Small Cap Value Report (Fri 24 May 2024) - IGP, NEXS, SCE, BMS, ENSI, AVAP

24th May by Paul Scott

110 comments 9213 reads

Good morning from Paul!

That's it for the day, and the week. Have a lovely long weekend!

Breaking news! No not another takeover bid, this is just to flag that my weekly roundup podcast has gone up early, as I'll be busy returning to the UK tomorrow. (EDIT: multiple background sound effects, I realise on listening back. Typical Gozo - there's a bird's nest just above my head, building site next door, under the flightpath for Luqa Airport, and swimming pool constantly refreshing. Maybe some cannons or guns going off too, that's usual?)

I hear that Mello was very enjoyable, and sorry I couldn't make it this time (I extended my trip to Gozo due to a lingering chest infection, which is now almost sorted).

Troll

I see we had a trolling outbreak again yesterday. Just when you think it's all sorted, another one pops up! Ignore them, is my advice, because they feed on and enjoy the disruption they cause. I look forward to the developers adding an "ignore user" facility, which I think we need. I've added an extra bit to the explanatory notes below, to emphasise that with the resources available (me, and 3 hours of Graham 4 days pw), we obviously can't cover everything! Although we're getting close to having reviewed c.500 unique companies so far in 2024, so there's no hope if you can't find anything of interest amongst that lot! We're not machines, we're human, so we have the occasional off day, offset by plenty of out-performing days. If people moan at me, then it stops being fun, and if that happens I'll hang up my keyboard and do something else with my time, to be blunt.

Market thoughts

Dismissing UK small-mid caps is now going out of fashion, I'm pleased to see.

NVIDIA (NSQ:NVDA) has 5-bagged in the last 3 years, which is truly remarkable, what an extraordinary company and share. But so has Warpaint London (LON:W7L), also 5-bagging (well, almost) over the same period (which we flagged early on here in the SCVRs, and all the way up with GREENs). So we've got plenty of opportunities over here, and much less competition for the shares, as people have drifted away from the UK market., on shares that are quick & easy to analyse. I can almost hear all that cash starting to flow back into UK…

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markb1961

24th May

Cheers Michael - I will indeed do that.

Pimlico on Thames

Yu (LON:YU.) (I hold), yesterday's AGM update:

Following the passing of resolution 9 in relation to the capital reduction process, the Company confirms that it will progress, subject to formal approval from the Court, the cancellation of the Company's share premium account which currently stands at approximately £12.28 million. It is currently expected that the hearing by the Court to confirm this capital reduction will take place on 2 July 2024 and that the capital reduction will become effective on 3 July 2024. Such capital reduction, if effective, will reduce the share premium account and increase distributable reserves of the Company by £12.28 million.

No indication of whether they plan a one-off distribution or to hold the cash as a hedge and raise the dividend on an on-going basis.

Paul Scott

Brilliant, thanks topvest! That makes sense. I remember one of the things that confused me, was that there was some tax advantage to doing it this way, so that the vendor of the acquired business reduced their tax bill by staying on? Does that ring any bells with you?

Thanks for the reply, appreciated :-)

stpalm

Non carborundum illegitimi Paul, there's always a few that will disagree with you and try to blame you for their investing mistakes. After all nobody holds a gun to your head to buy shares, you pays yer money and makes yer choice. I have known of you and followed your comments since 99 when I knew nothing. There is still a lot I don't know but I have always found you to be honest and forthright, I don't share all your views but I respect your right to have them. You brought me and I am sure many others to Stockopedia. It wouldn't be the same without you. So please do whatever you can to deal with this problem, don't let the rude idiots win!

NewInvestor1972

I think it depends on the venue, BBB Cardiff for example is a big sports venue.... Just a shame Wales didn't get through... XP Factory (LON:XPF)

Nice 16% up close, been waiting a long time for it to 'break out'! Happy days

Long may it continue

Dragon

International Distributions Services (LON:IDS) Released their results after hours, delayed a day by their auditors.

davidjhill

:-) well can’t argue with you on that point eParo

sparkler

My thanks too for the commentary on Braemar (LON:BMS) . Paul's write up was thought provoking as usual and very helpful, but it was also interesting to read further information by 'topvest' and 'tortoise investor'. I feel better informed, if not totally sure what to make of this tricky investment! I do at least draw some comfort from the small stake bought by an industry rival a month or so back.

Chrisp

Hi Paul, I want to say how much I enjoy Graham and your company reviews and the way you analyse companies. Your traffic light system is excellent! I really enjoy your podcasts too but would like to know why you don't like Kinovo (LON:KINO) - it is one of my largest holdings and has performed well. The stock rank is high, their revenues and net profit are growing well and they are sorting out their legacy issues. They are in my opinion on their way to £100m revenues and £10m NP.

sharw

Redcentric (LON:RCN)

On a quiet Friday afternoon before a Bank Holiday weekend the share price jumps at 15 17 and then 10 minutes before close we have "The board of directors of Redcentric (the "Board") notes the recent press speculation and confirms that it is in the early stages of discussions with Wiit SpA, regarding a possible offer for the entire issued and to be issued share capital of Redcentric".

Watch this space! (RCN provides in-demand cloud storage but the sp is still recovering from an accounting scandal in 2016 for which the then CFO was jailed for five and a half years).

topvest

Hi Paul - I'm not 100% sure on the tax treatment, but I suspect its probably treated as a capital gain (at 20% or less if it attracts Business Asset Disposal Relief or the like) as opposed to being taxed at higher rate income tax rates. Have a good weekend all.

sevenmonks

I had a look at GSF a few months ago. They don't present consolidated accounts which makes analysing them very difficult, although I don't think this is unusual for the industry.

Most of their assets are still under construction. They revalue the assets periodically using a discounted cash flow model and as they get closer to completion, the value increases (of course).

At holdoco level almost all their profits come from these revaluations rather than cash flow so it looked to me like I'd effectively be buying a construction company that will over time morph into an energy storage business. They are in the late stages of completing a number of their projects so their capacity is expanding fast but for now the cash flow doesn't seem to be there.

Another thing that stood out to me was their large dividend. It doesn't make sense to me to raise equity then spend that money paying dividends. I feel the money raised should be spent on their construction projects and dividends should be paid when they are generating sufficient cash to pay the dividends (which they don't seem to have). The fact that all this is hidden underneath unconsolidated accounts is disappointing to me.

There's very possibly money to be made here. There's enough cash to maintain the dividend for now, their storage capacity is expanding quickly and their valuation methodology seems reasonable, using a 10% discount from memory (which I hope isn't failing me) so the discount to NAV may well be unjustified. Understanding the underlying assets and cash generation however is very difficult.

Investment4Adam

I only get chance to catch up at night, but looks like a lot to get stuck into tonight - so thanks for the great variety today Paul - good advice on the troll(s) too to ignore. Good to see the thumbs up approaching 200 on a Friday too - a sign of solidarity against the trolls. We are incredibly lucky to get this content (and reader feedback) - of course there are always companies in our portfolios covered but anyone who doesnt accept that should fine a different resource. What we get with SCVR & all the other content, info, screens etc etc for considerably less than £1 a day is ridiculously good value. So a huge thanks to you and Graham (and Roland and the team too). Look forward to the podcast this weekend too which is also a very informative and enjoyable listen.

M B3

26th May

Ignore the trolls , love the reports !

Zipmanpeter

Bricks, CO2- and bricks imports. Will be interesting to see where this goes in the medium term. Both Ibstock (LON:IBST) and Forterra (LON:FORT) have recently put in big new factories which are more efficient (cheaper but also less energy intensive) and close older ones. Some form of actual or de facto carbon tax would be a way for Labour to square a circle of needing more tax revenue whilst satisfying its voter base's desire for 'green measures' and nationalist pandering. There will certainly be new, much stronger new build regulations favouring low CO2 emissions......but also much more house building. (Remember Starmer's promise to bulldoze NIMBY opposition and the dreadful record on housebuilding of late under the Conservatives; brick consumption has been at historic lows). Brick-makers are about to get interesting but I prefer local producers over importers like Brickability (LON:BRCK)

Hi Chrisp,

Many thanks for the positive feedback, much appreciated!

As regards Kinovo (LON:KINO) I've covered it here 3 times so far in 2024, so that link provides all the detail. I've reflected that the fundamentals are improving with a move up from RED to AMBER/RED. Why still negative? Because I see balance sheet risk, with it looking under-capitalised and having stretched creditors, therefore above average risk of it needing to do an equity fundraise, hence dilution.

Also the legacy issues are getting resolved gradually, but bear in mind there are still significant risks, with receivables and creditors on the balance sheet still quite sizeable relating to these problems, which still has potential to deliver more nasty surprises, as has happened in the past, several times. I can't see the appeal in taking a gamble that their legacy problems have now been resolved, when that might not necessarily be the case.

The core, continuing business at KINO looks OK, moderately good, but in a sector where I suspect it might struggle to be valued at more than a PER of say 10-12? So it's currently on a forward PER of 7.6x, a rating that seems about right to me, given balance sheet weakness, dilution risk, and the (hopefully reducing) risk of legacy problems delivering another nasty surprise.

Shares have indeed rebounded strongly in recent months, from a low base though. But still less than half the twin peaks in 2017-18.

Overall then it would be AMBER here, if there were no remaining legacy issues and all the drs/crs had been settled, so providing there are not more problems then that's where I'll probably end up with KINO.

It's your money, so your choice, but with so many other good companies to chose from, I find this a very strange choice to latch onto and make one of your largest positions! But each to their own, our different perceptions of risk:reward is what creates a two-way market.

Good luck with it, hopefully my caution will be unnecessary. As always, we're not saying our view is necessarily correct, as we can't predict the future (and don't try to). It's just my current assessment of risk:reward today, and that will change in future as the facts develop.

Also why did they put out another trading update this week, which sounds like it's ahead of expectations, but actually is reiterating the same £6.7m EBITDA number that they told us already on 2 May!? I found that a bit misleading, but hey it worked and the shares rose!

Regards, Paul.

I think the football could be a plus for Boom Battle Bars, because many have very large projection type screens for sporting events. I asked the CEO about these a while ago, and he said they're very cost-effective, pulling in loads of customers who want to drink lots of beer whilst enjoying a group experience of watching a big sporting event on a very large screen. He mentioned that it's completely incremental beer sales.

A lot of the BBB sites are particularly large, so they're well set up for things like big sporting events.

carmensfella

That is an excellent idea dp....Most of the companies had very full presenting rooms and Warpaint had to do three presentations in front of 65 investors each time so they were certainly appreciative and enjoy attending to meet shareholders and potential new shareholders.

Otman Salamat

27th May

To: Mr Paul Scott & Stockopedia team, thank you for transforming my life and opening the world of UK stocks/trading/investing to me. As a health professional leaving the NHS (sadly!), you have given me confidence to pursue a new career - so far it’s going okay (made up my losses and back in profit thankfully and enjoying my first bull market!)

Hi Pimlico,

True, Yu (LON:YU.) shares have been amazing on the timeframe you chose.

However, and just for fun, I added my biggest holding Plexus Holdings (LON:POS) [ignore the ticker, it's an unfortunate coincidence, not a description of the company] onto the chart, and played around with the x-axis, and discovered that POS trounced Nvidia, YU, and Warpaint over this specific period below ;-)

Small Cap Value Report (Fri 24 May 2024) - IGP, NEXS, SCE, BMS, ENSI, AVAP

Troll

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Paul Scott

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