Small Cap Value Report (Thu 14 July 2022) - JDW, APP, LGRS, FCAP, TRST, JIM, XAR, MCB, CTO

14th Jul '22 by Paul Scott

68 comments 7677 reads

Good morning! We're back up to full strength today, with Paul & Graham. Yesterday's report was a bit weak, sorry about that, we'll try to catch up today & tomorrow.

All done for today, I can't process any more numbers!

Agenda -

Paul's Section:

J D Wetherspoon (LON:JDW) - pubcos have been battered in the current bear market, for fairly obvious reasons - discretionary spending, when incomes are being squeezed by inflation. JDW's latest update is weak, with higher costs (some discretionary though) reducing profit guidance into a £30m loss. I think mgt can pull levers to restore profits, so this is starting to look like a potentially interesting entry point. Lots of costs are fixed, but not wages of course, a heavy drag on profits. Pubs are mostly freeholds, not revalued since 1999.

Appreciate (LON:APP) [No section below] - The CEO is stepping down, with the Chairman covering until a replacement is found. I listened to a recent webinar from APP, and can’t make my mind up about the shares. The upside case does sound interesting, but overall it left me flat. The outgoing CEO is most noteworthy for being a weak presenter on webinars (sounding robotic) - raising the question, does that really matter? I think it does to an extent - anyone running a company should be excited about it, and able to communicate that, and inspire staff. Although stellar numbers matter more than presentational style. Numbers at APP seem OK, but not stellar by any means. Let’s see what the next CEO plans to do with the company. I'll keep it on the watch list. [No section below].

Loungers (LON:LGRS) - a strikingly better performance than JDW, from this rapidly expanding chain of bar/cafe/restaurants. I skim through the results for y/e April 2022, which look great, albeit boosted by Govt support measures that have since gone. Forecasts for the new year look soft, so little risk of a profit warning. Much more upbeat current trading & outlook than JDW, which makes me ponder how different customer groups are behaving.

McBride (LON:MCB) (£28m) [No section below] - an in line update, but the company remains financially distressed, and is exploring options. Very high risk of dilution/insolvency. Two daft mistakes in the RNS - (1) a pointless footnote re market expectations, that doesn’t give any numbers! (2) quotes…

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Paul Scott

14th Jul '22

Just as an aside, we've got so many companies to cover, that we have to somehow try to pick things that are relevant, interesting, and that we can write about reasonably quickly (i.e. not complicated).

I know that sometimes people moan about, why haven't you looked at this, etc, and I do sympathise. So thanks to everyone who put up your own summaries here for stocks you like & own, it's very helpful, and often gets us interested (e.g. JDW & LGRS yesterday, which I wrote about today).

Sorry we don't have sector specialism in resources stocks. I know a bit about the sector, but not enough, and really don't want to start blagging it, and trying to sound informed, when I'm not. I did follow up the query though, and have floated the idea at HQ that Stockopedia could try to find some decent sector coverage. I think that was tried before, but didn't work out.

Anyway, here is today's GoogleDoc, where Graham & I tried to cover as much as we could, and to give you a flavour for things, which might be of interest - they go blue when published. Orange are want to do. There'a rarely enough time to cover everything, but we try.

Do people like the shorter sections? Or would you rather we just focus on more in-depth reviews? We're not sure what to do, as not much feedback on that.

Yes, good point Camtab. I had a similar experience seeing my Gran's savings from selling her big house in Essex, disappearing to almost nothing, thanks to the ravages of inflation in the mid 70's to late 1980s.

Although there are some signs that inflation might be peaking fairly soon. That's what the Bank of England has said recently apparently, and falling commodities prices reinforce that view.

Regards, Paul.

BattleOfBrit

In case the message was lost in translation as some seem to think. Atalaya Mining (LON:ATYM) is a superb company, paying an excellent dividend with a rock-solid balance sheet which is net cash, selling at a good valuation. So is the other company that was discussed yesterday.

It should be blindingly obvious that these are cyclical companies. So if the underlying commodity starts dropping fast, it might be a good time to review your investment instead of mindlessly averaging down a losing position.

It is wrong to tar every company in a sector with the same brush and to ignore them just because there are other companies in the same sector that have (historically) had a bad reputation. You will find highly speculative, junk companies in almost every sector. They're not restricted to the resource sector. I'm definitely not suggesting that Stocko start to review every resource company. But perhaps, it is worth considering whether or not some resource companies, fitting a tight set of rules might warrant an occasional mention, considering that there are some of us paying close to a thousand pounds annually for our subscription...

cmpeckham

In my view (fwiw) what you jointly do at the moment is just dandy. I like the short sections at the top and the difference in focus between the 2 of you. I don't see the point in trying to cover businesses where you don't have much relevant experience (or alternatively a keen interest in digging in and learning, because we should all be doing some of that).

I say: good job, keep it going, thank you.

jamesalastair

Great post .... I totally agree. I miss my days travelling Europe selling Scottish seafood to European Supermarkets. Happy days.

Graham Neary

Hi cmpeckham, I have seen CAPE applied to individual companies and it has some merit, but great care is needed. Finncap (for example) has made important acquisitions recently, and is likely to make more acquisitions soon. It's not the same company as it was five years ago.

It's possible to account for this and build a margin of safety into the analysis, but I think you'd agree that there are complications! It works best for very stable (perhaps very large) companies that are unlikely to experience fundamental change.

Best wishes, G.

Revs8

Hi Paul,

Anecdotally; my son has just got a summer job progressing insurance claims ( I won't name the company). He tells me waiting times for repairs are already long and getting longer. The earliest date for any Tesla repair is September! Its not good for customers waiting for repairs.

I suppose the hit to the insurer will depend on the flexibility of agreements in place and underwriting etc. I'm sure we can expect our policy renewals to rise to add to the inflation spiral.

The SCVR is excellent and improving with your podcasts and summaries.

If you cant fit everything in, then I like the short "no section below' comments.

Your detailed analysis is awesome but I skip it if the company doesn't appeal to me. Obviously, if you review one of my holdings I read every word. Some of my holdings are purely from finding out about a company in SCVR.

Investing can be very lonely (especially if you are a contrarian). Its sometimes reassuring to find that other investors have the same thoughts.

Keep up the good work.

PS. Renold (LON:RNO) is a company that appears to be doing a proper turnaround focused on the basics of running a good engineering business. Repeated good news doesn't seem to be getting the SP reward it deserves. I expect this one to rise in the long run. I'm looking forward to your thoughts.

Hi Graham. Thanks for the reply. I'd agree that there are complications, but in my opinion that doesn't invalidate the analysis. The S&P 500 is a very different "company" to 10 years ago, but that doesn't invalidate comparisons using the CAPE.

Regardless of any changes to our example of Finncap, the CAPE measure would still impart key information. Looking at Finncap at the top of the cycle, the TTM and Fwd P/Es would be very low, but the CAPE would be high or middling. It's that difference that's key. It prompts the question: is this a bargain, or just a highly cyclical share at the top? Other analysis would be needed to tell you the answer.

Equally at the bottom (maybe in a years time?) looking at Finncap would show terrible TTM and Fwd P/Es, but the CAPE might suggest a bargain that is waiting to multi-bag in the next bull market. Again, it's the difference between the 2 measures that is key. It doesn't give you an immediate answer but throws up questions for further analysis.

I would also say that CAPE is just one way of cyclically smoothing, and that the idea is also useful for other measures including quality, not just value, but all that is a longer story ...

ACounsell

Somebody forgot to tell the market! Atalaya Mining (LON:ATYM) down 13.7% today!

abtan

Jarvis Securities (LON:JIM) (no position)

Hi Martin

I'm flagging so will attempt to keep this short.

I've been doing a lot of work on Jarvis Securities (LON:JIM) today and thought I'd find a lot to like.
However, I'm more cautious now and feel that there's more short-term risk than I expected.

Some thoughts:

I actually think that the company will miss forecasts for FY22, but will smash them for FY23.
I've tracked Cash Under Administration (CAU) using a helpful post that you were actually a part of a few years ago:
https://www.stockopedia.com/co...

The Year End CAU figures below won't be 100% exact, but they'll be pretty accurate.
The interim CAU numbers are completely accurate.

Check out the concerning CAU drop from £382m (end of 2021) to £330m (end of June 2022).
Another thing I didn't realise was that the interest income we see in the accounts is Gross, i.e. the total that Jarvis Securities (LON:JIM) will receive from its banking partners.

For many years now that was all we needed to be aware of; there was no money to pass onto the client.

But I think 2022 is the year that changes.

I found this snippet in the x-o.co.uk T&C's:
"Interest accrued on sterling Account Money not immediately committed for investment shall be calculated monthly at 1% below the published HSBC standard current account rate."

The current HSBC rate for their Standard account is 1%.
So the client currently gets 0% on their cash held by the Jarvis.
But I imagine this will go up soon and I don't think the analysts are accounting for it.

I'm personally assuming HSBC increase their Standard Account interest to 2.0% by the end of the year, which I roughly equate to 1.5% on average for H2.

This means 0.5% will be paid out to clients = an additional cost of £800k in the Jarvis Securities (LON:JIM) accounts.

Note that the interest payment for clients is included within Administration Expenses, i.e. it is not netted off from the Interest Income within revenue, which is what Hargreaves Lansdown (LON:HL.) do.

---

I personally think the share price is far too low as I'm modelling a PBT of £6.7m for FY22 (a "weak year"), which seems like excellent value for a company with an EV of c£65m.

But I fear that if I'm correct on the client interest fees not being accounted for by the analysts, then there's more damage to come in these fragile markets.

Cheers

Mark Penney

15th Jul '22

Shorter views for me Paul-just key headlines and more about what you and Graham think of the information provided by the companies update.

Foodie

Hi Paul

I love the short sections, usually under a little time pressure so those are the sections that work for me.

If I get chance I do sometimes read the in-depth sections for companies I have an interest in and also look for ideas

Keep doing what you are doing it's appreciated, and aren't we overdue another Paul Scott ramble :-)

KevinS1

Hi Paul & Graham,

Great work from both of you. I like the short comments (no section below) - and would rather have these sections than nothing as all, as often they cover interesting companies for me.

Like the others below I don't always read the long write-ups if the companies aren't of any interest, but appreciate that many others do.

Keep doing what you are doing - your macro overviews are always of interest as are any views on your own holdings.

All the best. K

simoan

BattleOf Brit,

Well, as far as I can see Atalaya Mining (LON:ATYM) has only ever paid one dividend - that's not much of a record to start using the dividend yield as a solid case for investing! Cyclical sectors always look cheap when they are at the top of the cycle. The theory goes that you should only buy cyclicals when they look expensive at the bottom of the cycle. You say, it's a superb company and yet I now see this is what used to be EMED mining, a company I recall that struggled to get a license to mine its resource for many years from the local government even though it was in a "friendly" developed country like Spain.

And that is the point I am making against the risk/reward for small cap resource companies. They are often exposed to a single resource in a single country (like Atalaya), if you're lucky, maybe multiple deposits in two countries. This requires direct governmental approval for their operations. In less developed or developing countries the government nearly always wants some of the pie. When times get tough, they might want all the pie e.g. Argentina. If this isn't just a few million $$ paid into an offshore bank account, then that normally means they are looking for other ways to eat the pie. The point I am making, is that no matter how good the fundamentals, no matter how good the quality of resource, there is the exogent risk of direct government intervention. And you'll never see it coming...

It is my personal preference to remove the potential impact of direct government appropriation as far as possible from my investments. Who wants to invest in a company that has to declare its payments to governments every year? And what was the most recent case of threatened government appropriation?... Ah, yes, Hochschild Mining (LON:HOC) That looks very cheap too!

Mark Selby1

Hi Camtab, re £JDW Wetherspoon, seems you have stolen my identity! I agree with everything you say. I live in Tameside, Grtr Manchester. Wetherspoon prices are ridiculously low, and the quality of both food and drink perfectly acceptable to me - making exceptional value for money. But I will not buy any shares until they increase their prices by AT LEAST 20%. For just £1.20 you can spend as long as you want sipping (or even guzzling) coffee or hot chocolate. Cheaper than staying at home, heating (or cooling) the house. Can't fault the beers - drinks for every palate!

Sorry Camtab, I should have said Jack Hughes!

FREng

Paul

I find your insights and analysis really valuable. From some of your posts, it appears that you make notes as you go through a set of results or an update and then write them up into a detailed explanation of what you have noted. I'm greedy - I want both the breadth and depth of coverage! Would it save you significant effort to just publish your notes and your opinion but to omit the detailed write up? If there were things that subscribers found unclear, they could ask a question in the SCVR comments section.

Zipmanpeter

re Paul/Graham's write ups - I like both short and long! Personally, I think the current balance is excellent. Bit wider with a few short sections now but deep dives into something they find interesting and feel they can add value on. I am happy to trust their judgment.

Small Cap Value Report (Thu 14 July 2022) - JDW, APP, LGRS, FCAP, TRST, JIM, XAR, MCB, CTO

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Paul Scott

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