Small Cap Value Report (Fri 11 Aug 2023) - ZTF, CML, ZOO, GDWN

11th Aug '23 by Paul Scott

32 comments 7334 reads

Good morning from Paul!

I'll leave it there for today, as there's a webinar at 14:00 from SDI (LON:SDI) that I want to listen to. Thanks for tuning in, and contributing this week, with excellent reader comments! My podcast should be up tomorrow afternoon.

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 £1bn. We avoid the smallest, and most speculative companies, and also avoid a few specialist sectors (e.g. natural resources, pharma/biotech).

A key assumption is that readers DYOR (do your own research), and make your own investment decisions. Reader comments are welcomed - please be civil, rational, and include the company name/ticker, otherwise people won't necessarily know what company you are referring to.

What does our colour-coding mean? Will it guarantee instant, easy riches? Sadly not! Share prices move up or down for many reasons, and can often detach from the company fundamentals. So we're not making any predictions about what share prices will do.

Green (thumbs up) - means in our opinion, a company is well-financed (so low risk of dilution/insolvency), is trading well, and has a reasonably good outlook, with the shares reasonably priced.

Amber - means we don't have a strong view either way, and can see some positives, and some negatives. Often companies like this are good, but expensive.

Red (thumbs down) - means we see significant, or serious problems, so anyone looking at the share needs to be aware of the high risk.

I'm rather pleased there's no news today, as there are plenty of backlog items I want to look at, so I'll focus on that today.

Also if you've spotted anything particularly interesting, then do leave a comment below, with reasons why it's worth a look, and I could be persuaded to cast an eye over it!

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Wimbledonsprinter

11th Aug '23

I had bought into Hargreaves Services (LON:HSP) in October 2022 and sold out last month ahead of the full year figures. I had no specific concerns with the business but felt the shares were no longer super cheap and wanted to rationalise my portfolio and get rid of lower conviction ideas. I guess I had a slight concern too about whether Hargreaves would be able to extract the value from the German subsidiary, given it does not have voting control.

On reading the FY23 report, I did not regret my decision to sell but listening to ImC presentation I have started to doubt. The presentation really focused on reducing the capital the tied up both in Germany and in the land division. With the shares still trading at a considerable discount to book value, there is definitely value to extract. While we might not see serious change in the next 6 months, I definitely got the impression that the group could look very different in the next 2-3 years. CEO Banham definitely implied that the German management would not be an obstacle to passing cash back to Hargreaves.

I was surprised how much thinking seemed to have moved on in the last few months, particularly as the Chair (who I had always assumed was a catalyst for change) has been sidelined the last couple of months due to a health issue.

sheeza

I too hope Paul gets round to Zoo Digital (LON:ZOO) . I've read through their very lengthy market appraisal, and while prospects for H1 2024 look iffy, I accept the optimistic case . The complication of launching content internationally in multiple languages, dubbed and subtitled in the local vernacular must be enormous, Zoo Digital (LON:ZOO) concentrates on the premium end of this market where geographical spread, and attention to local detail are of major importance. They argue that AI translation cannot yet be relied apon to provide good script, though they expect it to have growing impact at the lower end of the market. For the longer term, they see it as an opportunity rather than a threat.

Zoo Digital (LON:ZOO) strengths seem to be in their ability to manage the detail in a wide range of different geographys and languages - I guess this is quite difficult to replicate.

Paul's input on the financial side would complete the picture for me.

Maddox

Hi Paul, ZOO: Yes you're correct, management intend to use these chastened circumstances to both renegotiate the price of the Japanese firm - and only complete the transaction once orders resume. So, as you say a very fortunate timing for the fundraise - albeit they did declare the pause by a major client in the document. They also have a scalable business model so with the substantial cash onboard they should be able to weather the storm . Very much one for the brave at the moment - as who knows how long this strike and streaming market re-set will continue?

peterthegreat

I noticed that FDM (Holdings) is up around 14% today at the time of writing. Does anyone know why? Judging from the financials (including ROCE and lack of debt), this company might be attractive to private equity so, unless there is another explanation, I reckon the share price jump could signal the interest of a bidder. I hold the shares.

Pimlico on Thames

Anyone have views on Tracsis (LON:TRCS) ?

Price has come off 20% since the end of May - half of that in the last 2 weeks.

Last SCVR was Green on 3 April. Considering taking an opening position.

BnB

Judging from the financials (including ROCE and lack of debt), this company might be attractive to private equity

I wondered too about a bid rumour. But the name is cheap for a very successful business model, which is highly likely to rebound operationally in the not too distant future, so perhaps traders had just recognised it as well oversold and fundamentally well supported.

topvest

A bit off-topic, but I'm finding a few opportunities with investment trusts at the moment. Given large discounts to NAV that have appeared in this bear market, quite a few sub-scale trusts (below £100m) are returning cash at NAV, winding-up , changing manager or rolling-over into a new trust. Atlantis Japan Growth Fund (LON:AJG) today (only bought 2 weeks ago on anticipation of wind-up), Investment (THE) (LON:INV) offered a cash exit or move to Chelverton, but took the cash, abrdn Japan Investment Trust (LON:AJIT) going to Nippon Active Value Fund (LON:NAVF) like AJG - Japan small cap value looks a very good place to be, Shires Income (LON:SHRS) merging with Abrdn Smaller Companies Income Trust (LON:ASCI), Asia Dragon Trust (LON:DGN) merging with Abrdn New Dawn Investment Trust (LON:ABD), Aberforth Split Level Income Trust (LON:ASIT) less than a year before wind-up, abrdn Diversified Income and Growth (LON:ADIG) in play and doubled-up today as on a thumping discount with a decision likely to be made in the next few months. As can be seen above its been abrdn trust consolidation, small cap and Japan small cap in the spot light so far. Renewables may be next.

Anyway, anyone else with large investment trust holdings and noticing the step change in numbers of transactions?

Small cap trusts have been particularly impacted so far.

Rusty2

Goodwin (LON:GDWN) the problem I have with it, is the spread, it is wide, just now it was around 7%, but then 20 seconds later, it was only about 2%. Prices are going up down like anything. Crazy market, at least I could get a live quote.

Benson212

For me, it would have been a good QM share had the price moved the other way! As it stands, this share is at risk of being re-categorised as a High Flyer to a Falling Star stock. IMO given the market weakness we are still experiencing, I wouldn't be tempted to catch a falling knife.

I agree with Paul's assessment though, it's a high quality company but these stocks tend to do better when we are in a bull market.

Mark L.

I was wondering about FDM (Holdings) (LON:FDM) too. Has it been tipped in any of today's press by any chance?

It's been on my watchlist forever. Slightly wary of the group because (as Paul mentioned) the management took it private some while back then refloated for a huge profit. Also had unwelcome publicity in The Sunday Times which alleged it provided questionable quality contractor training and then tied its staff to repay said training.

That said, ROCE and dividend yield, cashflow and no debt.

laurie

FDM (Holdings) (LON:FDM)

https://duckduckgo.com/?q=fdm+group+lawsuit&atb=v314-1&ia=web

It is worth reading through some of this before becoming a shareholder.

Bouden54

Yes a lot of consolidation in the IT space right now. GCP Infrastructure Investments (LON:GCP) and GCP Asset Backed Income Fund (LON:GABI) also announced a merger today. Probably a good thing as too many similar, sub scale trusts out there (similar situation with UK REITs).

One of the drivers behind this is apparently the consolidation in the wealth management space - they are the main buyers of ITs, but for liquidity reasons they're no longer interested in anything below £500m and ideally £1bn.

That story is as old as the hills and as broadly applicable as the number of trainer/recruiters. EDS were criticised for the same practices back in the early 1980s. Having run IT consultancies, I know it is a serious problem retaining trainees long enough to get a payback. You don't make money on that investment for a good while. And bear in mind that FDM takes ex- military and raw trainees and turns them into consultants who can earn £400 a day for themselves as an independent contractor within a couple of years. That's a serious leg-up to their circumstances and, it might be argued, ought to come with some recognition due to the organisation that made it happen, ideally in the form of a modicum of loyalty.

Of course, no one wants to be stuck in a job they dislike, but I just thought it worth looking at the other side of the argument.

Yes Helvellyn I agree that watching the Hargreaves presentation is worthwhile, it is not the type of company I normally invest in. Hargreaves does have quite a few moving parts and exposure to certain commodity prices and demand for development land, but this presentation makes it is clear that the company has implemented risk management wherever possible and I detect a degree of "entrepreneurial conservatism". You can't always believe what you are told, but my personal impression is that this and earlier presentations genuinely try to make the company's diverse operations as transparent as possible. I hold the shares.

rhomboid1

Hi Paul..I replied to a comment from Abtan on yesterday’s report so for brevity/& the record I’ve cut and pasted it here;

Goodwin (LON:GDWN) doesn’t screen well *yet*…arguably when it does it’ll be far more expensive & is complicated to model because they’re doing multiple new investments simultaneously to move the business into a significantly bigger & better business…they don’t window dress this in the numbers but do try to explain v clearly in the text what is going on…so the text is vital to the investment case.

as an illustration here is the operating companies P& L over the last few years extracted from the subsidiaries filings at Companies House…key to understanding what is occurring is the significant physical expansion in the foundry (complete next month) that gives it capacity to handle multiple times the current revenue primarily for US & U.K. naval & nuclear contracts at attractive margins. This ramp up is fully underway in the current year & will allow for revenue in the foundry to move dramatically upwards…& the bulk of that output will be machined by sister company Goodwin International.

the order book is primarily for delivery over the next 2 years but the underlying programmes it increasingly represents rolls over decades eg AUKUS…so it’s the tip of the iceberg of the business they see in front of them.

looking at *last* years results in numeric terms alone will miss this, equally margin evolution is yet to be apparent as start up of new casting types is time/cost intensive …& that is ignoring the rest (c50% of profit) of the business…I’d note they’ve set up 2 new Ltd companies, one for AVD Lithex which is ramping up fast now (see the comments in the RNS)..& one for Soluform another new product .

finally EASAT their radar business is tendering for some v large contracts in India & elsewhere …they are confident this will transform the financial performance there as they are now doing full turnkey systems rather than the antennas they’ve historically provided.

it’s my largest position & a company I know well…it’s a special business imho… an unusual vertically integrated globally active family controlled….it reminds me of JCB

re f’casts I only know that they’re on course to be a far bigger higher margin business in the years to come…the direction of travel is utterly clear to see when you look at the details ..not least the development of Duvelco that represents an entirely new patent protected polyimide product that will launch by June 24..the production line is currently being commissioned..with capacity for £40m of high margin sales ..this will likely become their largest profit centre in years to come.

Re price mgt have just spent £8.6m buying shares back at £48…& they know what is going on under the bonnet better than anyone..

scrooge

EMIS (LON:EMIS) Does anybody have ideas about what happens to the interim dividend for 2023? The takeover document provided for an interim dividend if due process was followed and paid before completion date. This of course related to the interim for 2022. But now the 2023 dividend half year has completed and the interim dividend earned; there is surely time for Directors to review the half year Accounts and declare a dividend should they see fit to do so before the October completion date. Does anybody have insights into what could/should occur?

Paul Scott

I agree with your first point, which is pretty much what I said in the main article - as you say -

"Paul would it be unreasonable to value Zotefoams (LON:ZTF) without the MuCell costs for ReZorce? My thinking is that this innovation will fly or die over the next 18 months."

Yes, I agree with your point above.

As regards capex, you said;

You noted the reduction in capex for capacity too. Sounds like a lot of good things in the background as well as some decent numbers already.

I'm not entirely sure what you mean there, but I've just listened to the IMC webinar from ZTF, and the CFO seemed to be saying that H1 capex was unusually low, and would be higher in H2. But I have been mystery shopping Boom Battle Bar (I hold in XPF) in Bou'mth earlier today, so there's a chance I might have misunderstood the capex point re ZTF. Also the tickers are worryingly similar.

Probably best I sign off now, before I cause another international incident.

Best, Paul.

Got to say, my version re cancellation of the share premium account was much better, and more concise than AI, even if I say so myself.

So I agree with ZOO - AI might have some advantages, but at this stage anyway, it's well short of what humans can do in specialised areas.

Also, I don't like how cocky, but also evasive AI sounds, in that chatty model thing.

Incidentally, I've also mystery shopped my local Cosy Club run by Loungers (LON:LGRS) this evening - I recommend it if you want to avoid the chavs in Bournemouth (everywhere else, basically). It would be a good venue for a shares evening actually, maybe we should consider it for south coasters?

Regards, Paul.

Thanks Maddox. Based on what you say, I think the cash support for ZOO if it ditches the Japan acquisition (likely, given the time elapsed), risk:reward could be quite nice. Wouldn't surprise me to get a say 30-50% bounce on news of Hollywood strikes ending. Not sure I'd want to hold ZOO longer term though. But could it be too cheap now? Possibly, your decision. More a trade for a bounce, than a long-term conviction buy, IMO.

13th Aug '23

This weekend's podcast is now live - available on all the main podcast channels, just search for "Paul Scott small caps" and you should find it. Or the web version is here on acast (the site I use for publishing). NO ADVERTS! I can't stand ads in podcasts, so refuse to inflict them on you :-)

This week's mystery share (my best idea, held back for Stocko subscribers only) is: Sanderson Design (LON:SDG) (I hold) - see Tuesday's SCVR here.

Hope you're having a relaxing weekend :-)

Small Cap Value Report (Fri 11 Aug 2023) - ZTF, CML, ZOO, GDWN

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