Small Cap Value Report (Fri 19 Aug 2022) - JOUL, HSW, VLX

19th Aug '22 by Paul Scott

33 comments 7688 reads

Good morning! It's just Paul here, with it being Friday. I have to finish by 11am today, due to being required to take Mum to Newbury for her 85th birthday lunch. My brother particularly likes this restaurant, but it's a 75 minute drive away, so the food had better be very good! Update: sorry I have to leave it there for today, but got 3 companies done anyway. Have a lovely weekend! I'll have a look at your comments this evening, so do flag up anything interesting that I could come back to next week. Today's report is now finished.

I should give a special mention to "our Graham" (80's reference!) who has diligently worked Mon-Thu this week in really difficult circumstances, with terrible internet in a holiday cottage, a crying baby, and a family wedding. Yet he's managed to cope with that, and produce sterling output here, so thanks Graham!

Weekly summary podcast - click here (Sat 20 August).

Agenda

Paul's Section:

Hostelworld (LON:HSW) - my notes are below from the webinar yesterday on IMC. There was a lot of information & commentary via a slide deck, but I only jotted down a few points that seemed most important. I'd be more interested in this share, if it were not for the expensive, risky debt. There's a capital markets day in November, so maybe that will be a precursor to a placing, to clear the debt problem? Management come across as knowing what they're doing, so I'm less bearish about this share, although still dislike the balance sheet structure.

Joules (LON:JOUL) (I hold) - another profit warning, as trading has continued to deteriorate over the last few weeks. I estimate this could lead to an H1 loss of about £7m. Bank remains supportive, and discussions with Next continue about a strategic investment. I think my patience with Joules has run out, and am considering whether or not to sell up. There's likely to be a nasty fall at the open today I'm afraid, so the damage is already done unfortunately.

Volex (LON:VLX) - the share price has been strong in recent months, bouncing almost 50% from the lows. Today's reassuring, even upbeat update seems to underpin that share price (partial) recovery, so I reckon it's looking safer now we know it wasn't just a bear market rally. Forward PER is…

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timarr

19th Aug '22

For me, StockRanks are one of the tools (and a very important one) in my toolbox. But there's no substitute for manually verifying the reasonableness of everything.

Always worth remembering that Stockranks are statistical. Around 2 in 3 of stocks with an SR over 90 go on to outperform, but there are no guarantees. Buy a portfolio blind and the history suggests you'll do very well. Buy an individual stock without doing your research and you're still going to do better than a coin toss, but you can't blame the ranks if you buy a dog, especially if you only buy a small number of stocks.

Of course, many high ranking stocks that look like dogs do go on to outperform, but that's the point really.

Factor analysis is all based on what has worked historically and there can't be a guarantee that it will continue to do so in all situations and for all time. So far it's done pretty well if you allow for the lag between new data being published and the ranks being updated - but that's an area that could be improved on, if only to add a warning to Stock Reports to say that there is new data to be processed and the ranks may be out of date.

As a starting point, however, they're damn useful.

DWit199

Kahneman suggests using computer algorithms but to always check for "broken legs". In Joules case the broken leg is a profit warning. Paul, I don't think the value rank will change significantly until the next results but the recently strengthening momentum will fade.

History for Q,V,M and SR below. I don't understand why Stockopedia can't provide this information.

Edited so all chartlets have the same scale.

Snazzytime

Fascinating to see that Joules (LON:JOUL) has had a rising Stockrank since January and it now stands near an all time high

I can't seem to locate the stock rank trends over time. Where do I access this trend information?

BnB

Made Tech (LON:MTEC)

For GARP lovers this must be the most important (and positive) update of the day. Made Tech has exceeded slightly reduced revenue and its more significantly curtailed profit expectations this morning. This could signal a turnaround in investor appetite for the name, which is a competitor to Kainos (LON:KNOS) in the provision of digital transformation (DX) services to government. This is a very hot area of the DX market with a long runway for growth. Competitor Netcompany, based in Denmark, recently announced 30% growth in their UK government division.

For an idea of what Made Tech delivers for government and public services, I recently had to update my photo card driving license. Not surprisingly, I chose to do so online and was able to point the DVLA to my passport records from which they picked up my latest photo ID and delivered a new license to me within 24 hours. Impressive.

The Sharewatch small companies publication gives an excellent background to the company, as does the research by Singer published on ResearchTree. I won’t go into detail here because I imagine most of you have access to one of those two resources. For my own part l spent many years delivering DX services in the public sector when active as an entrepreneur. It was very rewarding.

I am somewhat bemused at the price the market places on this name and at the swift reversal of today’s early 20% spike. The former might be explained by the disappointing trading update from February and a persisting concern that today’s swallow does not make a summer. On the other hand, the issues that resulted in the share price collapse of February, namely problems in achieving hiring targets and therefore meeting contract objectives and margin pressures owing to wage hikes, both appear to be somewhat resolved in today’s update, while the swelling order book bodes well for the achievement of the next six months’ targets. The mid morning pullback might just be would-be sellers finally enjoying an up day on which to sell holdings without depressing the price.

Made Tech is valued on half the rating of competitor Netcompany and less than a quarter of the multiple enjoyed by Kainos based on FY24 expectations. The name has more aggressive targets, being a relatively new, faster-growing player in the market and a recent (busted) IPO, but the risk is significantly mitigated by the fact that it is already cheaper than both today based on current year forecasts.

I’m not going to make bold predictions for the future trajectory of Made Tech’s share price, although it looks strong value to me today - Singer calls it "a deep value growth stock" in today's research update. But my not insignificant holding, to which I have added again this morning, reflects decades of experiencing an ever increasing demand for IT resources married to an ever diminishing competitiveness on the part of government in delivering its own IT projects without trusted partners. On which point, Made Tech’s satisfaction levels are very strong, as Singer confirms in this morning’s note.

I encourage GARP investors to research in depth.

Kieranj077

Great charts and breakdown of ranks, Dwit199. These are exactly the type charts that Stockopedia should provide. With the data available, surely it wouldn’t be difficult to implement.

With the data available, surely it wouldn’t be difficult to implement.

It must be harder than it looks as this feature has been requested many times.

Another broken leg with Joules is the Risk Rating. This is "Highly Speculative". The volatility(1yr) is 107%, which is extremely high. In my opinion anything with a volatility(1yr) greater than 60-70% needs very careful consideration as it is reflecting huge uncertainty about valuation. Shares in the highly speculative category tend to perform poorly.

fwyburd

Thanks BnB.

Made Tech (LON:MTEC) is a new one for me and looks interesting except: what are the £2.4m share based payments and why have they been excluded from the £2.6m EBITDA number? At first glance, with not much research, this seems at first blush to be a huge red flag. What am I missing?

cheers

Francis

Made Tech (LON:MTEC) is a new one for me and looks interesting except: what are the £2.4m share based payments and why have they been excluded from the £2.6m EBITDA number?

I think you'll have to wait for the audited results and annual report for that one. But it is hardly unusual for IT growth companies to exclude SBC from EBITDA, much as GAAP would have it as a real cost.

Rusty2

Stockopedia ranking is shown in the chart, under the share price chart, on the Stockreport.

jvb68438

Hi Paul,

Thank you for taking the time to listen to the Hostelworld (LON:HSW) ICM presentation and your follow up comments which are all very fair and reasonable. Its now time for the show me stock to show you !

Michael C

GAAP has it right, IMHO.

MrContrarian

Joules (LON:JOUL) opened at 27p, bounced to 30.7 (down 13.3) then fell back. That's not up.

TheRaven

It was up on my Stocko folio at 8.25a.m. - obviously the delay is longer than I thought.

MichaelFBS

Paul

Thank you for the review of Volex (LON:VLX) (I hold). Confirmation bias in play (perhaps) but agree with all you say.

As for:

1 Latest company compiled view of market expectations shows an underlying operating profit consensus of $62.8 million with a range of $62.3 million to $64.0 million.

It’s so helpful when companies provide a footnote, thank you, and why can’t everyone do this”

I think this should be obligatory under listing rules. And if they can’t and if they don’t know then they should be obliged to say “they have no idea”.

Regards

Michael

Caduceus

Oh dear, uber hoop day for Cineworld (LON:CINE) today isnt it!

yiannos1

Hi Paul

I know you are very busy but I ll appreciate your thoughts on my concerns (two days ago) on Boohoo’s Chairman tactics and the money invested for no reason on Revolution Beauty.

qimotte

20th Aug '22

The share-based payments were £0.71m in H1 (which equated to a total of 6,847,812 new share options), which compares with £2.4m of payments for the full year. They did not reveal how many share options had been issued at the full year, but as the share price has collapsed ( back on Nov 30, 2021 used for H1 accounting the share price was £1.10 compared to £0.35 on May 31, 2022), surely the option pricing would be adjusted downward accordingly. Back of the envelope estimates would suggest that could equate to between 40 and 50 million new share options in the H2 period compared to a total share count of 148m (according to Stockopedia data). Surely I’m missing something or have made a mistake, for such generosity makes no sense! Can someone put me right please?

Hi yiannos1

On Boohoo (LON:BOO) (I hold smallest holding). Is the rumour about Kamani buying to the IPO of Revolution Beauty (LON:REVB) anymore than Daily Mail tittle tattle. I can find nothing online to confirm and there is no notifiable holding.

I don’t know thus the reason I am asking Paul ( maybe he knows something since he is a Boohoo supporter ).

But, the money Boohoo invested in Revolution Beauty last week makes me wonder. Makes no sense to me to invest in a company with so many issues ( accounting issues , future placing issues etc ). Is it meaningful you? Wouldn’t you wait to get it from the administrators?

Is this not it: https://www.stockopedia.com/sh...

Small Cap Value Report (Fri 19 Aug 2022) - JOUL, HSW, VLX

Weekly summary podcast - click here (Sat 20 August).

Agenda

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Paul Scott

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