Small Cap Value Report (Mon 21 Feb 2022) - MNZS, SLP, CLG, WIL, SNG

21st Feb '22 by Paul Scott

71 comments 12023 reads

Good morning, I'm back (Paul) after a few days break. Many thanks to Roland for covering.

It's certainly a very tough time in the markets at the moment, especially small caps. I always remind myself at time like this, that bearish market conditions are laying the foundations for the next bull run. So providing we hold sensible companies, reasonably priced, they'll usually go back up again.

Mello Monday starts at 6pm (online) this evening. Details here. I do think it's important to keep engaged, rather than withdrawing into despondency when markets are difficult.

Agenda -

Paul's Section:

John Menzies (LON:MNZS) - looks like a cash bid at an increased 608p is now enough to win over management to back the takeover bid from Kuwait's "Agility" infrastructure group. Are bearish stock market conditions creating opportunities for more investor windfalls from takeover bids?

Clipper Logistics (LON:CLG) - continuing the takeover theme, management has agreed a bid from US-listed GXO, 75% in cash (690p) and the balance in GXO shares, which UK investors may not want to hold. It looks a fair price to me.

Synairgen (LON:SNG) - a speculative drug treatment company delivers the news investors dread - that its product failed the main targets in testing. Although crumbs of comfort come from secondary results. It's difficult to see much of a bull case now.

Jack's Section:

Sylvania Platinum (LON:SLP) - I hold - production down due to flagged technical difficulties and cash costs are up. The stock remains cheap in my view, but that depends on the outlook for the group’s PGM basket price. Management continues to return cash to shareholders via dividends, special dividends, and share buybacks. Even accounting for the operational challenges, the company remains highly cash generative at these levels.

Wilmington (LON:WIL) - good H1 results, as previously flagged. AMT has been sold for a useful premium, which goes some way to mending a balance sheet that could still do with a little work. The group’s two segments are both growing organically, and the return of face-to-face events could lead to further upgrades. I think it’s one to watch.

Explanatory notes -

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Boon

21st Feb '22

Inflation.... while I was having lunch, I had a bit of a thought which is making me re-assess my portfolio for those companies depending on discretionary consumer spending in the UK.

If we take the general population, and assume 75% of income is spent on essentials/must-haves. And 25% on discretionary items.

In the worst case scenario, assume they get zero pay rise. And essentials/must-haves go up by inflation, lets assume 8% this year.

That means the ratios change; now 81% of their income goes to essentials, and only 19% left on discretionary. That's a 25% decrease in their discretionary income.

So if we look at the discretionary industries and imagine they will see a 25% drop in demand, and also facing cost/input inflation headwinds, as well as fixed cost headwinds (ie wage increases, energy, etc). Then it is clear that unless a company has at least double digit net margins (I'm thinking 15%+ net margins are required to withstand), the going over the next 12-24 months is going to get very very tough. Unprofitable and cashflow negative tough.
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Obviously very simplistic calculations above, and you can input your own variables like wage growth to temper it down. But from a macro-view, I don't think we're out of the woods yet...

Thoughts?

JohnEustace

There's a limit to how far the BoD can push things when institutional investors are willing to sell up at 605p. I haven't given up all hope of a counter bid yet.

Bouden54

I think against this you need to factor in that consumers have built up a lot of excess savings over past couple of years, which should cushion the blow. Furthermore, unemployment is low with lots of demand for labour - under these circumstances I would expect most workers to get fairly healthy pay rises (perhaps not matching RPI, but not too far off).

MiserableJacktPotato

My thoughts are that you've just pulled a load of numbers out of the air. I get the general idea that inflation goes up, discretionary spend goes down, that much is obvious, but where did you get numbers like 75% of spending is essentials on average?

And I think you're starting from a flawed premise - if inflation is 8% that doesn't necessarily mean bills go up to 81% as that 8% won't carry through to fixed costs. Most mortgages are fixed rate. Most car loans and other borrowings are fixed. Additionally essentials are essentials, but there's a lot of discretionary choice even in staples like food. People will swap brands for supermarket labelled goods, down scale to the budget stores. It's more likely the 8% inflation only really hits the discretionary spend rather than core spending.

And why are you stating that pay rises are zero in a high inflation era, the lesson from history is usually the opposite to such an extent that pay rises can become the cause, not the response to, ongoing high levels of inflation.

As I said at the top, I think your general premise is correct, discretionary spend will be down, but I don't anticipate the absolute bloodbath you predict.

cmpeckham

I think the essence of what you are saying is valid. The BoE agree. This is one dynamic that they are factoring in to models and relying on to bring inflation down. One thing that's worth pointing out is what economists call the "permanent income hypothesis" which basically says that consumers smooth consumption patterns so the kind of effect you are discussing is much lessened. It's also worth saying that the evidence on this is mixed but there is a picture that says the wealthy behave as if they have a permanent income while the less well-off don't (unsurprisingly). Ignoring other factors you could then say that the likes of Burberry (LON:BRBY) or perhaps £SAGA might be unaffected, while discretionary spending at Scs (LON:SCS) might fall. But you could also predict that revenues and profits might rise at the likes of B&m European Value Retail Sa (LON:BME) , so perhaps margins aren't the metric that will determine who does well and who badly.

Rusty2

Inflation on essentials is going up far more than 8%. My gas and electric are going up around 100%, that's from January to April, then again in October probably. Petrol/diesel has gone up around 15%. Food also is going up. So essentials are going up way more than inflation.

FREng

Thanks for all the answers on liquidity. I like dahokolamoki's suggestion of the daily average shares traded (available in the 'full quote' panel in the stock report) but as he says, in difficult times liquidity can disappear. It seems EMS is of little use to investors in small cap shares unless one keeps one's position sizes very small - which implies a very large number of different shares unless one has a rather small total investment.

But I'd like to hold a maximum of 50 (ideally 20) different shares , so that my stock picking has a material affect on my portfolio performance, otherwise I may as well buy an index tracker or three.

It was easy to be tactical rather than strategic when the market was rising. Now I need to think harder about my strategy.

Zipmanpeter

I think you need to go one level down and split consumers. Roughly the top two-thirds (i have seen various estimate) of wage owners have built up savings, as have those on good pension schemes (the retired rich). The bottom third (poor pensioners, the working poor and young adults) have not. This bottom third will now face a disproportionate impact from the cost of living crisis as non-discretionary food, energy etc are a much bigger part of income plus National Insurance rises.

From an investing point of view therefore, Saga (LON:SAGA) premium cruises and older owner-occupier insurance are in a very different place than say £Boo, a budget discretionary clothing company. I hold both but see why one has tanked.

Quilleron - Well done for emailing. Who did you email, and at what address? Maybe some others here want to encourage investigation of the sales by the CEO of Morses Club (LON:MCL) ...

TheFloatingInvestor

I am thinking that big items, sofas, white goods etc could well struggle a bit, any spare cash could well go on holidays if borders open up fully, I am also not watching companies with very low or unstable margins. But TBH I think buying into any more companies ATM seems like folly, as todays fair price just gets smashed down through tomorrow. Keep what I have and sit back in cash till the dust settles, which i think could be a few months yet.

Threepeat

I hate to be the one asking the stupid question here re Morses Club (LON:MCL) but what exactly are these claims and what is the wrongdoing that they claim Morses to have done

gmtrader

Synectics (LON:SNX) 21.6% up today. Results tomorrow. Looks like a leak.

Quilleron

MIUMailbox@fca.org.uk

BattleOfBrit

I also reported them and got the same response. Unfortunately, I've received so many of those responses over the years, that I am not hopeful that anything will happen. The UK markets are amongst the weakest regulated in the developed world. It's extremely rare that the FCA takes action. Oh well, there's another investment down the tube.

I also just wrote to Sharesoc about this, hoping to start a ball rolling

I should have noticed that another director also sold their entire holding a few weeks ago. In my experience, seeing a director sell their entire holding is a red flag. Double red flag today, but the CEO was cunning enough to do a runner straight after selling and we only heard about his selling after the profit warning! Another possibility is that the company sacked him after hearing of his sale, but that's just conjecture. Either way, it stinks.

Stocks123456

It's not a stupid question at all. There is a real lack of information in the £mcl RNS. That together with the CEO leaving suggests something is badly wrong here. I hold a small amount thankfully but will stay out for now.

Ponzy Mad-Hoff

When the likes of Wonga and Amigo got hit hard by regulation I thought the writing was on the wall for Morses and their equally dubious business model. I’m bullish on the pawnbrokers as pretty soon they’ll have most of the sub prime short term credit market to themselves.

Reading about this in the FT just now, it reports that Paul Smith is a member of the FCA Smaller Business Practitioner’s Panel!

https://www.fca-sbpp.org.uk/fc...

https://www.ft.com/content/05c...

Harry Hindsight

19th Apr '22

The Lords, the FCA, the FOS. I though mining was bad and so watched it carefully. I will do so with any UK institutions as well as would I Latin America.

Small Cap Value Report (Mon 21 Feb 2022) - MNZS, SLP, CLG, WIL, SNG

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Paul Scott

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