Stockopedia StockSlam - July 2019

Last week we got a great crowd of retail (and professional) investors down to the Holborn WeWork to pitch their best investment ideas. It was a night of good fun, tasty pizzas, and great ideas.

If you’ve never been to one of our StockSlams, they are worth checking out. Retail investing can be a rather solitary pursuit, so these events are a great way to meet and swap stories with fellow enthusiasts.

We recorded the whole thing and have transcribed it below. Hopefully this gives you an insight into what to expect if you’d like to make it to the next one. Either way, reading through these pitches is sure to bring a couple of new investment opportunities to your attention.

Thanks to Damian Cannon for hosting the event and to all the speakers and listeners!

Topps Tiles (TPT)

When I’m looking at an investment for the first time I almost always start by looking at the Stockopedia StockReport. Here we have Topps Tiles, a retailer that is probably familiar to most of you. Now high street retailers are in a bad place, and have been for some time, but I think that there will be winners and losers. Topps Tiles is no exception and you can see here that earnings have been falling for almost 5 years now. However I think that there is room for some optimism at last.

For a start analyst forecasts point to a 25% improvement in earnings this year with further growth in 2020. Given a P/E ratio of around 10 and a dividend yield above 5% this suggests that we’re getting some cheap growth here. The business also has some reasonable quality metrics with ROCE above 20% although including lease obligations does bring this down to around 11%.

So what’s changed with the business? Well Topps has always sold into the retail and trade markets with sales roughly equally split between the two. Recently management have expanded into the commercial market on the back of an acquisition which opens up a whole new line of sales. In addition trade sales are increasing while the store estate is being carefully managed to optimise their retail exposure. With the average unexpired lease term coming in at around 4 years they are in a good position to close loss-making shops.

Then there’s the recent Q3 update where like-for-like sales were reported to be up an excellent 3.8%. This follows a recent trend of like-for-like numbers improving although there is some volatility in these numbers. In essence I think that Topps Tiles is just unloved by investors and that it’s going to be one of the retail survivors.

Q1) When you’re referring to growth, are you referring to the broker consensus trend?

No I’m looking at their trading updates.

Q2) Why would you buy the share when the price is falling?

I’m not a technical trader, I guess, so that’s less of an issue for me. To my mind, there’s a sort of base that’s formed at this 65p level that supports the current share price.

Q3) What do you think about the gearing?

If you look at the forecasts. Yes, there’s a reasonable level of net debt and the gearing is quite high but the trend in net debt is falling. It comes down from cash flow quite strongly.

Q4) Do you think UK retail is recovering?

Well, I think it’s too soon to say that it’s reached the bottom in the retail market, but there’s definitely been winners and losers. It seems that Topps Tiles has been pretty successful in navigating these issues. It might be better to wait until after Brexit - uncertainty is set to continue until that point - but I certainly see Topps Tiles as one of the winners

Q5) Do they import their tiles or do they come from the UK, because then currency becomes a big issue?

That’s a good question, I’ll have to get back to you on that.

Q6) One thing to watch out for on the net debt is the impact of IFRS 16.

Yes, if they have a lot of operating leases, which Topps Tiles has, then this will be reflected on the balance sheet. That’s a great point.

Coro Energy (CORO)

So, I’m going to talk about Coro Energy and as Damian said, the StockRank numbers make it look distinctly unattractive, the bankruptcy risk makes it look even more unattractive but nevertheless, I’m presenting it tonight and I hope you’ll see why.

So it’s a small oil and gas company, it started up in Italy and then it had a change of management last year and that’s the key to this story. So the change was that the new CEO James Menzies joined. The reason he’s relevant is that he’s operated the same type of strategy at another London quoted company called Salamander Energy, and that essentially was oil and gas assets that had been proven, then developing them and either selling them or producing from them. In other words, they’re not taking the greenfield risk.

So far they have bought two assets and I am going to talk about the metrics on one just to illustrate the attractions, really. They’re both in Indonesia. Their Duyung project represents a 40bn cubic feet interest. The normal transaction metrics are thermal units, so per BTU they pay 34 cents, the development costs will be 90 cents and the operating costs will be about 125 cents, so altogether that’s $2.50 per BTU.

The asset has a pipeline running next door to it which goes to Singapore, so the attraction is they’ll get Singapore pricing. Now that’s not just putative, they’ve actually had negotiations with the pipeline owner and buyers in Singapore. The price in Singapore is 8-11$ per BTU so you can see there’s a big fat margin there.

As a measure of confidence in the company, they thought about taking over another listed oil and gas company earlier this year (bear in mind they’re a £20m company) and they went to Citibank who gave them a $400m committed line of financing. As you know, a bank will not provide that level of financing without a lot of due diligence and trust.

That’s about it - any questions?

Q1) Do you own it? When did you buy it?

Yes I own it, I have bought on multiple occasions over the past six months.

Q2) In terms of the development assets, how much money are they going to need. Are they going to do a share placing?

So what they did to finance it, unusually for a £20m company - they have two institutional investors, Lombard Odier and CIP - what they did was they issued Eurobonds for 20m euros with a 5% coupon and some equity kicker, and they’re going to do some drilling over the next few months. So to get into the deal, they paid a small amount upfront - I think it’s about 5m and another 10m of development drilling - so that comes out of that Eurobond. So the EV, which is more relevant than market cap, would be more like £40m.

Argentex (AGFX)

Hi, so I’m talking about Argentex today, which probably many of you have never heard of because it only IPOd two weeks ago. So, there’s another company called Alpha FX which is very similar. What they do is FX trading, so spot and forward is most of it and more recently options. They match the trades directly with institutions and they charge their clients about 20 basis points on top, so that’s how they make money. They’re dealing with companies and high net worth individuals so they have to put some margin with their institutional banks.

They raised about £12m net from the IPO and pretty much all of that is going towards increased collateral with their banks so they can handle larger volumes, and they’re also going to hire more sales staff. About double in the next two years. As sales staff mature, the amount of revenue they bring in increases dramatically. They give an example: the average was £42,000 in year one and £1.8m in year five.

So, barriers to entry: there’s a lot of compliance and licensing requirements and there’s a lot of onerous procedures in terms of trying to get their relationships with banks. The risks are client credit risk. Their clients have to put up some margin which Argentex occasionally has to chase up.

The numbers are: year-end March 2019 the revenue was £21.9m up 65%, operating profit of £11.2m was up 80%, they are on a historic PE of 14. Compare with Alpha FX which is on an historic PE of 32 and it’s a more mature business. So either Argentex is undervalued or Alpha FX is overvalued or both.

To summarise, very high revenue and profit growth, high margins (about 40%) and they are using IPO proceeds for growth. I am talking my book because this is my biggest position.

Q1) What kind of structured products do they do then?

They just do straight FX, which is half spot, half forward contracts and a tiny percent is options which was introduced recently. The blended average margin is about 20 basis points but because the volumes are so big they make a lot of money.

Q2) Strikes me as a bit of a crowded market, there’s quite a lot of FX players out there. What’s the USP of Argentex? Is it just on the margins that they’re trading?

That’s a good question - it is a competitive market and there is no moat as such. The banks, which traditionally have had 85% market share, are being eroded, so a lot of these new upstarts are undercutting the banks. So it’s a huge market to go for. They have 0.05% market share, so it’s a huge runway. There is no USP as such. They say service but I don’t buy it.

AA (AA.)

I’m going to talk about AA, so I’ll catch any falling knives you care to throw. I do own it. I bought it first in January-February 2018 when it had its strategic review and lost some money on that obviously. Then I bought a full position after talking to management at its AGM back in May, I think.

This EPS line tells you why the shares don’t look great, and that’s because there is a lot of things that get in the way between EBITDA and EPS. Debt payments, pension fund management, and also their internal investments after underinvesting for a number of years.

We’ve got £2.7bn debt, a £300m market cap company, so EV £3bn. EBITDA £350m. Insane private equity spin out, and that’s what you get. I’ll give you some more negatives, I should do that. Woodford had a big holding, about 15-20% now down to 7% but some of that’s at St. James. The CFO recently departed, but I suspect that was partly ‘punted’ and that’s due to the way it’s been managed. Yields are rising. It’s also the most shorted stock in the UK.

So, going forwards, it’s still got a strong brand and people still use the service. The pension situation is being handled better, debt service is about £130m on an ongoing basis, debt has been refinanced out to 2022. They are investing in growth, which is the right thing to do, rather than the last management which was just trying to take cash out of it.

I’m not going to tell you this is a safe stock, but I would look forward and say: £1bn revenue today, £3bn of EV. If they can grow their top line, the leverage through to their bottom line is pretty massive. I’ll give you seven years and it’s £5bn enterprise value, they pay back £1bn debt. That’s £1.7bn debt, £3.3bn equity and you’ve got ten times return. And if it’s valued like Diageo, which is very similar in many respects, you get 20x return because that’s on 7x EV to sales.

Q1) Do you know what rate on the pound the bonds are trading at?

So the rate did peak at 5.5%. It’s come down now to c4%. You have to take a macro view about debt.

Q2) Do you know the average maturity of the debt?

Yeah, so the first refinance is 2022, the biggest refinance is close to £1bn. They’ve had a lot of exceptional costs recently and a lot of those are debt refinance costs, a lot of which are non-cash. You’ve got to look at the lines in detail. I think it’s sustainable, but silly. It’s a slow debt work out with top-line growth.

Q3. Do you know what the credit rating is, out of interest? Is it investment grade?

It’s still investment grade.

Q4. What about electric cars? They seem more reliable, less prone to breaking down.

Electric cars, whenever they come - maybe it’s five years, maybe ten - but you’ll still need data infrastructure and AA have been investing in data a lot.

Petrofac (PFC)

Good evening all, I’m here to talk about a company called Petrofac.

Petrofac is one of 14 companies on the London Stock Exchange that met my initial criteria. So pretty rigorous screening.

It was founded in 1981 in Texas and has been listed since 2005. It currently resides in the FTSE 250 and is a mid-cap stock. The sector it’s in is oil services and equipment. It operates worldwide, providing engineering and construction services to the oil and gas production industry. Its three operating segments are engineering and construction (70% of revenues), engineering and production services (25% of revenues) and integrated energy services (4.8%).

There are several ongoing large-scale projects, some of which have been completed and some of which are yet to be completed and thus generating future revenues. There have been several new contracts that have been awarded in the UK, Oman, the UAE, and Iraq.

Why do I think it is a worthwhile investment? Well, I use 10-year averages, as opposed to some of the data that Stockopedia uses and, for me, the 10-year average return on capital employed is leading in its sector. Free cash flow yield as well is another metric I like to use and is also leading in its sector.

For me, this demonstrates the solid history of generating shareholder wealth - and potentially evidence of a competitive advantage as well. So it’s grown its free cash flow reserves over 10 years at 6.6% annualised, which is great. The competitive advantage I believe it has is that it is able to produce high margins due to low capital expenditure and repayment of debt.

Management has been active in trying to reduce its debt levels by reducing its capital expenditure and improving its margins too. I use my own discount cash flow model, and I value Petrofac at a 7% discount, so, based on future expectations - obviously I know that’s very individual - I estimate a 7% discount.

Risks associated are that it has some debt, but the debt is covered by free cash flows 2.7 times and it has a fixed charge coverage of 6.6 times. In February this year we had a former employee of a subsidiary admitting to bribery offences. This has had an impact on share price, which is great for people like me because it means that I can buy at a discount, however some people get a bit nervous about that. Other risks are mostly market orientated, so being in the oil industry it is exposed to the price of a barrel of oil. The US-China trade war could impact on this and hit the bottom line of Petrofac, so something to be aware of.

With management as well, they did mention in their latest annual report that they are committed to a capital light business model and a focus on cash management. Overall, very candid and I like what I see.

RM (RM.)

Hello, I’m going to talk today about RM, formerly known as Research Machines. So if you’re as old as I am and you were at school in the 80s, they were one of the first computers you would’ve seen at school. So I saw this at my school. They used to supply computers to schools.

So, what are they doing? They supply technology to education, notably schools. They used to be very much more UK-focused but now switching to be more internationally focused, which I think is a very big plus point. Market cap is around £200m, so it’s a small cap at a price of around 250p. It has done relatively well of late and indeed, if you’re interested, there were trading results released today which I thought were fairly decent but I won’t go into it. There are lots of pluses and minuses and really three minutes could easily turn into three hours.

So, why should you look at this? Three segments. There is a legacy segment. What they used to do and they still do, which is called RM Resources, which is basically supply technology hardware like computers and other supplies, some of which they make and some of which they sell third party. It is one of their bigger businesses and it is lower margin. It is not growing - in fact it is shrinking in the UK. There is an offset to this in that this resource business is going more international, where there is a lot of growth.

Secondly, you have RM Education. Now they’re more of a software and services business which is higher margin both in the UK and abroad. And thirdly, you have RM Results, and this is the bit I really like. This is automated marketing of exams and if you’ve ever looked at a stack of exams and thought: ‘I pity the poor person that has to sit there and mark these things’, well, these guys have an automated solution. So they’ll mark it via computer with a more than 97% accuracy - so really very accurate - which is a huge productivity gain because it means that nobody has to do it all by hand. There they are seeing big take up not only in the UK but internationally.

So the story of this company is a transformation away from just supplying hardware to schools, which is pretty low margin business, to high margin services and software, not only in the UK where the budget is a little more constrained in terms of education but going international and here, you’re really surfing the reputation of the UK as a prime supplier of education services worldwide. One of the few things the UK is actually very good at, I think, is education. Particularly things like exams like A-Levels and GCSEs. You would not believe how well that sells abroad, and these guys ride off the back of that.

So, it’s got growth, it’s got very high profitability, return on capital, it’s cheap - less than ten times PE - and if you look at all the StockRanks you will see it scores a 97 and qualifies for six Guru Screens, so Stockopedia loves this stock. And it’s going up, by the way. So if you like value and momentum, this is your stock. Thank you.

Q1) What do you think is the probability of a takeover?

Who knows? I would say quite high because it’s quite an unusual stock and as I said, it’s in technology. Private equity have a huge amount of money these days to invest - $2.44tn of cash to invest, uninvested, globally. Now the number one sector private equity like at the moment is Technology. So they are looking for anything that is in technology and not expensive. And the main problem for private equity now is that the deals are too expensive. So I think actually, you know, if I was to run the rule over this, and I was to do a leveraged buyout and maybe finance it 50% equity and 50% debt, you could make some juicy returns out of this because the profitability of the company is already pretty high, it has got a runway to growth internationally, and it is cheap. So it ticks a lot of boxes for me.

Q2) Do you know the revenue split?

It’s still mostly UK but most of the growth is international. There have also been acquisitions to augment organic growth, so for instance they have just made an acquisition in Australia of a software-as-a-services business on the exam results front. So they are going more international and it’s quite clear that that is the focus for the company, so the idea for them is to lessen their reliance on the UK government, pivot to international, and leverage the strong UK reputation for education.

Q3) Just looking at these figures, until 2016 the company had net cash of £40m. It’s now net debt. It seems to have been profitable throughout. Where did all that cash go?

Acquisitions to get the company away from just providing boxes to schools and to become more international. And secondly, it has got a pension deficit I have to admit and they have been having to use some of that cash flow every year to pay down that debt. It is debt, let’s just call it debt. But they have been overpaying to reduce that. But I think the big one is really the acquisitions.

Q4) In your opinion, why is it cheap? Can you talk a little bit about the shareholder base as well?

The shareholder base is quite diverse, it’s pretty institutional. I don’t have a lot to say about it. Why is it cheap? Because of its history. Because it has been a box shifter and a box shifter which has been very exposed to the vagaries of UK government policy. We have had nearly ten years of austerity, education budgets have not escaped that austerity and that has put a lot of pressure on the UK side of the business. Secondly, it’s a transformation story and that story still has yet to be fully believed. And also with the acquisition strategy the vote is still out whether or not the acquisitions have been well bedded in, whether they can cut costs like they say they will and really integrate the acquisitions.

As I said, if you look at the profitability, the cash flow generation has been very steady, profitability has been going on the up, so for me the transformation away from low-margin business to much higher margin software and service business and this automated marking of exam results is really the way to go and I think, in time, that should lead to a rerating as long as they don’t hit any bumps in the road.

Q4) Sales growth doesn’t look too exciting for a growth stock?

For this coming year, it is true that they are still bedding down the acquisitions and the problem is the transformation means that sales are going down for one business as they are growing in the other, so it’s a bit of an offset, but what you’ll notice is that in all three divisions profitability is going up. But that’s why the earnings growth doesn’t look so great, because you are exiting some businesses they just don’t want to be in anymore and that’s putting a bit of a drag on growth in the short term.

Q5) You say it’s a growth stock but it has a PEG of 4. Why?

The problem with the PEG ratio is that it is very sensitive to one year of growth and I think you need to take a longer view if you want to get a sense of how expensive the growth is relative to the valuation. I think the growth will be better in the future.

Q6) You’re preaching to the converted here because it is one of my favourite stocks, but I assume that you’re a holder?

Yes, I am a holder. Along with Damian and yourself I am a loyal holder and I own a reasonable amount, so I am talking my own book 100%.

Enteq Upstream (NTQ)

Hello, I’m going to talk about a micro-cap stock that I imagine pretty much no-one else has ever heard of. I’d better tell you what it is that they do, to begin with. So the stock is Enteq Upstream. They make specialised drilling kits. They make, rent and sell various kits. They’re essential pieces of equipment for directional drilling which, in other words, is used for shale wells.

This is a recovery / growth play. If we look at the revenue and profits, we see they’ve been through some dreadful times because as some people are probably aware when the oil price collapsed, capital expenditure by drilling companies also collapsed. What you will also see is that management have been very prudent and they have maintained a net cash position throughout, which they still have, so it’s a rock solid balance sheet.

I bought back into this stock last year when it became clear that they were getting past that crisis, had successfully navigated it, and were starting to recover quite nicely. Annual results show they are still making losses, but if we look at half-on-half results we can see that they did actually make a profit in the second half of the last financial year. They’ve been recovering steadily and all the trading statements have been positive.

It’s pretty operationally geared so even if it sits on quite a high rating based on forecasts, profits should increase significantly and the rating should come down quite rapidly, which is why I think it is an interesting stock that I am invested in.

Q1) Who are the clients and where are they geographically?

Primarily in the US and the clients are independent drillers, so they will either sell them kits or rent them. Some strong features of the business are that they have quite a few patents over what they have, and they’re developing new products as well, so I’m expecting some secular growth to kick in alongside the cyclical recovery.

And is this useful for horizontal fracking in Texas and that sort of thing?

Yes, exactly. This was the primary reason for the decline. Also, whilst the US is recovering quite nicely, international clients are recovering much more slowly, so it is still in an earlier phase of recovery for their international clients.

And who are their biggest competitors?

Well they don’t sell to the majors because the majors develop their own kits, people like Schlumberger and Baker Hughes. They don’t have many competitors that sell to independents, they’re fairly unique in that regard, so it’s a very niche sort of business, which again, I like.

Q2) Are they selling kit? And are they selling services? If they’re selling services what’s the kind of timeframe they contract over?

It’s purely the kit, but the kit involves software as well. A nifty part of the business is the software that goes with the kit.

Q3) Thanks, I think the factory is in Texas isn’t it?

Yes, in Houston, but their headquarters are in Amersham. Though their operations are based in Texas, the founders, who have a lot of previous experience in the industry, were British, so it’s a sort of British run company with its operations focused primarily in the US.

Q4) One of the things that worries me - and I have looked at Enteq before - is what do the Brits actually do? They are paying for a quote on the London Stock Exchange.

There’s two things they do, they do the design for the products, which is kind of fundamental, and a part of their original strategy was to acquire other companies but the collapse put a stop to that, but there’s still developing new products. There is a level of not M&A activity but partnering that is driven out of the Amersham office.

Character Group (CCT)

Hello, I’m Dee O’Hare and I’m a full-time private investor. There’s five things I look for in a company: 20% growth in one year, 50% share price movement over two or three years, limited downside, a simple story and something confirmed by the chart pattern. I’ve previously presented at StockSlams on IAG at 560p, Mission Marketing at 56p and Sylvania Petroleum at 22p.

So I want to talk about Character Group, it’s one of my top five holdings. The facts about Character Group: at 580p it has a market values it at £124m, a PE of around about 12, economic value of around about 7, a yield of coming up to 5% next year. StockRank: 99 in Quality, so it’s verified by Stockopedia as far as Quality goes. Value: 74 - not particularly cheap, but not particularly expensive. Momentum of 78, which gives it hope that maybe further upside can happen in the share price. Overall, a StockRank of 97 and a Super Stock.

The share price is at an all-time high so to my mind that makes it worthy of further analysis.

What do they do? They are the UK’s largest independent toy business. They design, they manufacture and they distribute brands that they have under exclusive license, so Peppa Pig, Teletubbies, Stretch and Scooby Doo, and then they partner exclusively to distribute some products in the UK for others.

They are the market leader in pre-school, which is a growth market and they’re actively looking to expand overseas. They recently took a 55% stake in a Nordic distributor, which has got the rights for Fortnite distribution around Europe.

I actually don’t see them as a toy company, I see them as an asset manager - they have a portfolio of brands, and that’s what their job is.

Some more facts. Earnings per share have gone over the last 10 years from 10p to 50p - that’s 26% a year. The dividend over the last 10 years is growth of 20% a year. Net assets over 20 years goes up from £2m to £30m - and those, by the way, are the dull figures. Over the last six years, the shares in issue have gone from 26.6m to 21.4m and debt has gone from £6m to cash of £20m. So in six years, they have paid £26m of dividend, increased cash to £26m and they have bought 3m of shares. That’s effectively £10m of cash flow per year, while still providing working capital to double the size of the business - and that’s only in the last six years.

The chart is at an all-time high. There was a big resistance for years at 520p and the shares are now clearly above that. The management holds 20% of the shares. So looking back to my summary, I can see there’s upside coming from earnings growth and ratings growth, and the downside is limited because the company is buying back shares. They have authority to buy back 15% of shares and they’re buying back regularly, so there’s my recommendation.

Q1) Peppa Pig. Obviously that’s the big driver. Do you know what percent of sales just that character is? Because I’m guessing that’s the number one risk, if something bad ever happens to Peppa Pig.

That’s why I mentioned the concept of an asset manager. So I don’t know the percentage that Peppa Pig is. Peppa Pig has been around for longer than anyone would’ve ever imagined. Their job is just to find what’s currently on trend. They’re not going to always get it right, but year-on-year they’ve got several brands in the top 10 UK toy products for Christmas. That’s their job, just to get most of it right most of the time. And if you look over 20 years ago, the share price was 60p. This isn’t cyclical - these guys are good at what they do.

But I guess you’re thinking the growth will come from Fortnite as much as anything else, given the popularity of the game?

I think Fortnite enables us to latch onto the story but it doesn’t matter in terms of there are other internet games and other things going on. Their job is just to be the intermediary between what kids are interested in to then provide them with a leisure toy which is the physical thing. So there are lots and lots of brands and they just design and distribute those. So it’s better if it’s not about one brand but a portfolio of brands.

Q2) On the operational cash flow point do you know why the figure goes up to 93p for the current year?

Good question. Toys R’ Us went bust last year and that led to some short term stock problems. They have been able to unwind those stock positions this year. Also, these guys are just good at generating cash.

Q3) Do you know how vulnerable this company is to licenses lapsing?

I don’t know the exact details but they talk about being exclusive and they are the largest in the UK at what they do. They have been doing this for 20 years, so if you are a new program or you have a new product, who are you going to? You’re certainly going to go and talk to Character in terms of getting your stuff to the customer.

Q4) What are the threats to this company?

I think the biggest threat is not necessarily the one you might think of toys or brands or anything like that. They are exposed to foreign exchange to the extent that they buy product in dollars and sell in the UK, so they are exposed to weaker sterling. And then there’s the bit about directors. Most of the directors are late 60s, so where do they go in 10 years’ time? I’ve asked management about this a couple of times and they’re very comfortable that Character is more than just a few people at the top with good contacts.

Q5) After four years it has broken out in the past month or so. Why now? What’s changed?

Why does any share break out? I think people are realising the quality of the company. Earnings have been going up and this is reflected in the share price.

Kenmare Resources (KMR)

Hi, good evening everyone. So I’m conscious it’s quite a tough pitch. It’s a miner. As someone said on the lift on the way here “I don’t do holes in the ground” so I’m conscious it will be a minority interest. But let me tell you why this is, why I’m pitching this to you.

It’s actually thanks to a member of the Stockopedia community whose username is grb. He wrote an article in December last year called “Attempting to replicate success - looking for debt turnaround situations” and he said: “whenever I reflect on it, I’m always disappointed by the lack of coverage on resource stocks here at Stockopedia. I’d love to see some serious coverage of them in the manner of the Small Cap Value Report looking over the figures and analysing their prospects. I’ve always found that mining companies are much easier to understand than software, financial or pharma stocks. Their basic model is so simple.”

So I thought: OK, that’s a good challenge. grb went on to analyse in this article the lifecycle of a mine, and he honed in on the point where the debt that you’ve incurred to install all of the equipment and actually get the mine producing is then paid off and the shares then start to pay a dividend, and he looks also at how the StockRanks behave at that time, so I really recommend that article from December last year. I used his techniques and picked on this company, Kenmare Resources, which actually wasn’t one of those that grb identified but fitted his ideas.

I did buy some as well, so this is not just theoretical. Kenmare has the highest Value Rank of all 158 Metals & Mining stocks and actually the sixth highest value in the whole Stockopedia universe. You can see in the StockReport this whole valuation block is pretty green. PE ratio of less than 5. You’re paying 35p for every £1 of tangible assets, and you can see the F-Score is 9/9. So it’s projected to start paying a dividend next year - 4% or so but well covered.

So cheap shares are often cheap for a reason, of course that’s the case here. It’s a hole in the ground in Mozambique, a titanium minerals mine, so you’ve got loads of risks: single location, commodity prices, politics, even climate change (there was a cyclone in Mozambique earlier), and the bear case - if anything goes wrong, those assets are there producing and you’ve got them for good value.

Seems to me though that you can guard against those risks with a diversified portfolio and a relatively small holding, but as I say you are getting excellent value and titanium is in demand around the world.

My final fact is that Kenmare say that current rates of production they have 100 years’ worth of stock left in that mine, so depletion is not an issue. Thank you.

Q1) Why is it so cheap? Is there something wrong with it? I think there were some corporate governance or management issues a while back.

I don’t think it’s the management, I think it’s that combination of political single country risk and the cyclone that did hit sentiment last year because everyone thought “well, what if they can’t get the product out?” Then that’s it, the cash flow dries up. There was very heavy dilution a couple of years ago, as well. Just worth mentioning as well that they do have some quite heavy capital expenditure going on at the moment, so they do have some execution risk there as well, and management say by 2021 they will have incurred all the capex they need to keep producing at a steady state.

Q2) They went from net debt of £330m in 2005 to now net cash that seems to have been accomplished by an enormous issuance of shares. Do you want to just talk a little bit about the capital structure of the group in terms of debt to equity?

That’s true, and that’s why I came to it through grb’s article that talks about that moment at which net debt is paid off. As I said, it's paid off only partly through free cash flow, you’re quite right, a lot of that was done through shares. Just as my colleague in the lift said “I don’t do holes in the ground,” I find that I don’t do debt. I found for example the AA figures quite worrying. You can see for example the liquidity figures here are well in the safe zone. What enabled the debt reduction doesn’t matter so much to me, what helps me sleep at night is that that’s where we are.

Q3) Talking about free cash flow - what are they going to do with it? Miners are very good at wasting money.

Good point. We’d have to trust them that they’re going to use it for dividends and buybacks. If they use it to open another mine, that would be a sell signal for me.

Q4) Are there any political risks to investing in Mozambique?

I’m sure it’s part of the reason the price is so low. I had a good read of their corporate governance and social responsibility figures. They employ a lot of local people and they invest a lot in education to make sure that it’s not just expatriate managers and a local workforce but genuinely that the company becomes more Mozambican and that there is a genuine sense of identity there.

Q5) How much does management hold as a percentage of the float?

I don’t know. It’s not big.

Q6) What is titanium used for?

Titanium dioxide is the pigment that makes tiles white and opaque and white paint is used as well. They sell all around the world, something like 40 countries.