Small Cap Value Report (Fri 24 Nov 2023) - TM17, IKA, FIH, MTC, MACF, MBH

24th Nov '23 by Paul Scott

88 comments 8527 reads

Good morning, just Paul here today.

I've got a lunch in Oxford today, so will have to rush out this report early. I'm meeting Tom Benyon, founder of charity ZANE, to hear an update on the situation in Zimbabwe, which I believe is particularly grim at the moment with another outbreak of cholera, and continuing hyper-inflation. Many thanks to those of you who support ZANE with monthly donations, it's literally keeping vulnerable people alive. It also helps me put my own problems into perspective, when I hear about Zimbabwe.

Right, gotta dash! Today's report is now finished. Sorry this has been such a rushed job, but I covered everything on the list!

Tune in for tomorrow's next thrilling instalment of my weekly podcast!!

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 has a reasonably good outlook, with the shares reasonably priced.

Amber - means we don't have a strong view either way, and can see some positives, and some negatives. Often companies like this are good, but expensive.

Red (thumbs down) - means…

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Monty Carlo

24th Nov '23

Just spend 10 minutes on each of:

https://www.consortiumeducatio...

and

https://www.tts-group.co.uk/?g...

Then come back and please tell us what you make of it?

Oops...you can't - they seem to have just taken the website down (or there is an internet issue somewhere, but TTS is still running)

My observation was a huge amount of product overlap.

planetx

Trifast

Pretty chunky director buy by the new independant executive chair serena Lang

137000 at 73.8p just over 101k

Not sure if anyone sold that’s a big chunk to get hold of.

Anyway very good to see a balls on the table commitment from a director as opposed to the nonsense of free charge or discounted share options that are in many cases nothing more than blue collar shareholder theft .

Bravo Serena .

ken mitchell

Roger Baron

I hold Diversified Energy (LON:DEC) and included it in a previous post on bombed out shares and Investment Trusts. I didn’t include it this time as the focus of my post today was on what (imo) are good quality shares and risky DEC can’t be classed as quality.

DEC business model is fiendishly difficult to understand and I don’t! Bearing in mind the debt and decommissioning costs I can’t fathom how DEC not only pays big quarterly dividends but somehow has increased the dividend several times, including 3 increases in 2022.

Yiannos1 says the dividend is unsustainable. That’s what I thought years ago and so far that’s wrong. I’ve held DEC on and off since 2017 including a lucky buy on a dip after covid to just 55p and have already had most of my stake back in dividends, so if there’s a sudden dire profits warning or worse, with sudden dreaded suspension of the shares “pending clarification of our financial position,” (I.e we’ve gone bust) it’s no problem. And for all I know DEC could go on paying the huge dividend for a lot longer.

I’ve never understood why DEC is on our market and not their Home US market. But!! DEC recently announced that from December 11th the shares will be listed in the US too. In preparation for that and because apparently US investors prefer shares with a high nominal price there is a 20/1 share consolidation soon.

Some are hoping that being on the US market will give the share a big boost. I’m not so sure and so far there’s no sign of the share having a good run ahead of the US listing.

So I see DEC as a risky punt, but maybe some here will disagree with that and put a more convincing case.

PitBullCH

From what I have experienced locally here in Switzerland, iPads are the preferred choice as they are easier to properly lock down - Chromebooks are weak security-wise and kids are rather good at circumventing any restrictions the schools might put in place. Here they usually supply the school iPads in a protective case with attached keyboard - seems to work very well.

StrawberryDreams

Soros Fund Management was short the danish wind producer Orsted.. one of the 'better performers' last year.They've closed and gone long for whatever that's worth.They were short Vestas too i think, not Siemens Energy though, which almost got into real funding trouble.

I think the UK government has finally upped their prices/guarantees too now after the previous wind auction debacle with no takers.The US still is a problem i read with Orsted dumping a couple of wind projects they were going to do over there for three billion in losses, due to inflation related cost issues, price guarantees again no doubt.Best to stick to good old oil and gas still perhaps.

Not much use to your son but the Open University have great materials for those who prefer or don't mind studying at home, whilst potentially working too.I'm coming to the end of an undergraduate degree with them and even i've done well.

Great materials and tutors who are responsive and not just interested and bogged down with research do make all the difference to the academic side of things.It's still marginally cheaper than some other unis now too i believe.Although, that was a real shame when they had to put up their fees as many liked to study for enjoyment.I always like to extol the virtues of great organisations.

Pimlico on Thames

Thank you to everyone who provided their insights today.

Best Black Friday offering I've seen.

It was an internet issue - website is back.

mojomogoz

I'm out of date on RM (LON:RM.) not as I'd given up on the botched RM Resources integration process (I lost interest before then!) but as I think there is high risk of disappointment in the higher profit / 'sexier' areas of RM Technology and Assessment (previously called 'Education' and 'Results" I think). What do I mean?...

My following and analyse of the company over many years thinking it was a turnaround play (I invested and exited before the woes became visible for a small profit...not worth the legwork) lead me to think that there is product problem at the biz...in that they are light on genuine repeat and scalable product that can be expanded profitably over many users. Instead they do a lot of bespoke IT work for their customers when selling and providing product (they badge that when reporting as if its a standard product but imo its a lot more client by client) with that grunt work done through the Indian bit of company. That made sense 10+ years ago as Indian IT/software labour was much cheaper and could be tasked with grunt work unprofitable in a western setting (...or likely to lose you your valuable technical and support staff through disillusionment). BUT Indian tech and support labour is more expensive and generally moved up the price-quality curve. This creates a big organisational problem for RM as they have sunk cost and knowhow relative to what I think is a rather fractured and messy product set.

So what do they do? Move that to a lower cost destination? That's probably not feasible either in terms of alternate location or moving a great deal of rather heuristic knowhow with the current client base. Simplify and generalise their product offering? That would likely create clients friction and loses.

There's a risk IMO that there is not much salvageable at RM as an ongoing business.

Several years ago I thought the CEO of RM to be a bit underestimated and destined for bigger things over time. That was an error of judgement and now I see he was probably a shortsighted tinkerer...

I'm out of date so someone may put me right...

sevenccc

jdn

I'd suggest contact the Investor Relations team at Team17 (LON:TM17)and ask them to send you a hard copy (they usually have a few) or the Financial PR at the address on the latest RNS and ask them to reformat the pdf to single page view and send it through. If they don't know how to do that, or claim technological incompetence, ask them to contact the design agency that created it for them. It's a quick fix.

Oops. My bad. Maybe Paul might know after his meeting with Tom Benyon

yiannos1

I am not talking about ‘years ago’ , as years ago the dividend cover was 4 and now on a 2 year forwarded it’s not even 1 and it’s definitely not sustainable.

Years ago (last 4-5 years) it was not 19-20% as the price was higher.

Yes I agree - not for widows and orphans. But debt is being repaid, dividends maintained and let's not forget they are also buying back shares. I'm comfortable with both the risk and the dividends.

Threepeat

David

re Petrotal (LON:PTAL) I hold a miniscule amount but I noticed that Stocko's dividend page appears to be wrong and I have asked stock to check although I havent heard back yet. You are right though yield is about 15%. See their RNS

Mark B

A shame that the recent acquisitions have put so much drag on operating costs. Often the case, but I think they will work out over the long run. Businesses so often under estimate the short term costs of integration and buy more than they should. Still, I think they will learn and push down the operational costs to get margins back to what they were. For traders, this looks like a nightmare. For me, I always try to think of 10 years and I still like this business. I think, I am happy to own this and accumulate more. So I am. Not my only business, so this year went from being great, to being good, in terms of my market capitalisation. It still amazes me just how fickle shareholders can be, but they may be proven right. I will see how it pans out over the next ten years. I think I am writing this to help me process just how much the market punishes businesses that hiccup and yet as people and anyone who has been in any business, knows this is part of the territory. I see opportunity, others are running for the hills.

We just need Venus now to start buying!

Executive directors are committed to buy to 250% of their salary over the next 5 years-that’s a lot of buying.

jonno

25th Nov '23

Sigmaroc (LON:SRC)

I have a reasonable holding.

So I could better understand the mechanics of the fund raise and proposed acquisition of the limestone quarries from CRH (LON:CRH) I spent last night reading the 50 page brokers note from Liberum to help decide decision whether to add to my holding'

The following points are I think on the positive side of the risk/reward see-saw.

Having met the management team on two occasions, they come across as competent and knowledgeable. In particular they are in my view forward thinking as exemplified by the tie up with Arcelormttal, the use of Aqualung technology to capture CO2 from lime kilns and the development/promotion of 'Greenblock', the ultra-low cementitious building blocks. This why I have continued have to hold the shares despite investors shunning the UK market especially AIM listed shares over the last 2 years.

The CRH assets are complementary to Nordalk that Sigmaroc (LON:SRC) purchased in 2021. There is no geographical overlap and if acquired will make the company number 1 or 2 in the supply of lime across 8 markets. The initial acquisition 'Deal 1' is for assets in Ireland, Germany and Czech Republic. Deal '2' relates to assets in the UK and Poland. Sigmaroc (LON:SRC) has call options on the latter, which it is not obliged to exercise.

The acquisition will reduce Sigma's construction exposure as a % of revenues from 57% to 48%, while increasing its exposure to environmental and food related activities. I t will also broaden its revenue by geography. This should make it a more balanced and less cyclical business.

Lime is an essential ingredient in many industries and often represents a comparatively small cost of the whole, hence margins are higher. It is used in water treatment, soil improvement, steel and paper making.

CRH is a willing seller and is seeking to recycle capital from Europe into the faster growing Americas. CRH has agreed to take part in the equity raise and the contingent deferred consideration of 175m euros does not become payable for 6 years post acquisition. This has been agreed to ensure continued supply of materials to and demand of materials from SigmaRoc.

Sigmaroc (LON:SRC) management have identified 30m to 60m of potential synergies and historically has a good track record of delivering on such.

The potential negatives and more obvious pitfalls are:

The assets to be acquired are of a lower quality that was initially assessed.
Unforeseen reduction in demand for limestone/lime
Free cash flow across the Group doesn't materialise to enable the anticipated debt reduction from the forecast post acquisition leverage of around 2.6 times.

Conclusion

There is an awful lot of detail including numbers in the Liberum Note, too much to summarise, I am afraid

Whether or not the acquisition goes ahead will be decided at the General Meeting on 11th December. I would be surprised it it doesn't get the green light from shareholders. It is a significant opportunity but comes with execution risk, amplified by the size of the acquisition.

Quarries are large long life assets, admittedly subject the vagaries of the economy, but if managed properly can be very rewarding. I have therefore decided to keep faith with the management team and have taken advantage of the price weakness to add to my holding below the offer price of 47.5p.

Incorrect yiannos1. “

Years ago” I bought some Diversified Energy (LON:DEC) at just 55p compared with 72p now. So any who also bought then have seen a capital gain as well as a huge annual dividend. More recently though the share price has fallen significantly and even accounting for the big quarterly dividends investors who bought ahead of the current dip are losing.

As I and others have posted the jury is out on DEC. It’s not a share for a cautious investor.

What’s incorrect?

I am trying to understand where is this going?

I just corrected your statement that the current dividend of 19% is unsustainable (the current!) as it is not covered by future earnings. My statement has nothing to do with the price you bought the shares or if you have got back your investment in dividends. That’s the past- Don’t think anyone is interested about that.

I am just warning potential investors that the current dividend yield cannot be covered by the current/future earnings and cash flows; according to all research available.

Thanks

doctor dave

26th Nov '23

Doesn't Diversified Energy (LON:DEC) come under the heading "if it looks too good to be true, it probably is?" Especially given that no one seems to understand it....?

Small Cap Value Report (Fri 24 Nov 2023) - TM17, IKA, FIH, MTC, MACF, MBH

Explanatory notes -

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Paul Scott

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