension scheme problem as it is quite a common problem on other companies, but i do not know how to spot it.

How do we "civilians" get to know if a company has a pension problem (and a weak balance sheet as a result of it) from the Stockopedia report and associated info?

Taking Wincanton (LON:WIN) as an example, Quality Rank being 58 does not suggest a terrible balance sheet. The StockRank is 85.

Am i right to say that the pension problem would show up somehow in the StockReport if the pension scheme "asset" were to be accounted for correctly as a liability?

Which brings me to another question: is this legal? How can a liability be counted as an asset?

Personally I think some clarity is needed as to how to spot a pension scheme issue In Stockopedia, if that is possible at all. The only mention of Pension in the StockReport is the following table which I admit shows a big number.

Mine is not a criticism but a genuinely attempt to understand better the problem as it is recurrent in many other companies and I believe can benefit the community.

If this post is inappropriate here, I am happy to post it as standalone discussion or ask Stockopedia for Help.

thanks. R

doublelutz

I completely agree with you Paul. The only thing I would say to anyone not already in at present is that to buy now is a bit of bottom fishing and I would be inclined to wait for a move up above 20p (although I have just done my fishing with Stobart). RBG should show a good move up if only we can get a vaccine.

brads13

From the accounts on Wincanton's website (page 29):

At 31 March 2020, the Group has reported a net IAS 19 surplus of £94.4m

(2019: deficit of £(7.1)m).

The movement from deficit to a significant surplus is primarily due to

market uncertainty as a result of the COVID-19 pandemic and the impact

of the hedging in the Scheme. The valuation of Scheme liabilities is

calculated using a discount rate based on high quality corporate bond

yields while Scheme assets are hedged against movements in gilt yields.

Credit spreads on corporate bonds increased due to market uncertainty

resulting in a reduction in the liabilities which was not matched with

a corresponding fall in assets as at 31 March 2020. The difference is

expected to reverse in the post year end period, as a result of which the

size of the surplus is expected to be significantly reduced.

It looks like the asset arises from hedging that will shortly reverse, and so the asset is likely to disappear soon.

Gromley

An interesting question R_G and I think the short answer is that there is not a simple way to identify any potential pension issues from the StockReport.

The pension surplus or deficit will be on the balance sheet, and you can see it within the Stocko Balance sheet.

under the line "Other Liabilities, Total" you will see the pension deficit - in the case of Wincanton (LON:WIN) who now show a surplus this is shown as a negative liability!

Stocko do not appear to breakout an pension top up payments in the cashflow statement (you will generally find it itemised though in the company's own accounts. (And it does not appear in the P&L as it is not a "cost" as such, just a balance sheet transfer.)

I don't know that the deficit or surplus are available to any of the screens(?)

But even if they were, you won't necessarily be looking at the figures you would like to.

The pension balances that appear in the company accounts are on an IAS19 basis, which whilst being a perfectly valid metric is much more "aggressive" than the calculation used by the trustees when negotiating any top up payments required to make the scheme "safe".

And both metrics can be quite volatile. Last year WIN's pension (IAS19) moved from a £7m deficit to a £94m surplus! Hugely material in terms of their balance sheet. This is the small difference between two very large numbers : Pension obligations of £1.061Bn and pension assets of £1.157Bn.

There is certainly some utility to having a framework to assess the pension issues for companies, but I don't think you can get the necessary figures from Stocko and they would be dependent on their data providers in order to deliver anything new on this.

Probably a case of DIY on this unless others can suggest available resources.

hawkipa

Because the market has never rated it above about 15x for any length of time in recent past. It's average 11.3x f/c earnings since 2016. So conservatively, a few beats should get it above average. The weather related issues that occurred last year also led to suspicion that it was a cover for wider issues, possibly Boom screed demand. I would love to be proven wrong and see 20x in 2021, but I can't see a material re-rating without consistent beats on expectations for a few years. I do believe the market also prices in the weather angle which brings cyclicality too.

I also think they underplay the competition angle. The support that they offer is clearly good but there are other options available to the market available and whilst their quality metrics suggest the products are really good, I don't believe they are yet the undisputed market leader which could drive growth to another level.

rmillaree

Somero Enterprises Inc (LON:SOM)

hawkipa
1, All holders should ensure they elect to receive the divi in GBP paid by BACS to avoid delays and FX charges.

Thanks for your comments hawkipa - do you know if anything needs to be done if i have bought shares via my SIPP?? - i know i have submitted WBEN thingymabob to my sipp provider. Mine is very recent purchase.

Paul Scott

I tend to do a CTRL+F search on all results statements (if I remember), searching for the text "pension". If it comes up 57 times, as it does in WIN last results, then it needs looking into. Although this also flags "suspension", which kills two birds with one stone!

Phuntt

The market reaction on the pub trade today seems like a big overreaction to two pieces of negative news - extension of restrictions to social gatherings of over 6 people in pubs/ slight setback to one of many vaccines. The one worrying part I picked up on was Matt Hancock’s comments this morning saying the restrictions would stay in place for foreseeable future, possibly until Christmas. I have said before if Christmas ends up being a dud, that is massively damaging for the entire pub industry (which totally relies on it) and there will be casualties no matter what mitigation the government throws at the problem.

Disclosure: I shorted J D Wetherspoon (LON:JDW) on Monday - not because I foresaw this movement, just because it seemed overvalued and the COVID issue was rapidly growing. As I say, today’s movement seems like a big market overreaction to what I judge to be a fairly minor restriction for a company like JDW so I’ll start to unwind the position this afternoon.

RayStraw

Depends who your provider is, some people had problems with the payment and the witholding tax. If you are with HL it should not be an issue.

Ref pensions i tend to default to the annual report when doing research (as paul says CTRL+F is your friend here) - you may find that there is significantly more information within the annual report than there is per the final results released by RNS. Only problem is you have to wait for these to be issued after results are issued by RNS by which time you have forgotten what you were going to check (Applicable if you are 50+)
An example would be the Norcross PLC 2020 annual report where there is a treasure trove of info available from page 112. To get more over a flavour of whats going on look at 4 or 5 years swings and roundabouts to see how high and low the numbers go - presumably Wincanton is similar in that regard.

I just re-read this section of your post R-G and realise I hadn't (directly) addressed it.

The "asset" (in the case of surplus) is the net value of the pension scheme assets and the pension scheme liabilities (based on the assumption for future value of the two). So yes it is totally legal! (I *think* I have seen other accounts where they show the asset and the liability to the same net effect.

As I alluded to the balance sheet figures are based on the IAS19 definitions, which are pretty much the most favourable interpretation, but not necessarily wrong.

Probably the key figure to look for is the amount of the pension scheme "top up payments" and the conditions around them, this gives you a view if there is a potential issue and the scale of it.

It is DIY (AFAIK) but I do agree with Paul, "Ctrl+F" can be your best friend when assessing company statements - the stuff you really want to know is probably not in the first few paragraphs. Phil Oakley in fact suggest reading statements from the back to the front, but personally I probably take that too literally and cannot really do it.

davidjhill

Well nothing is impossible but what makes me comfortable is the following....

Fair Value of Assets = £441m

PV of defined obligations = £415m

so the surplus is £25m (I notice I put £35m above which was incorrect)

The effectiveness of the liability matching programme was a key contributor to the performance. So floating rate liabilities have been matched with floating rate assets and same for fixed rate liabilities. As it has been done well this means that the rate changes (falls in this case) have a much less pronounced effect. The discount rate used is presumably already pretty low and offset some of the gains.

So having watched this over the last 3 years it feels to me like the pension scheme is managed well and has withstood large scale reductions in interest rates and still come out the other side with a decent surplus.

Housemartin2

Strangely you never hear this aspect examined or interrogated on the news?

- but that would reduce the frightening narrative. There is not much mileage in such a narrative for the media

Thanks Gromley, Paul, rmillaree and brads13

I use the new site and the Pension Deficit (old site) is now called Total Funded Status which is the inverse of it. Not immediately obvious that this relates to Pension Fund Surplus/deficit but now it is clear. The old site is immediately clear. See below comparison.

Thanks also for pointing out that the real issue is the actual impact of the pension fund on the cashflow i.e. the amount of top-up payments eating into the profits.

I think the pension deficit payment top-up (£17.8m) is included in Stocko cashflow statement under "Other Operating Cash Flow" but it is not itemised.

Pension problem debunked for now. :-) thanks all

I would just send them a message and ensure you state if they do nothing it will be paid by cheque in USD.

OK fair points, but please let me know if you find another company with such pricing power, massive cash generation, and low valuation! Seriously, I mean it!

ed_miller

Most brokers/platforms will arrange for payment in sterling without troubling you about it, but check with them if you want to be sure.

QuaysideCapital

Paul, have you ever thought of doing a weekly podcast for the site (in collaboration with Jack) going over your thoughts and analyses from the prior week? I think it'd be of value to hear you zone in on some of the bits that you personally found more interesting about the reports you went through - and most of the hard work presumably would already be done for it since you'd have already gone through the RNS once before!

I sincerely hope we laugh about my pessimism in times to come & another gem is unearthed in the meantime!

Best wishes & as always thanks for your ongoing high quality output.

peterthegreat

Thanks for the latest COVID commentary Paul. I think it is important to distinguish between opinions and scientific facts and you are absolutely right to want to drill down to the original scientific research . I would reiterate my comments made on this site in February (I think) that the pandemic will almost certainly continue to have a major impact for a long time to come because we will need herd immunity induced either by infections of by an effective vaccine before the current type of problems are reduced, but even then it is very unlikely the virus will be eradicated. I can say this confidently because this is based on known scientific facts relating to respiratory viruses, not my opinions nor any ability as a forecaster. Moving away from hard facts, my opinion is that April 2021 would be the earliest when the impact of the Oxford vaccine (if trials are successful) might be felt. I use the term "almost certainly" above because events could be different if the virus mutates to become less (or more) virulent but this is unlikely because of its low mutation rate. I can't add much from an investment viewpoint but I would note that Oxford BioMedica is certainly going to be kept busy both during and beyond the pandemic. Later this month there should be results from pivotal trials of Regeneron Pharmaceuticals' antibody cocktail drugs to prevent and possibly treat COVID-19. I feel optimistic about these results but I do not think there is sufficient capacity to produce much of the drug for use outside the US for a long time, and I am sure Trump will have something to say about that in the run-up to the election.

Small Cap Value Report (Weds 9 Sept 2020) - SOM, WIN, QUIZ

Covid - my latest thoughts

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Paul Scott

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