Small Cap Value Report (Thu 10 Mar 2022) - MEAL, FCAP, TUNE, FORT, BOO, FSJ

10th Mar '22 by Paul Scott

48 comments 11347 reads

Good morning, it's Paul & Jack here with the SCVR for Thursday.

Agenda -

Paul's Section:

Parsley Box (LON:MEAL) - placing & open offer, at 20p per share. Directors & associates are stumping up £4.1m of £5.9m placing, an impressive commitment. Trouble is, so far the business model has been a cash burning failure. Is that likely to change? Revised strategy looks more about survival than growth, so I see lots of risk and little upside. Hence best avoided I reckon.

Focusrite (LON:TUNE) - an in line trading update for H1. Share price overshot last year, and like many small caps, has corrected sharply this year. Is it a bargain now? Not really, but the valuation of PER 20 seems justified for a good quality business.

Boohoo (LON:BOO) (I hold) - back by popular demand, as it's almost a small cap again after a disastrous sector-wide de-rating in the last year. Today's FY 2/2022 update is (surprisingly) in line with (lowered) expectations. This looks a turning point to me.

Jack's section:

Finncap (LON:FCAP) - full year revenue to exceed the top end of its £45m-£50m guidance. No word on distribution of profits. The shares are very illiquid, but they also look cheap given how well the group is performing. Market conditions could turn of course, in which case you’d have to expect some volatility.

Forterra (LON:FORT) - FY results slightly ahead of expectations, despite previous upgrades. The shares have fallen along with the rest of the market but the results are good and the valuation undemanding, so it could be worth taking a closer look at these levels. The company notes rising costs but is pushing through price increases.

James Fisher And Sons (LON:FSJ) - not a company I’ve followed before, but one with a long operating history. Things have gone badly over the past couple of years and the share price has collapsed, so being cautious. There could be value given the lack of equity dilution and it might be worth monitoring on that basis, but debt is quite high, the results are poor, and the long term strategy has yet to be properly defined. I'm curious to see how the situation develops but the risks are considerable.

Explanatory notes -

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FREng

10th Mar '22

Paul: re Boohoo (LON:BOO) Thanks for the helpful analysis.

You wrote "Rumours from a usually good source (Betaville) suggest that the founders might take it private. I think that has some credibility. After all, why go through the rigours of being a listed company, if nobody is interested, and the rating is low?" ... and ... "these numbers suggest to me BOO is currently undervalued, hence I’m comfortable buying more."

That must mean that you think that, for BOO to be taken private, there would have to be a fair premium to the current SP. What sort of premium would be required, in your experience?

rk71

I hold Capital (LON:CAPD) - broker note following todays positive results from Tamesis states target price of 140p following upward revision of 2022 revenue estimates from $248.6m to today's company guided $270-280m, which they believe to be on the conservative side. I am happy to continue holding.

Zipmanpeter

Re Forterra (LON:FORT) - I own Ibstock (LON:IBST) who reported yesterday and listened to their presentation of the results. They now described their pricing as dynamic and at least quarterly but also seemed very confident of pushing prices through (and that at current levels some some of energy support would be forthcoming from the Govt).

They have been focused on energy reduction/carbon reduction for some time via capital investments.

I came away confident for the brick industry ie that the triopoly felt secure ands that returns would be good . Having scanned Forterra (LON:FORT) I see a very similar strategy (energy reduction, brick slips etc) and thus outcomes

Bronstein

Had my finger on the buy button then thought of my heating bill. Can

Forterra (LON:FORT) pass on full energy cost hike I wonder? It would be good to check what fuel efficiencies will come with the new plant coming on line later this year

Bouden54

Capital (LON:CAPD) the thumbs down was based on a rather lazy assessment that it was based in Africa and therefore too much political risk. It wasn't really based on any in-depth insight, so wasn't too concerned about that (but probably explains the low rating)

ridavies

Where is the Capital (LON:CAPD) broker note please, rk71? Gratefully received if you can.

Hello JCPr. I am a member of Mello and am a fan of Mark Simpson who often takes part in the Mello Bash at the end of the programme. He has a recurring theme of seeking out shares with Added Value and some months ago picked Capital (LON:CAPD), a very unusual gem in the picks and shovels category. His view was that the company had additional elements which added value and were not fully reflected in the SP. The two added value ones were the labs and the investments. Both are very interesting from my point of view, and will come to pass. All IMHO of course!

illiswilgig

James Fisher And Sons (LON:FSJ) Hello Mark - thank you for your kind comments. I agree. I think the share price got ahead of itself this week and it will most likely lie around 380 - 400p for a few months now - unless there is some very positive news flow which seems unlikely this early in the year,

cheers

Mark

cmpeckham

I still hold some Just (LON:JUST) but sold a big chunk when they indicated previously that rising interest rates would have a significant negative impact. I see with these results that although adjusted profits were fine, IFRS profits were -£21m due to £251m of "investment and economic losses". The explanation for these is:

"Investment and economic losses for 2021 were £251m (2020: £9m profit). The main driver for the large difference compared to the prior year is the increase in risk-free rates during the year, which contributed losses of £226m compared to a gain of £360m when interest rates fell during 2020."

I can't say I feel comfortable with these being adjusted out of profits. Surely exposure to interest rate changes is part of their normal business? Neither do I feel comfortable with the throw away comment that "The Group actively hedges its interest rate exposure to protect the Solvency II capital position, but in doing so we accept the accounting volatility that ensues." What does that mean?

All a bit too opaque for me.

Harry Hindsight

Brick slips are a great point. Imagine standard 100mm thick bricks constructed by hand in all weathers and difficult work - to modern methods of construction - having the 'look' of robustness and numerous design (stone, slate, colours, textures) but stuck onto a board or rendered surface. Time, skills, cost efficiencies. But manufacturing wise slips can be 7mm, 9mm or 15mm so a 6:1 ratio minimum.

Fred Dibnah would not approve of these 'new fangled methods' but makes sense (until we start ripping them down lol - but thats not Forterra (LON:FORT) or Ibstock (LON:IBST) problem dem fire proof.

There are issues over backing board and insulation, but then thats another story.

And Bison is a precast concrete plank which is used on housing and lower rise I think to save pouring wet concrete, and probably the strongest thing in the whole edifice. Fingers pies.

Epsilon

The Capital (LON:CAPD) note is available on Research Tree, although it doesn't even stretch to 2 pages

abtan

Boohoo (LON:BOO)

I don't hold, but I do keep an eye on the results.

I certainly would have preferred more detail today and found it hard to infer how the company is performing going into FY23.

A Full Year Gross Sales figure, for example, would certainly have been useful, as the Q4 +7% Year-on-Year Net Sales figure in isolation doesn't tell me the whole story.

I think it's worth adding that this +7% figure is the lowest YOY revenue number I've seen by the company going back to 2017.

The above aside, I can't help thinking that the company is going to do a large raise in the near future to pay for their future US warehouse. I'm therefore not keen on buying in right now with the possible threat of dilution on the horizon. Or perhaps I'm being too cautious?

Retireyoung

11th Mar '22

Isn't the bigger medium term risk for Boohoo (LON:BOO) that rapidly increasing inflation (which we can expect a lot more of with Russia's invasion of Ukraine and the subsequent sanctions) will severely squeeze UK household's disposable incomes? I suspect this will affect the revenues of all companies that sell "unnecessary/optional" goods and services over the next couple of years.

Bullygig

Or, as we’ve seen in past recessions, is it the mid-market that really gets squeezed?

Those who shopped mid-market move to the more budget end and those who shopped top end aren’t impacted.

Re Boohoo (LON:BOO) and "inflation squeezing UK disposable incomes" and the additional issue is the age focus of BooHoo's main brands (young adults).

They are under huge age-specific pressures from govt measures like NI, changes to student loans and general essential inflation plus a continual failure to address issues on housing. I am hoping that the (relative) move upmarket and into slightly older person brands like Karen Miller and especially Debenhams will help but it will take time to grow these.

The other offsetting factor in their main UK market is scale - they may be able negotiate better prices and marketing budget cuts than the many small competitors and squezze out some margin gains by tightening returns policies etc. In their other markets, esp the US until they get better distribution costs, they will suffer.

I hold, have taken a bath having bought back in a twice today's price but think the price will recover somewhat in time but it may be a 12-18month wait.

davidjhill

Basically as I understand from the report it means that they are liability and duration matching future liabilities and cashflows, which is sensible, but the instruments they use to hedge out interest rate exposure are seen as investments from an Accounting perspective and therefore marked to market. Thus whilst the end result (say 10 years down the line) will be more or less the same there can be significant gains/losses from these hedging instruments year on year.

So you do need to take them out of IFRS profit to show the adjusted profitability as this is the value the company is actually generating for shareholders. The ups and downs of the hedging instruments is effectively noise.

David, I didn't want to put this detail in my previous comment ... I originally assumed (in essence) the position that you describe, but what was not clear to me is how the corresponding gain is treated. They back out the losses on the hedge, so to arrive at the correct profit figure, they must either back out the corresponding gain on the position that they hedged, or that gain must not appear in the IFRS profit in the first place. I can't see any corresponding gain backed out, so the implication is that it's not in the original profit figure. But ...

The reason for the hedge is there to protect against increases in insurance liabilities. Higher rates help them by reducing future liabilities so the hedge works in the opposite direction. They confirm this by saying:

"Change in insurance liabilities was £1,039m for the current year (2020: £2,983m). The decrease is principally due to an increase in the valuation interest rate due to the rise in risk-free rates noted above."

So, the change in liabilities is less bad than last year because rates went up. If rates had fallen further, the change would have been worse. This is the movement that the hedge is there to protect them against, so this line and the hedge should be treated in the same way. But this "Change in insurance liabilities" is one of the key lines in the P&L (e.g. see page 14) while the hedge is excluded. So, at least on my reading, it appears that this is not a fair statement of underlying profit because profit and loss are not matched.

Note that although you talk about the "ups and downs" of the hedge, there is no guarantee that there are any ups at all, it might be losses every year until the hedge is closed. In which case what does that say about the accuracy of the adjusted profit? The loss never appears but the gain always does!

I'm not familiar with the relevant accounting treatments so I'm very willing to believe I'm wrong about this if you have the time to enlighten me, but I think it needs explaining, which is why I said ... opaque.

Just re-reading this I should have said that it is not the whole value of change in insurance liabilities that needs to be treated the same as the hedge, but rather that component that relates to changes in the risk free rate.

Paul Scott

Absolutely no idea!

Small Cap Value Report (Thu 10 Mar 2022) - MEAL, FCAP, TUNE, FORT, BOO, FSJ

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