Small Cap Value Report (Mon 26 June 2023) - BMS, DWHT, LOOK, CINE, POLR, AML, CBOX, DEMG

26th Jun '23 by Paul Scott

49 comments 7707 reads

Good morning from Paul & Roland, raring to go!

Today's report is now finished.

Gorgeous weather continued over the weekend here in Bournemouth, so it feels like I'm on holiday!

I've got into a good routine each weekend now - Saturday morning is to go through the week's SCVRs, replace any missing tags, update my quick reference spreadsheet summary, then I record the weeks' podcast. Sunday morning is for recording my macro/markets podcast, having done some digging around for relevant data and articles. Sorry part 2 was so lengthy this week, but there was masses of information, and I reviewed the Bank of England MPC summary/minutes, which was useful in better understanding the Bank's rationale for increasing rates aggressively again to 5.0% (due to inflation & labour market running hotter than expected), despite admitting that it didn't yet know what impact the previous 12 interest rate rises would have.

Brief macro thoughts

I'm actually a little less bearish than last week though, as I explain in the podcast. This is because consumer confidence data from GfK has been consistently improving since last autumn, and the interest rate hikes mainly shift money from borrowers to savers. Yet mortgages are something like 85% fixed, so that impact will only occur gradually, and impact a relatively small number of people. Whereas savers are benefiting already from higher interest rates, and there are many more people saving, than borrowing (only about half owner-occupiers have mortgages at all). Plus many people got a 10% pay rise from April, boosting spending, as Next (LON:NXT) pointed out in its upbeat statement last week.

I suspect some sectors might slow down (e.g. business-to-business, capital goods, construction, etc), but others might perform better than the current gloomy mood suggests. I don't know, we'll see. All up for debate, and I always remind myself that no matter how expert anyone is, and how emphatic their language, and certainty in their own opinions, we're all just guessing! That's why it's better to keep an open mind, rather than to become rigidly wedded to some theory about what the future holds.

I've noticed that in the past, lots of sceptical bears miss out on the best part of a recovery, because they're still denying that it is a recovery (seeing it as a bear market bounce). Similarly, people who sit in cash, often miss the recovery,…

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topvest

26th Jun '23

On Braemar (LON:BMS) its interesting to note that results were originally due by the end of May and then put back (by RNS) to end of June. CFO replacement annnouncement on 20 June with new CFO coming in on 1 August. Pretty obvious that the board have lost confidence in the leaving CFO, who hasn't been able to get his accounts out on time. Whether the new CFO will want to take responsibility for last year's accounts in August is questionable. I suspect BDO risk management requested management to request a third party review of the historic transactions as part of their final audit processes. Auditors don't really care about hitting deadlines if there is something not fully resolved. It all reflects badly on the CFO for not managing and resolving the issue on a timely basis, hence he is walking the plank....2 years of missed deadlines!

colin1862

Thank you for pointing that out - the spelling actually crossed my mind as I wrote it but I thought if it's good enough for the Daily Mail it's good enough for me. I've spent the last 5 mins trying to get Mortgageor to rhyme with borrower but failed. Maybe Eyeore would be more appropriate? I did, however, succeed in rhyming Mortgagee with Society - could be the basis for an advertising jingle?

gmtrader

One last point, to open up a monthly saver you do need to have a basic account with the bank. The great thing is, a lot of banks are offering money to open up an account with them, or at least they were doing a couple of months ago. What I did was open up a second bank acc with my regular bank and used that dummy account to do a bank switch. I was given £175 for opening up an account with Halifax. First direct kindly gave me £200 and NatWest also gave me £200.

Nanotrader09

Just wanted to warn people on PROCOOK (LON:PROC) I'm getting offers daily now - desperate to hit targets perhaps?

iamflimflam1

It was nice to hear Paul being a bit more cheerful about the macro world in the podcast. I'm feeling a little bit pessimistic at the moment, but I'm mostly involved in the startup world.

Anecdotally, I'm hearing a lot of issues around raising funds and there being no money out there. I'd be the first to admit that there was a period where raising money was way too easy and ideas without any proof points would be able to raise stupid amounts.

That tap has definitely been turned off. This is going to have quite a bit effect on the ecosystem as there are lots of companies providing services to startups that have gotten used to being able to charge a lot of money.

I went through the dot com bust and it feels like there are some similarities. Money suddenly became very difficult to come by. Many companies failed and many companies reduced their spending significantly.

Revs8

Thanks Paul. I take the view that there is something unpleasant in the history else why take such measures. I no longer hold.

Wolf of Small Street

Just reading in the Times something similar.

"Nine out of ten businesses are halting growth plans because of problems accessing capital, forcing almost a quarter to scale back expansion or make redundancies. In a survey of 500 mid-sized businesses by BDO, the business advisory and accountancy firm, more than half cited inflation and increasing operating costs as the biggest challenges in the next six months. As a result, businesses were considering new sources of financing, notably private equity, as they called on the government to help to improve their access to cash. The survey found that 24 per cent were being forced to make cuts, including reducing employee numbers, with 22 per cent unable to finance expansion plans. Another 20 per cent were struggling to invest in new technology or software. Even if companies manage to avoid job losses, 20 per cent said they were unable to raise salaries and 24 per cent were struggling to invest in benefits or schemes to retain existing staff.The survey highlights this as a big concern, given that 24 per cent of businesses cite staff and skills shortages as one of their biggest challenges over the next six months."

ken mitchell

Not sure this is much help Paul/anyone but I sold Lookers (LON:LOOK) last week as it looked a done deal and immediately put some of the proceeds in to Pendragon (LON:PDG) after your prompt about doing that. And I’ve already got a full stake in Vertu Motors (LON:VTU) luckily bought in the 40s. All three buys and an incredibly lucky wild punt in SERAPHIM which tripled on a bid just days after I bought were thanks to your excellent commentary here. ZANE is a beneficiary as I’ve broken my only give to UK charities rule as you’re so keen and it does seem such a worthwhile charity, and worth monthly payments in to it with a bit of the profits.

With bids I nearly always sell quickly unless the share price goes above the bidders price. Markets are often the best guide for us with bids and are so often right when the share goes above the bidder price as it is then followed by other bidders or the original bidder paying more, And when the share price stays well under the bidders price it’s so often proved right and the bid fails.

And Lookers (LON:LOOK) has been just below 120p throughout so far. It’s not worth hanging on for an extra penny or two. Also imo unless the share price suggests a higher bid quite likely it’s not worth holding on in case the bid fails. And there’s just a hint of that now with Lookers.

Paul Scott

Thanks for the kind comments Ken. And particularly thank you for supporting ZANE too. I attended online the annual ZANE conference recently, and things are predictably dire out in Zimbabwe. I think about it every day, the hundreds of lovely people I met out there, who are scratching around just trying to survive from one day to the next, in a completely dysfunctional country. They are incredibly grateful to us for helping them with the basics - food, basic medicines, and the other projects (club foot, pop-up schools in townships, womens refuges & rehabilitation for victims of brutality. But obviously it's not the right time to be tapping anyone here for money to ZANE, as the bear market has been so savage for small cap investors. So I'm delighted you're finding some to send to ZANE, thank you :-)

andrewdb

Not sure. If you count real returns the story is different.

1% interest when inflation is 0.5% = +0.5%

7% interest when inflation is 8.5% = -1.5%

But what the right thing to do is is not clear to me.

Personally shifted to larger 500m+ cos that pay reasonable divis that have lots of cash or assets last year. With hindsight would have done better just buying really big cos

Interesting, thanks. With hindsight, this was a warning sign with Joules. In the last 6 months before that went bust, I got daily half-price offers by email, I remember we discussed it here, agreeing that they were trashing their own brand in a desperate plight to offload excess inventories. Even the broker, Liberum I think, said in a note that Joules was being run for cash, not margin. That's why, rather belatedly, I jumped ship and sold my shares, turning bearish here, but only after the big losses had already occurred unfortunately. Still, salvaging something is better than nothing.

Roland reviewed PROCOOK (LON:PROC) last here in April 2023, saying he thought the balance sheet looked risky without a return to profitability.

It's family-controlled I seem to recall, so de-listing might be more of a risk than insolvency perhaps? Or they might buy it back for peanuts from an administrator, minus the leases?

Last TU for FY 3/2023 indicated a breakeven result, not a disaster. It's got 58 stores though, so fixed overheads on those mean it's geared to a further downturn (unlike online, where costs are mostly variable).

Looking at its last balance sheet at 16 Oct 2022, there's not really any support there. If we write off worthless fixed assets (which will mainly be historic shop fit-out costs I imagine), then NTAV is only about £4m.

I could do with some new kitchen knives actually, as I've been struggling with a tiny "kitchen devil" for many years. So I might have to mystery shop Procook! Also of course more wine glasses, where I've broken thousands of them over the years, and always only seem to have 2 mismatching ones left from the many original boxes of six.

(Never take the seat opposite me at a long lunch, because a wild gesticulation or two usually launches a glass of red into orbit, and you'll go home drenched & discoloured, as many of my friends will confirm!)

Regards, Paul.

The Jayman

It’s a shame you’ve discontinued deployment of the ethereal jingle to signal the pending Mystery Share announcement.

It eerily had something of the Twilight Zone about it, for those of us old enough to have watched endless repeats of the show (late BBC2 and later C4) well into the 80s.

Lamb of Wall Street

With Cake Box Holdings (LON:CBOX), being egg free, it seems strange they don't have a selection of cakes which are also dairy free. This would cater towards people who are vegan and/or lactose intolerant.

Cricketfan

Thanks Paul for the write up on Cake Box Holdings (LON:CBOX. (I hold but a small position).

I think that you are spot on with the list of questions for mgt. That said, the underlying business does now look quite firm with past probs hopefully gone with the last FD.

I do like the franchise model and with the StockRank hike and the good divi in mind, I need to do a mystery shop before thinking about increasing my exposure. The last time I visited my nearest store (Tolworth, West London), the display looked great and two families ahead of me were spending freely. Good service from the staff who appeared cheerful which, IMHO, is always a reassuring sign.

Mark

sharw

PROCOOK (LON:PROC)

Once upon a time there was a brilliant shop near me called Kitchens. It stocked for the basic amateur and high end professional equally.

Then along came Procook and took over Kitchens and all its branches and drastically cut the stock that appealed to the amateur leaving only the 'pro' end of things. No more Mary Berry cookbooks!

Result - closed

Inspiration Healthcare (LON:IHC) has an AGM statement tomorrow I think

Just scanning for shares which have risen in the past 7 days, and its one of only a handful of smallcaps to have rallied strongly.. After earnings forecasts were slashed in November things were looking better Q4 + Q1 this year so will be interesting to see if positive trading has continued.

BenHazz

Reading Pauls report that Polar Capital Holdings (LON:POLR) has started to shift more of its assets towards Emerging Markets. Is it possible that this could have a positive read across for Ashmore (LON:ASHM)? They took a nasty dip over the past week like many stocks and currently trade at 195p, this is roughly a 30% decline since Graham rated the stock 'green' back in February (277p). I bought into ASHM on Friday so probably clutching at straws to vindicate the purchase!

Boon

I am also a suffering Ashmore (LON:ASHM) shareholder, but I am in it for the 1-2 year horizon at a minimum. The solace I take is the tasty dividend on offer, and a solid balance sheet to weather the storm.

Long term, I think high inflation and high interest rates are going to squeeze growth in developed world, and developed stock markets will struggle for gains in the next few years. Meanwhile, some of the drivers of inflation (high commodity costs, increasing labour costs) should benefit emerging markets in general, given that they export quite a bit of commodities, and also will benefit from more labour intensive work shifting to emerging markets. Don't forget that demographically, emerging markets should see good structural GDP growth vs developed markets. This was not the case 2008-2022 due to cheap credit in developed economies, as well as COVID impacting developing markets more.

But now, investors in general have this view that developing markets are always going to lag developed markets in growth. This is where I take a contrarian view. The leveraged bet is investing in an emerging markets fund specialist, because when the tide changes, they will see a huge surge in AUM due to more allocation to emerging markets among investors.

(I hold in the Boon Fund)

GloucesterBob

They have just opened a new headquarters by me, and it is says

"The new site will bring all of ProCook's stock back under one roof, improving product availability and operational efficiency and further supporting the customer experience both in store and online."

So they must be doing something right, not sure about giving food away!!

ProCook new Headquarters

*** Paper is under the Daily Mail, so expect a bit of sea sickeness as the pages refresh all over the place.

Hi Boon,

Thanks for your detailed summary on Ashmore (LON:ASHM) above but also for your detailed write-ups that you put together regarding the Boon fund, always a good read. I had actually only read your summary on Ashmore a few days ago and when my alert went off at 200p I decided to buy in.

Another factor I think will benefit Ashmore in the mid-term timeframe is the current perception around onshoring compared to the reality. A lot of companies have talked up moving business onto home soil which would reduce FDI inflows. Whilst I believe this will happen in the long term, in the short term companies will be looking for any way to save money in the moment, which if anything might actually result in increased EM investment to get companies through the upcoming downturn.

Lets hope the dividend is maintained for this year and next year. If that happens then at the very least we should walk away with 15% upside... if only it was that easy!

Ben

Small Cap Value Report (Mon 26 June 2023) - BMS, DWHT, LOOK, CINE, POLR, AML, CBOX, DEMG

Brief macro thoughts

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Paul Scott

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