Small Cap Value Report (Fri 20 Sept 2024) - Brief: STCM, PRES. Small Cap Bargains?

Fri 5:38am by Paul Scott

123 comments 10303 reads

Good morning from Paul!

Podcast mystery share this weekend (21/9/2024) is: Warpaint London (LON:W7L)

Consumer confidence drops sharply

Data out today (I can't find the source on GfK's website, so have used a free article from Retail Week, many thanks to them).

This shows below a sharp fall in the widely followed consumer confidence survey from GfK, dropping from -13 in August, to -20 in September, undoing the steady improvements which had been occurring earlier in 2024. I'm livid about this, as it's obviously been caused by the inept messaging from the new Govt, about a supposed black hole, taking the fuel allowance away from pensioners, and how a dreadful budget is on the way. They clearly have no understanding of the economy needing confidence in order to grow, for both businesses and consumers. So a pretty dreadful start I'm afraid, with basic, schoolboy errors. Let's hope they realise they're saying all the wrong things, and remedy the situation with a more positive approach in future.

Possible small cap bargains?

New video looking at screening for potential bargains: click here

Also now published on Youtube, to help anyone who struggled with the bandwidth on the original link (buy a new computer, cheapskates LOL!)

?si=sFNoSygICdRT36SK

Annoyingly, I got up early today to record a video looking for bargains in small caps. Dutifully done, but it didn't record any sound, so I had to do it again (edit: done, link above) now with the sound on. Please see below some of the share ideas which came up for further research on my manual and screening approach to find recent fallers which may or may not be bargains. My thinking being that we could be seeing some irrational, fear & tax-driven selling in UK small caps, whilst US markets rise to new all-time highs, which should be good for UK shares in due course, once the end Oct budget is out of the way.

Here are some ideas for you to properly research yourself in more depth -

Mortgage Advice Bureau (Holdings) (LON:MAB1) - note reader comment flagging potential regulatory issues - thanks for that.

Frontier Developments (LON:FDEV)

Sanderson Design (LON:SDG)

Tristel (LON:TSTL)

Tribal (LON:TRB)

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dulciemo

Sat 6:45pm

Too busy partying!

Spender71

Sat 11:58pm

Thanks for taking the time to add your view Paul.

Sun 12:00am

Agreed. Seems to be ready for abigmove upward. Imho.

Dead in the water

Sun 6:38am

Hi Paul. I am a new listener to your podcast and enjoying it very much. Newbie question... I have not discovered how to locate your mystery share of Tuesday last week as the spreadsheet on Stocko only shows up to 13/09. Is this where one should be looking?

Orthodon

Sun 7:42am

Hit the 'Discuss' icon on left margin of Stocko home screen, and you'll see Small Cap Value Report under 'UK BLOGS', where all the SCVR's are available for viewing.

Paul Scott

Sun 7:54am

Thanks DitW! Glad you like my podcast :-)

Podcast mystery share is Warpaint London (LON:W7L) this weekend, 21/9/2024.

I'm just updating the spreadsheet now.

Regards, Paul.

yiannos1

Sun 9:28am

Osb (LON:OSB)

Very good points Si.

And I will add (having analysed the banking sector for many years) that this has all the signs of potentially ending up in tears.

1. They have written an impairment credit out of almost £5B stage 2 and stage 3 loans!

2. Their coverage ratio of stage 3 loans is 7.95% whereas for HSBC is above 20%!

3. Their stage 3 loans amount is just bonkers!

4. When they decide to take the proper impairments they will record massive losses.

All the best

simoan

Sun 9:42am

Point taken re banks being valued on low PERs and often large discounts to NTAV. Although I suspect that might be because their accounts (eg Barclays) are incomprehensible, and there could be all manner of nightmares & risk hidden in the huge numbers for things like derivatives. Also it shocks me how little capital they have overall to support huge lending, although we're told that apparently they're much safer now post 2008 regulatory changes. Hence why I avoid holding bank shares,

What appeals to me about OSB is that it has hardly any of that complexity. Its balance sheet is really simple - it collects in deposits from savers (I couldn't determine what proportion are on demand, and what are term deposits), then it lends to BTL landlords. Those debits & credits make up the main bulk of its balance sheet, with only some relatively small other items. It's that simplicity & transparency which I like about it.

But it's still a bank. I think we both agree that the banking business model is lousy and requires huge amounts of leverage just to keep the lights on. At least the leverage of OSB is lower (around 12x) than the large banks which have 18-20x assets to equity. The latter means if 10% of the loan book turns sour the equity is wiped out. The good news for these banks is that they are too big to fail, because they would take the UK economy down with them, so the government is lender of last resort for them. Alas, as we found out with Northern Rock, small banks and buildings societies will not be afforded this safety net beyond retail savers being protected up to the FSCS limit. Whilst I appreciate that the OSB balance sheet is easier to understand, it is also clear it is less diverse and almost subject to a single point of failure i.e. the UK buy to let market.

So I don't understand your point 1, because the loan book IS funded mostly by deposits.

I don't understand why you don't understand? It is a fact that deposits do not cover loans and that some external funding is needed. I couldn't find another UK bank where this situation exists but I didn't search exhaustively; all the larger banks have loans which are 60-70% of deposits. To make matters worse, the gap in funding is at least partly made up by securitising mortgages - does that ring any bells? Even if they are not alarm bells currently! This all adds to risk and hence a discount to the valuation of other banks should be applied and IMHO OSB is not as cheap as it looks on those grounds. It's also a fact that two of its brands (Kent Reliance and Charter Bank) are always at the top of the savings rate tables when I look. I'm not trying to be alarmist, but this reminds me a lot of the situation with Icelandic banks in 2007.

Of course, the share price may bounce from here and everyone will make money and be happy, I hope. But all I'm saying is that the risk/reward is not as good as it looks from a cursory glance at the StockReport.

All the best, Si

Sun 10:11am

I think it was Mervyn King who said it makes no sense to start a run on a bank, but once one has started you should most definitely join in :-) Liquidity my dear boy, liquidity!

davidjhill

Sun 10:41am

Hi Yiannos,

Of course what people are missing with Osb (LON:OSB) though is that they only lend against collateral. In this case property, and the LTV is just 66%. There is a huge coverage there - even if we apply a 10% haircut for quick sales when did property asset prices last fall 24%?

The other banks all lend both unsecured and secured so impairment ratios are different.

Sun 11:16am

Except Simoan, that the Government backstop protection on customer deposits means that retail depositors are generally no long skittish.

If you look at SVB the cause of that was no backstop - lots of large balance skittish investors and a very low liquidity ratio,

Osb (LON:OSB) liquidity ratio exceeds 200% (100% is mandatory requirement in Europe). That means the event horizon is significantly longer.

Sun 11:36am

I think we all know that what people say they'll do, and what they actually do given the chance of their money being locked up for a period are two completely different things. I've read enough behavioural economics books to understand that what you wish for is unlikely to occur and a bank run is likely in the worst case scenario, particularly once word goes viral on social media. Or do you think assurances from the government will stop it given the low esteem in which politicians are held these days? :-)

No-one has to invest in a bank. It's all about risk and reward and all I'm pointing out is that the risk is higher than for other banks for a number of reasons, and so perhaps the valuation of OSB is not as cheap as it first appears.

doctor dave

Sun 11:49am

Hey great to see you back here Yiannos

Sun 6:14pm

Thanks Paul

Thanks Ortho

Sun 8:27pm

There are hardly any defaults/bad debts with buy to let lending though.

That's why OSB is attractive, as a simple savings & loan business, making a margin on low risk, vanilla secured lending to people who are not going to default.

Sounds like we're not going to agree here, not sure why though.

Run on deposits - why would that happen? £85k are insured.

Sun 8:30pm

Exactly David!

OSB loans money to buy-to-let landlords. They don't default. And if they do, it's secured on the property. That's the bull case on the shares in a nutshell.

Mon 8:36am

Sorry, Paul. I don’t like banks because 2008 is still seared into my memory.

My main point is that OSB is maybe not as cheap as it looks and that P/E and P/TB is not the way to value a bank. I agree it’s simple to understand compared to other banks, and I’m not saying it’s going to go bust, just that some of the warning signs and risks you’d look for are there i.e. deposits do not cover loans, they are needing to offer market leading rates (well in excess of gilt rates of the same duration) to get those deposits. These are facts. I wasn’t even trying to be bearish!

You should read some Richard Thaler books if you need to ask that question. The FSCS limit is a fig leaf IMHO. What percentage of deposits exceed the FSCS limit? We don’t know, but anyone with savings above the limit will withdraw their money and others will follow, that’s all that’s needed to start a run. Even Mervyn King has stated that’s what you should do. Even those protected by the FSCS will take months to get their money back. The good news is that OSB don’t have branches so there won’t be pictures of queues on the BBC News! :-)

Andrew Holmes

Wed 7:12am

Booo. You'll never make it as a mystery writer. "Chapter 2 - The butler did it, with an ice-pick, in the larder".

ken mitchell

Wed 9:13am

The 2008 Banking crisis showed that the DIrectors of the big Banks didn’t understand Banks. e.g the hapless Fred Goodwin of RBS and the Directors of Northern Rock and the other Banks that either went bust or had to be rescued. And if they don’t understand their business model and the risks in it, what chance have most of us got?

Small Cap Value Report (Fri 20 Sept 2024) - Brief: STCM, PRES. Small cap bargains?

Consumer confidence drops sharply

Possible small cap bargains?

New video looking at screening for potential bargains: click here

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Paul Scott

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