Small Cap Value Report (Fri 23 Feb 2024) - TRB, YU., CLIG, HRN, SED

23rd Feb by Paul Scott

79 comments 7868 reads

Good morning from Paul!

Director interview - I've resumed doing my audio interviews with CEOs. Yesterday afternoon I had an interesting update call with founder/CEO of Beeks Financial Cloud (LON:BKS) Gordon McArthur. Disclosure: I have a small position (<1% of my personal portfolio) and intend buying more at some point when funds are available. Remember the point of difference is that I approach companies I want to interview, and I don't charge any fees, so that it's independent, rather than PR. It went out on my podcast channel yesterday, or the web version is here. I thought it was very interesting, not just his points on Beeks, but also wider market comments. I've got 3 more company interviews in the planning stage! Ideally it would be great to talk to all 20 companies on my list of favourite 2024 shares, which has got off to a good start so far. So any company advisers who could facilitate this, please do get in touch.

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 (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).

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…

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illiswilgig

23rd Feb

Lower volumes atSmurfit Kappa (LON:SKG) last week (sales down 12%) which I hope won’t read across to Macfarlane (LON:MACF)

Thanks for the pointer NeilS - after a quick look at the Smurfit overview it doesn't look too bad - the company reports improving demand into Q4 and high demand for sustainable packaging. Enough for them to hint at an improving outlook for FY24?

Smurfit is an impressive operation but I find it hard to draw comparisons as Smurfit is a global paper maker. I do note that at Smurfit volumes are down 3.5%, sales down 12% and basic eps down 20% - which points towards lack of pricing power?

By comparison Macfarlanes TU (results next Thursday 29th) reported sales down 2% and adj profit ahead of last year. We're not given volumes but I suspect that they have fallen further than Smurfit's and is the opposite trend - indicating some pricing power? Not entirely suprising if thats the case as Macfarlane is primarily a distributor and its growing manufacturing operations are in high margin sectors - defence, medical, industrial - so should be more nimble than the paper mills with which it is normally compared?

Macfarlane did report particularly good performance from its European operations - to the extent that it will need to take a charge for writing back the deferred consideration for Packmann which it had previously considered unlikely enough to write down. Given the huge opportunity in Europe I found that encouraging?

Perhaps Macfarlane will also point to an improving outlook next week? Thanks for the pointer,

cheers

Mark (Macfarlane is my second largest holding)

Charles Mitchell

Georgia Capital (LON:CGEO) Edison latest update https://www.edisongroup.com/re...

Main holding is Bank of Georgia (LON:BGEO) . CGEO trades at a large discount to NAV.

NeilS

Hi Mark, well they both sell cardboard boxes but Macfarlane (LON:MACF) is more of a merchant whereas Smurfit Kappa (LON:SKG) is vertically integrated and owns forests, paper mills and colossal converting and box manufacturing and printing capacity especially in shelf ready packing. Whereas DS Smith (LON:SMDS) sits in the middle between the two with a smaller mill footprint and a lot of retail brand exposure.

I believe you are right about some of Macfarlane (LON:MACF) niche markets as they did buy a correx (fluted polypropylene) converter a few years ago however just for example, Smurfit Kappa (LON:SKG) leads in wine boxes and owns the IP for the taps.

Here’s to hopefully good news from Macf next week! I hold too.

Wimbledonsprinter

PlanetX Thanks for your interesting comment and I wish you good luck with the investment. Transense Technologies (LON:TRT) is just the sort of innovative company that should be at the smaller end of the stock market and hopefully should be able to be financed by investors. The management are open and approachable and you should get a lot out of the meeting

I held the stock for a couple of years and sold out in June 2023, a few months after attending the AGM in Bicester, when I realised I was really a newbie and most of the other shareholders were still waiting for Godot. So, for balance, let me point out a few of the bear points - although I am no longer up to date with the company.

1). The P/E is a meaningless number as the itrack royalty will end completely after FY2030 and will take two serious step downs in 2026 and 2028.

2). The SAW technology has been the long-term promise for this company for a long time but it seems a slow burner - the licence deal with GE was signed in 2016.

3). I would advise listening to the 20 October 2020 ImC call (questions 5 in particular of the Q&A asked by someone called “John” - but also see Qs 6, 7 and 11). On listening to this in 2020, I decided that the company would be really hard nosed about capital allocation decisions - and would not fall into the temptationof frittering away the cash flow from the iTrack business. I felt Nigel Rogers was guiding the market that within the next 12 months or so (by end-2021 say) they would have a good idea if SAW was a worthy investment or not. I guess the reason I then sold out in 2023 was that I was not so confident this remained the corrct assessment.

You seem to see quite a bit of promise in the Translogik (tyre probe business). This was seen as the least important of the three businesses at the time I was looking at the stock more closely Perhaps things have moved on .

donQ

DecEnt Big Boy Has Just Four Page...

Guybrush

Well done finding this stock. Its multi-bagged nicely if bought in at the lows. I've added this to my watchlist if it sets up again, its rallied too much for an entry right now.

The US markets reminds of the AIM stocks back over a decade ago, when there was still plenty of risk but plenty of reward too with multi-baggers in abundance. Now its smells of death.

Got my eyes on Arm Holdings (NSQ:ARM), waiting for correct setup before I take a position.

jamesalastair

Chemring (LON:CHG) a UK small cap in the defence, security and space sector, seems to fly under the radar a bit. I hold along with several other European defence companies, but most are large cap. Chemring fits my GARP approach, is a small cap and is, I think worth a look, providing you don't have any objection to investing in defence. After hosting Ukrainians for 14 months, I no longer have any such reservations and I think Trump's recent comments mean the European end of NATO is going to have to get its act together and fairly fast.

Chemring (LON:CHG) report unchanged guidance for 2024, perhaps not surprisingly given the strong tailwinds in the defence sector. Chemring has a 50% market share in the global countermeasures market. The 2024 order book at £991 million is up nearly 52% on 2023 with nearly 80% forward visibility.

The ROKE division in the sensor and information division shows solid growth with recent sales of electronic warfare systems to Sweden and Japan. ROKE also reports an increase of £10 m to £50m of project zodiac which is a core part of the British Army's Land Intelligence, Surveillance, Target Acquisition, and Reconnaissance ("ISTAR") Programme. The Sensors and information Division now has forward sales visibility of 74%

Their Countermeasures and Energetics Division has also delivered several major new deals providing 99% forward sale visibility for 2024. Chemring's Norwegian subsidiary Chemring Nobel has signed a 5 year contract worth £42 million with Diehl and in the US they have signed off a £9 million contract with NASA for the NASA standard Initiator system. They have also signed off on a AUS$31 million contract with the US Air Force who are acting for taly, Australia, Japan, UK, Poland, Germany and Denmark.

The shares have delivered a return of 134% over 5 years + an annual dividend of 2.3%. The business holds no debt but ROCE is a pedestrian 10% or so. I am hoping margins and ROCE improve in the years ahead as the product mix changes with increasing sales of from the ROKE division.

yiannos1

Intel (NSQ:INTC) is interesting in my opinion as well-I have added to my position today as I feel they have the capacity for much bigger revenues. Arm Holdings (NSQ:ARM) is on my watchlist as well.

Zorbatheleek

Chemring (LON:CHG) Agreed, but at 10yr high and directors selling at these levels...what do they know?

BnB

Intel (NSQ:INTC) is interesting in my opinion as well-I have added to my position today as I feel they have the capacity for much bigger revenues.

Well done on LUNR but if you can tolerate a negative view, Yiannos, INTC is dead money IMO without a decent divi to keep you engaged. Losing market share for the last decade across AI and Data Centre due to a lack of competitive products vs NVDA esp but also AMD and now losing out to multiple new competition on CPUs across PC/notebook. They've always got a plan to fight back and it hasn't worked in all the time I've been watching. Price is barely up in 20 years.

File under IBM - literally and figuratively!

Gung Ho

Ndivia and our own Indivior yesterday had my eyes going cross eyed

stockorocko

From John Authers today - At one point, Intel’s market cap was $497.6 billion bigger than Nvidia’s; now it’s $1.78 trillion behind.

Maybe I know things you don’t know

Who knows!

All the best

Michael Ord was appointed to the Board on 1 June 2018. Since his appointment, he has consistently sold options and never held the shares long term which I agree is a bad look. Sarah Ellard is basically the company secretary and has been at Chemring a long time. She also does not hold onto her options either and sells them pretty quickly. I have no idea who Lewis is ... he/she is not on the Board currently anyway.

What do I take from this?

They have always sold even as the profits moved higher. To be clear, Sales, Net Profits, Cashflow and EPS have all moved higher and consistently so over the past 5 years. Not only that but the company has progressively become cheaper on any measure - PE is down so is Price/Book and Price/Sales. So yes, they are at a 10 year high (but so are many of my defence companies - Rheinmetall AG (ETR:RHM) ; Kongsberg Gruppen ASA (STO:KOGo); BAE Systems (LON:BA.) ), but Chemring is actually at the cheapest point they have been for the past 5 years on the basis of the above metrics.

I think these individuals are deeply conservative as in the opposite of entrepreneurial. This mindset pervades the defence sector which must be one of the tightest regulated sectors out there. They are all heavily security cleared. I think they view their share options as part of their (cash) salary package.

I could be wrong of course, but they have been around a long long time and can trace their roots back to 1905. They have a critical role to play in defence strategies across NATO including the US and also supply NASA. I can imagine the intelligence community from multiple agencies has been all over them.

Having said this, in 2018, it was announced that the SFO had opened an investigation into corruption and money laundering. A SFO spokesperson has stated that the inquiry is focused upon "the conduct of business by Chemring Group and CTSL". However, in 2022, the SFO concluded: "There was insufficient evidence to support a realistic prospect of conviction as required by the Code for Crown Prosecutors".

https://www.sfo.gov.uk/cases/c...

Maybe there is some dirty washing about to be aired, but I doubt it. As I say, I think the share sales are a sign of a lack of entrepreneurial mindset.

tic_tac_toe

to ME. to Yu!

(for anyone who grew up in the 80s)

TB_Investor

LOL perfect!

Samsgrandad

Chemring (LON:CHG)

"She also does not hold onto her options either and sells them pretty quickly"

A lot of people who have never been given an option don't realise that as soon as the option is exercised the difference between the value and the exercise price attracts PAYE income tax. For a lot of people the only realistic way of paying this is to sell some. A company I worked for gave everyone a share option in lieu of a pay rise, when it vested there wasn't a choice but to buy and sell in one deal via the company broker. The proceeds were paid net of income tax with the next salary payment.

jonno

A continuing rubbish market for UK small caps if my portfolio is anything to go by. But it will change. I suspect that will be when Andrew Bailey takes the metaphorical road to Damascus and hopefully sees the light

Dragon

If this was other years and I had a week with a share up 24% another up 16% another up 10% a couple up 5-6%. I would have had a Stella week. But week after week, for every share that goes up by a decent amount, the rest of the portfolio wipes it out. It's like a game of wack-a-mole. My portfolio has gone nowhere for two years now. I was down 0.5% this week.

But never mind, I'm in Malta for the weekend and It was sunny and warm today.

Huwster

24th Feb

It's very sad what has happened to Saietta (LON:SED) as it looks like really promising technology but they made some wrong turns and the cash burn was astronomical. I see the share price ended down 80% by the end of the day so condolences to any holders. It was interesting to look back on the interviews with well known fund managers over the last couple of months with one saying they were in a great position less than a month ago while the SCVR was repeatedly screaming red given the dire financial position. Maybe in a different market with strong financial backing they could have made it eventually as there did seem to be a demand for their eDrive systems which would have been good for the planet. I hope they find a buyer with deep pockets but it's not looking good.

Small Cap Value Report (Fri 23 Feb 2024) - TRB, YU., CLIG, HRN, SED

Explanatory notes -

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Paul Scott

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