Small Cap Value Report (Fri 16 Aug 2024) - OSB, CAPD, GHH, GATC

16th Aug by Paul Scott

51 comments 7923 reads

Good morning, it's Paul here!

OK that's me done for the day and the week! Have a lovely weekend :-)

There's hardly any news today, so I'll do some backlog items.

Let's have a reader poll!

Vote for your favourite backlog item (companies which have reported this week) - and I'll cover at least the top two chosen by you collectively -

~~VOTE HERE~~ Poll now closed, thank you for your votes!

Results so far at 09:11 - a very clear preference for me to look at Capital (LON:CAPD). Done.

Update at 12:36 - there's clear appetite for Gooch & Housego (LON:GHH) and Gattaca (LON:GATC) so I'll do shorter sections on both of them next (finish time will be a bit later, est. 2-3pm). Done.

Explanatory notes -

A quick reminder that we don’t recommend any shares. 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 (usually) between £10m and £1bn. We usually avoid the smallest, and most speculative companies, and also avoid a few specialist sectors (e.g. natural resources, pharma/biotech, investment cos). Although if something is newsworthy and interesting, we'll try to comment on it. Please bear in mind the "list of companies reporting" is precisely that - it's not a to do list. We typically cover c.5 companies per day, with a particular emphasis on under/over expectations updates, and we follow the "most viewed" list of readers, so if you're collectively interested in a company, we'll try to cover it. Obviously with the resources available, we can't cover everything! Add you own comments if you see something interesting, and feel free to discuss anything shares-related in the comments.

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…

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Deegee Eff

16th Aug

It went ex div yesterday.

Wimbledonsprinter

You ask how big is the Sukari contract for Capital (LON:CAPD). Note that Sukari has long-standing (c20 years) drilling contracts with Capital and these continue. The only contract that is ending in Q3 2024 is the mining services (mostly earth moving) contract. This was signed in Dec 2020 and was estimated at being between $235-260m (so roughly $60m a year), although this also included the value of an extended drilling contract. But still the termination (Centamin (LON:CEY) decided to take mining services in-house) leaves a major hole in revenues.

However, it should be noted that as far as I understand the brokers’ forecasts never assumed a continuation of the Sukari contract post mid-2024. In addition, Capital feels that it has covered the hole that the Sukari contract leaves with new contracts, particularly Belinga (Gabon) and Nevada (US) and by the growth of its MSALABS business. H1 was disappointing for all 3 of these but Capital is talking them up for H2 and notably broker forecasts for FY25 have been robust. My experience is that Capital has historically been realistic in its guiding of the market.

It is also worth pointing out that reported earnings can give an incorrect impression of earnings votality. This is mainly because Capital has for the last few years run an investment portfolio in junior miners - where mark to market changes are run through the P/L. In 2021 this portfolio performed outstandingly, leading to the blow out 2021 EPS numbers. The investment portfolio is now much smaller, particularly after the sale of PDI on Wednesday. Stripping out the effects of the investment portfolio, the EPS growth over recent years has been pretty impressive and consistent (at least until H1 FY24).

If MSALABS’ growth can be reinvigorated then I would not be surprised to see an IPO/ part sale (to reveal underlying value) maybe in FY25. MSALABS is a less cyclical and capital light business that the equipment hire business.

As you can tell from the above, I like Capital at this price and it is one of my biggest holdings. That being said there are a few amber flags that it are worth pointing out and I did not see Paul mention above:

1). Given Capital’s African centred business model (admittedly being diluted by the Nevada contract and MSALABS), Capital is always likely to trade on a modest valuation.

2). There are a long list of unresolved tax disputes shown in the notes to the annual report across a host of African countries. The company says this is not something it is particularly concerned about. But it is something that the investors might want to get comfort on.

3) Jamie Boyton (the Chair and co-founder) also owns personally some of the shares held in Capital’s investment portfolio. - eg he has to exclude himself from the board’s decision to sell PDI (see RNS on 14 Aug). Investors should get themselves comfortable on the conflicts of interest.

4). As I said, I think long-term performance has been good during the period when Jamie Boyton ran the comapny as Executive Chair (with no CEO). Peter Stokes became CEO a couple of years ago and I think the jury is out on whether performance has been as good in the last couple of years.

5) Marins do seem to be coming under some pressure - for reasons that are explained in the H1 report.

6). My biggest concern has been the poor conversion of earnings into FCF (as opposed to CAPEX). This is a fact Paul did point out. When the cycle turns down, Capital can still show the business can be hugely cash generative (by reducing its rig fleet).

One final minor point is that Capital has been a regular on ImC and interested investors should find a long history of presentations there - which I think shows management has been realistic historically in its guidance. I see from Alex’s post below that Capital will in September start presenting on Yellowstone. Congrats to Yellowstone.

Silver Moon

Rio Tinto (LON:RIO) ? or HSBC Holdings (LON:HSBA) which didn't even flinch today?

BnB

Gattaca (LON:GATC)

To be clear this is a very poorly-performing company whose pretensions of specialist market positioning are laughable. You only have to look at the operating margin - even back in the good days - to understand that this company buys its contracts with paper thin margins and staffs them with numpties. Their operating margin is below 1% where a quality operator would aim for 8%.

But, but, but… I do get Paul’s point about the cash pile. And it seems to me that the cash might be being retained in the business for the sake, and at the command, of the largest shareholder, who would benefit from having it charged to CGT - and possibly at a reduced rate thereof - on a business sale. Against that, I would argue: who would want to own this crock for anything other than a trade?

I regard this as presenting exceedingly low balance sheet risk and very high operational risk. The latter perhaps eased by the knowledge that we are maybe at the trough in the cycle already. There’s probably money to be made here, but, along the way, the quality of sleep that the cash pile delivers will quite possibly be interrupted by operational deficiencies.

Peter T

Just to squeeze in one more post about Osb (LON:OSB, I see Blackrock bought yesterday - now up to 5% of the company from a previously not notifiable %.

Spender71

Thanks for the patient effort in explaining the position. First class.

ACounsell

With Rio Tinto (LON:RIO) did neither. Sold sufficient to lock in the current profit on my holding (average purchase price c. £34) and retained the balance for the inevitable recovery as I have sold part of the holding!! Strategy might be flawed but have seen so many holdings go ‘to the moon’ and then crash back to earth that have decided to take profit on the way down before it returns to cost or worse. In the commodity space just look at the Albemarle (NYQ:ALB) and Umicore SA (EBR:UMI) price graphs both of which I previously held and didn’t take profit when I could have. It’s not a mistake I intend to make again.

Graham Wells

Wimbledonsprinter,

Yellowstone are presenting on Capita (LON:CPI) which is a different company to Capital (LON:CAPD) ??

Sorry to point that out,

Graham.

Boon

17th Aug

Not the most recent ones in Jun24, otherwise the announcement from Osb (LON:OSB) would have made clear how many options were exercised, how much sold.

These were straightforward sells, from what looked like mid-senior level management (one below the c-suite) from their shareholdings. Good timing too, a month and a half before a profit warning...

At the moment the rate cuts looks more stick than carrot for Osb (LON:OSB) ? With no rate cut (in the trading period they announced) they were already seeing more "churn" than "acquisition" due to more competitive rates in the market.

IMO having worked in industries with similar "back book" dynamics (where you have existing customers on rates that are highly profitable to the company but not if those customers wake up and switch).... it is a multi-quarter painful process as you have waves and waves of customers do it over time, not a one-off hit you can recognise to the P&L.

I love Rio Tinto (LON:RIO) as a cyclical play, always kept it on my watchlist waiting for a low point.

They're well diversified across multiple commodities now, especially with their new copper mine in Mongolia.

However, definitely one to buy when there is "blood on the streets"; either a big commodity price crash, or some "environmental disaster" at one of their mines.

Right now, the price is low, but neither event has happened, so I continue to wait on the sidelines... 7% dividend is definitely not a low share price point yet.

doctor dave

Over the last few years buying under 5000p has worked out pretty well.....Rio Tinto (LON:RIO)

Chrisp

Hi Paul, I very much enjoy your podcasts - hope you keep going with them! On your last one you mentioned that you had bought some shares and think you said you listed what you bought in your report on August 6th but I can't find them. Could you list them again? Thanks.

Plinkut

Hi Chrisp - it was on the report from 7th August - if you search for 'Would you mind listing the 11 companies you bought' you'll find it - here's a link but not sure if it'll work:

SCVR Aug 7th

ridavies

Hello BnB. I agree with your principal sentiments about Gattaca (LON:GATC), chiefly buying business cheaply and staffing with numpties (presumably low quality staff).

I would add that if I remember correctly, the company is the combination of a couple of poor quality business which was then renamed Gattaca (LON:GATC) which I'm sure means something in Greek or other mythology. Whatever, especially with regard to the cash pile, it certainly isn't run for the benefit of private shareholders like us - which I am fortunately not. Lets see the colour of their money in share buy backs and / or better divis and I might - just might - change my mind.

ken mitchell

It’s never wrong to take part profits or to sell the entire stake at a profit. The thing to question is, is really better taking that part Rio Tinto (LON:RIO) profit after a 20% share price fall and right at the current year to date low rather than as the share started to fall away from that May 2024 £59 peak?

Mining sector (except for those with big focus on copper like Antofagasta (LON:ANTO) and also Anglo American (LON:AAL) which has outperformed the sector this year as the BHP (LON:BHP) bid premium has not fully unwound) is going through a weak spell thanks to continuing problems in China.

Current sector prices look tempting and with some big dividend yields to support their share prices (e.g Rio Tinto (LON:RIO) paying 7%) it’s unlikely with strong “green” demand ahead that their shares will fall much further. AND Miners pay special dividends in the good years instead of spending the money on buybacks. Rio Tinto (LON:RIO) paid 20% in dividends via ordinary and big specials on top in 2022.

There’s a potentially multi year big Mining sector bull market coming, but not yet. Now is a good time to check out the sector big guns and also BlackRock World Mining Trust (LON:BRWM) as they hold the big guns in their top 10. AND like Rio BlackRock World Mining Trust (LON:BRWM) pay big dividends in the good years via 3 standard ordinary ones and then a big final one.

Coops

Brilliant summary thank you. The one thing that dissuades me is the directors dealings. All seem to be sellers.

cheeky_minnows

Phew, thank god for that ! (hold Capital (LON:CAPD)

Fair comment but fortunately already sold Rio Tinto (LON:RIO) two previous tranches since January 2021 - one lot around £61+ and the second at £53+. So quite happy with those profits! Keeping a close eye on BlackRock World Mining Trust (LON:BRWM) for further price weakness. Sub £5 would be very attractive.

18th Aug

Oops. Sorry. Thanks for pointing out

Small Cap Value Report (Fri 16 Aug 2024) - OSB, CAPD, GHH, GATC

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Explanatory notes -

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Paul Scott

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