Two High Quality Tiny Titans: Tandem And MPAC

23rd Sep '20 by Jack Brumby

13 comments 5866 reads

Time marches on and in business, change is the only real constant.

Given that dynamic environment, I think sensible rules of thumb can outlast highly engineered and complicated models. They feel like more robust and fundamental truths to steer by.

For example:

Assumption 1: a strong stock price can indicate improving prospects that are not fully priced in by the market.
Assumption 2: a low price-to-sales ratio indicates a relatively cheap share price (profit margin, business model, and financial health considerations aside).

Pair these two assumptions together and you have a reasonable starting hypothesis that company A is modestly valued with improving or undervalued trading prospects. Maybe you’ll find something to disprove that hypothesis, but it’s a solid place to start.

You’ve also just described James O’Shaughnessy’s Tiny Titans (more or less). This screen regularly beats the market with just a couple of simple and intuitive rules that allow it to recruit a deep field of fast-moving stocks.

Its minimalist central criteria (of price-to-sales < 1x and relative strength 1y of > 0%) does mean that no thought is given to financial health, cash flows, quality of earnings, or scale of opportunity - but it’s easy to add some of these checks in by copying and customising the screen.

pthvuzgbSkhVMGcd8yaS5WtzLEJDNyZAIeZavYQ96hNYwlwwcyU_AYK-fwCyLDekNXBjgZ4frPzVu3nc-3r7cXJoTbDnJtdvNq7mjE8HnLAX9-HKpsLHoMgp2_lG9mcGiJxsLaLo

Below I’ve added two additional criteria: an F-Score of > 5 (for financial health) and an operating cash flow to EPS ratio of at least 0.9 (to show accounting earnings are backed up by cold, hard cash).

I’ve also loosened up the market cap limit to look at bigger stocks on the move.

goLEjJ_Z_cZoeG0m4tCn2jzvukFkPQrSiBa0Rh8L6RW3g3Wld-d60bwucpyIEcs5rN2aeZiXlckDQx13jndiHSWihBvj3Qcuzx1l9Cbl_gMPOg-RHJSd-epNObhtyrMfVrEPsjU8

Here’s the screen. There are many promising candidates here including a couple I have covered before such as Premier Foods, Gear4Music, Computacenter, and Volex.

All of these are exciting companies worth revisiting - but for now I’d like to look at two small caps I haven’t covered before: Tandem and MPAC.

Tandem (LON:TND)

Market cap	Spread	Op CF to EPS	F-Score	Price/sales	Relative strength 1y
£19.4m	779bps	2.9	8	0.5	+157%

(I hold)

I’ll start with Tandem (LON:TND) given it released its half-year results yesterday.

This bike and leisure toy developer and retailer comes with a lot of history (and not all of it good).

…

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Snowbum

23rd Sep '20

Nice read Jack. As an employee in the Pharmaceutical industry, I'd say Haver & Boecker are probably the market leaders in packaging technology. There are fairly high barriers to entry for new companies to the industry so will be interesting to see if Mpac (LON:MPAC) can gain traction. I have also seen Albertina Group with a reasonably strong presence in the sector, unfortunately I think both are private companies.

Most will take up some form of service contract with the suppliers of the machine technology, for Maintenance purposes, so it could generate ongoing revenue if they can get their machines into enough production facilities.

jonno

Hi Jack

Superb commentary on both companies. I recently bought a small holding in MPAC.

To think that I attended a presentation by Tony Steels just after his appointment and while the company was still Molins and switched off, thinking that tobacco machinery was a sinking ship. Oh how I failed to cotton on to the catalyst for change, unlike the Castleford Tiger, who has sizeable holdings in both MPAC and Tandem. Still better late than never as they say.

All the best

Mark Tughan

Hi,

I attended the ?TND investor meeting yesterday and sensed that the aspiration to engage with shareholders was genuine, and yesterday was a definite good start in my view. I was also impressed with management and their vision and commitment. ?TND seems to be in a good place with high demand for their products, if anything the issue seems to be satisfying that demand. The company now has net cash and the dividend is firmly on the rise, with the pension deficit being the the main drag on potentially significant dividend growth. It is not inconceivable that the cash pile could be used to potentially deal with this and then move to raise the dividend thereafter.

Overall I came away with the view that ?TND is very much in a good place right now, and still significantly undervalued, and I topped u p this morning.

Apologies, the ? thing with the ticker is not working (again)?

JohnEustace

It's a £ thing - Tandem (LON:TND)

Jack Brumby

Hi Frederick,

As John says, try "£ + TND" rather than "? + TND" hopefully that works next time.

Thanks for the comments - I did actually try to get an invite to the presentation but it was too late in the day. I've just looked at the presentation uploaded today (here if others are interested).

I'm aware that there have been a couple of false dawns and frustrated holders at Tandem (LON:TND) in the past but it does seem like there's some good momentum there now, with a bit of growth potential in online too. Even if the group doesn't do anything there, hopefully the strong demand and apparent easing in supply constraints is enough to bring home a solid H2

Cheers Forbsy that's interesting - I've just had a quick look & reckon you're right in that they're both private. Not much info on them but good to know the names.

Pharma was just shy of 50% of Mpac (LON:MPAC) revenue when I checked so not insubstantial. Plenty more work to do on the company but I quite like what I see so far

Marcus Deva

Hi Jack,

I was tempted by Tandem (LON:TND) back in June when Graham covered it in the SCVR. It was 288 at the time but decided against a holding due to size of the pension deficit liabilities, supply chain issues and the excessive spread. Looking at the share price now I wish I had invested! Oh dear.

Tortoise investor

26th Sep '20

Thanks for the write up on Mpac (LON:MPAC) Jack (I hold). A couple of further things to consider from my own notes:

- Following the recent interms the broker said 'Looking ahead, H2 has begun well, with un-seasonally strong July bookings, especially in North America & Healthcare, with Food & Beverage not far behind’. Granted, NA sales might be pent-up demand following their slightly later and steeper first COVID wave.

- I wonder if the company could benefit from worries about security of supply following the first wave of COVID. There is pressure, especially in the healthcare industry, to localise supply chains to avoid the disruption we saw in the first wave. To take one example, the Financial Times noted that the UK Government has upped UK made personal protective equipment from about 1% pre pandemic to an expected c.70% later this year.

- Their tax charges against the company seem to have been low in the FY19 results and H1 this year. I noted previously, possibly from a Small Cap Value Report, that they were in receipt of credits/refunds but as they have resumed profitability during 2019 that situation may now reverse. I haven't fully looked at this yet but might be worth examining. Corporate tax in 2019 was about 5% - I am definitely no tax expert but that sounded low to me but that may be my naivety.

The Equity Development broker notes on Mpac (LON:MPAC) are very useful and worth a read. They're a good next step after this article for anyone looking to research this share further.

Djinn1000

27th Oct '20

What makes me feel uncomfortable about MPAC is if I add the EPS reported over 5 years the message I get is that on a normalised basis 5 years EPS is 80.4p, whereas on a reported basis EPS is 31% of this number at 24.8p and FCF generated is negative -19.6p. So the numbers we're all using to calculate our ratios are ignoring some big costs and the business is not generating cash.

I guess most of this is down to the rules on reporting acquisitions. The basis of which has been argued about for as long as I can remember. For me I think acquisition costs are real costs and ought to be written off against profits over a period particularly if MPAC regularly buys other businesses.

Berksbee

27th Nov '20

Excellent write up which I've only just round to responding to. I've held MPAC since 2016 and for me its a prime example of why I don't believe in automatic stop losses - especially with smaller companies. I had a holding @109p and then (with a deep breath) bought again @52p, the rest is history. I've therefore followed the MPAC story for some time.

My penny worth on MPAC is that the specialist packaging market has a high barrier to entry - especially in Pharma. Also packaging is (nearly) never the most expensive part of the product equation but a major indicator of product quality - so it needs to be got right - and thus price is not the driver. This applied to the old Tabaco Business too.

Never appreciated the Pension overhang until I joined Stocko but apart from that I intend to hold for the long-term.

planetx

10th Dec '20

Tandem group analysis has overlooked some very severe supply chain issues facing the cycling industry that make 2021 an intriguing year .

After the tsunami of demand this current year the worlds major bicycle brands have been thumping down such large orders that lead-times have gone through the roof , Shimano is now reportedly over 1 year and SRAM is up to 6 months from 1 month , add one that assembly time , shipping time and 2021 is certainly a year with poor supply .

Whilst for sure sales in the bicycle industry 2021 will be on the basis that they will be able to sell whatever they get .

The further risk is then that presumably if demand softens at back end of 2021 that will be met with the arrival of the high inventory levels as suppliers have finally arranged shipments .

The exception to this would be the brave brands / companies that ordered big at the start of the curve (march / April this year ) or the ones with the muscle to push to the front of the queue , and Tandem are probably neither of those .

It would be very interesting for shareholders to find out if tandem group have orders placed and a supply chain that can supply product to feed the undoubted demand . I would guess this is on the unlikely side .

Thats the summation from an industry perspective so look at the order book and supply chain and if / when products will arrive otherwise there will be nothing to sell .

carmensfella

12th Jul '21

The Tandem CEO will be interviewed live on the show tonight

https://www.stockopedia.com/content/we-are-back-mello-monday-is-tonight-835336/

26th Jul '21

I hold Mpac (LON:MPAC) and Tandem (LON:TND) and recently added to the latter, after watching the presentation by the Jim Shears, CEO on Mello. My initial position in Mpac (LON:MPAC) resulted from watching the interview with Andrew Robinson, aka Castleford Tiger, on PI World quite sometime ago. Tandem was also reviewed by Andrew in the same interview. A big thanks to Andrew and Tamzin for alerting me to the potential of both companies.

Anyway enough of my rambling, the purpose of this post is to alert Stocko members who are not already aware of the announcement today by Mpac (LON:MPAC), which looks interesting given the focus on renewables and battery technology. No financial metrics are disclosed, but nonetheless it does appear to open an exciting and perhaps unthought of avenue for MPAC's technology.

Investegate |Mpac Group PLC Announcements | Mpac Group PLC: Mpac new contract

Two high quality tiny titans: Tandem and MPAC

Tandem (LON:TND)

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Jack Brumby

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