Small Cap Value Report (Thu 22 Sept 2022) - BEG, SNWS, AQX, MORE, JDG, PBEE, VLG

22nd Sep '22 by Paul Scott

45 comments 8316 reads

Good morning from Paul & Graham! Today's report is now finished.

An energy support package for business was announced yesterday, which I've yet to go through in detail. The crux of it seems to be substantial reductions in gas & electricity prices for businesses, coming directly off their bills, for 6 months from 1 Oct 2022. That's clearly going to help. There's also talk of Stamp Duty, and other tax reductions in the pipeline. No doubt we'll get more detail in due course, and I'll keep my eyes peeled for what companies start saying about these changes in their forthcoming outlook comments.

Agenda -

We're looking at today's newsfeed, but also want to cover (today or tomorrow) 2 backlog items in particular:

Warpaint London (LON:W7L) - we've run out of time today, so this will have to be tomorrow.

Hostmore (LON:MORE) - oh dear, things are starting to look grim, I'm afraid. FY 12/2022 is now expected to be a (small) loss. Forecasts for a bounce in 2023 just don't look realistic to me, so I'm worried trading could deteriorate further, and the current -14% vs pre-pandemic revenue trend is worryingly weak. I'm now concerned about the high bank debt. Risk now looks high. Profuse apologies for how badly this has turned out, but the fundamentals have dramatically deteriorated this year.

Today's news -

Paul's Section:

Begbies Traynor (LON:BEG) - puts out an in line with expectations update for Q1 of FY 4/2023. Some interesting additional detail is provided. With earnings likely to be buoyant due to increasing insolvencies/restructurings, and a PER of 14, this share continues to look a sensible place to hide.

Smiths News (LON:SNWS) - a surprisingly good update for FY 8/2022 - ahead of market expectations. Stunningly low valuation now, with the PER below 3, and the dividend yield of about 15%. It won't last forever probably, but the valuation currently looks compelling for value investors. I'm tempted to buy.

Aquis Exchange (LON:AQX) - interim figures from this junior stock exchange fail to impress. Although it does have a nice balance sheet, with plenty of cash. There could perhaps be strategic value in the business? Based on these numbers, I can't get anywhere close to the current market cap though. So I'm afraid it has to be a thumbs down from me, on valuation concerns.

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Bristolian

22nd Sep '22

Hostmore (LON:MORE) has been a disaster for me but thankfully I took a good hard look at my portfolio a month ago and made some very difficult and financially painful but realistic decisions to exit shares including Hostmore (LON:MORE) and so in that respect I am pleased I am out of this and avoided an even bigger loss. I may have racked up losses from this and others but do you know what..thanks fully even though my losses have been high it's not money that I need and can live without and my slimmed down portfolio is so much better and I am much more confident in....also ..I have learnt so much over the last 2.5 years of holding stocks support rates by Paul and the team at Stocko and others. You could say that I am far more cautious, sceptical and worldly wise about holding stocks compared with 2.5 years ago,. You've got to take the positives however you can. Onwards and upwards, I am looking for long term value opportunities and building up new positions as I'm confident of an improvement however long it may take....

andrewdb

It smells like the managers of the company are expending considerable time and effort rearranging Coral's finances.

This is not being done so the underlying business makes more money, it is so they can pay money to shareholders.

If I was a 73 yo chairman and had my tax affairs nicely arranged, I might propose a share buyback.

Not being contrary, just wish the managers (who are no doubt well paid) concentrated on managing a bit more.

rmillaree

Hostmore (LON:MORE)

It seems to me that the woes of Hostmore (LON:MORE) are very similar to the woes of revolution bars group sometime back before dilution and removal of debt - one can take a rosy viewpoint if one wants but with £25 mill of debt and bottom line losses is lets hope they can keep the lights on is best case scenario at present. Anyone who isnt worried about losing their shirt here really should be.

TooBaldTooSoon

I really like the way management have conducted themselves at Smiths News (LON:SNWS) and I bought in with a cautionary initial stake just sub 40p early 2021, and added more in November when it was clear they were achieving what they were setting out to do. I regrettably felt I had to sell out a few weeks back after watching the SP tick down without what I felt was any real justification as I had held beyond my stop loss, but couldn't hold any longer.

For me, the fundamentals appear really attractive, and if I was looking at getting in for the first time at the current SP, I would probably take a punt and do so, but I feel it is little more than a punt at the moment. Jim Slater warns of shares performing badly in the market despite of otherwise very attractive fundamentals. I usually adopt his quick check of current share price being within 15% of their 2 year high, and for Smiths News (LON:SNWS) it is just over 30% so not encouraging. Combine this with there being nothing new and exciting in the pipeline I can't justify holding any longer. There has been some director buys this year mid 30p's but not a significant enough volume to put me any more at ease. For me there needs to be a spark to reignite this share, some sensible acquisition for example, but until that potential spark arrives, I'm happier sitting this one out and watching closely as I feel it more likely this will continue to slowly tick downward. Of course holders could get lucky with a buyout? As Jack said in a previous SCVR report, "not a share I’d want to be holding when the cost-cutting can no longer be done to maintain the divis".

The dividend is appealing, but I think that there are better options out there offering good dividends which offer better safety for your capital, such as Sylvania Platinum (LON:SLP) (I hold) and potentially Foresight Solar Fund (LON:FSFL) (Not currently holding). Good luck to all continuing to hold Smiths News (LON:SNWS), it deserves to do well from here, whether it will is yet to be seen!

jonno

Added a few Smiths News (LON:SNWS) this morning. What is the final destination for the company. Its only competitor is Menzies News, which is privately owned. Given the prodigious cash generation, my best guess is that it will be acquired by private equity. For the time being it will no doubt continue to be ignored by Mr Market despite in my opinion the compelling value currently on offer.

It should also be a beneficiary of the World Cup as youngsters try to complete their sticker collection of football 'stars'.

Effortless Cool

Hi andrewdb,

Thanks for replying. I'm actually very happy with how the Coral Products (LON:CRU) managers are behaving:

Almost 10% of equity bought back over the last eighteen months and held in Treasury
Dividends reinstated at a high level
Four acquisitions in the last 18 months, more than trebling revenues
Sale of a property for a large profit
£277k paid to the three executive directors in total in 2022 with no bonuses
Underlying profit almost doubling in 2022

illiswilgig

On Macfarlane (LON:MACF) - BouncingBack you are welcome.

Another consideration I have is that management expectations have been cautious in previous years, as is the accounting, particularly at H1. The Interim results exceeded my expectations but forecasts for the FY remain unchanged. Which is sensible under the circumstances. Anything can happen in the next few months. But if MACF follow their usual seasonality then based upon the H1 figures they will significantly exceed current expectations. They usually do - but nothing is guaranteed - especially not now.

Conversely the market is seeing much higher risk of not meeting expectations across the board for many sectors - hence is de-rating multiples.

As a result there is something of a double-whammy on the share price right now. Management expectations are under-stated in case of poorer trading - whilst the market is also de-rating the understated expectations in case of poor trading. All of which does make the waiting quite painful, but improves the chances of a 'bounceback' in my view,

cheers

Mark

Dicky Mint

Agree with your comments re learning a great deal from Paul and others on Stocko. Are you a Bristolian? Bristolian :) If so we will be in fairly close proximity.

Boon

And yup... the BoE has majority gone for only a 0.5% this time round.

Looks like they don't think inflation is accelerating in terms of growth rate, leaving them with the luxury of slowly and steadily doing meek 0.5% increases...

FREng

Unless I missed it, no-one covered the results from Strix (LON:KETL) yesterday. I don't hold at present but their patent moat seems a valuable asset and they are passing on some cost increases. The good dividend is maintained and well covered.

Any views?

abtan

Time Finance (LON:TIME)

I would be interested in hearing thoughts on Time Finance's announcements today.

My own opinion is that the company looks far too cheap and I can't really understand why.

The loans are asset-backed and therefore require in-person verification before being approved.
This should hold off competition from the current rapid rise of automated, algorythm-driven lenders.
Revenues are up in Q1 (June - August) - this surprised me given the current turbulent times.
Own-book originations are up significantly YOY for both FY22 and FY23-Q1.
Net arrears seem relatively low.
The company is still able to borrow at 4%.
£0.9m of PBT has already been booked for Q1.
I would not be surprised if FY profits are at least £3m vs a market cap of c£16m.

I don't have a position though I'd probably be more tempted to take one if there was a dividend to justify the opportunity cost of putting my money here.

Is this just one of those shares that remains unjustifiably low?

Thoughts would be appreciated.

planetx

Let me check .

For sure the landowner received circa 7% of yearly income that is a fact , with absolutely no cost and the Developper pays everything .(I’ve seen 5% and 10%) and of course if energy levels are higher it’s much more .

7% of 84 million is circa 6 million

I’ll check the yearly income numbers for sure .

To give sone context I own sone forestry in Scotland (200 hectares ) and have 3 wind farm developers offering 7% , with zero costs my side . 8 turbines was estimated to give 600k a year clear income . There’s an adjoining property with de elopement just getting approved .

5 years to get turbines through planning so land value with s yearly income of 600k , we’ll do the numbers .

The numbers are quite frankly scary , 1 million for national grid connection (Developper) , 35 million per turbine to build , (Developper) , 500k per year to local community (Developper) , 1 million pound per year to national grid (developer ) , 7^ to landowners (Developper) .

Landowner does nothing and pays nothing with zero risk .

This is why Gresham forestry fund , Hargreaves are two big opportunities .

In my case unfortunately the wind isn’t quite hitting the required wind speed so it’s not looking economical to build so I have to content myself with knowing that “money grows on trees” albeit very slowly .

So trust me the numbers are well into the millions and the income is very significant .

Anyway let me let more facts otherwise I look a right muppet as 7% of 84 million is not 84 million

Kermit

Ps - one thing that did concern me was when speaking my contact he did comment that “Hargreaves are a nightmare and do all their wind farms through a connected company “

Given the market rate for landowner is 5-7% and Hargreaves according to above poster quoted 1% that is quite alarming .

I will ask them directjy as they need to represent shareholders and achieve best market rate for their wind farm potential - that goes without saying .

Right

Made a bit of a fool of myself (nothing changes”

The yearly income to the landowner (with zero other costs ) is

“Will be no more than 7%”

And

“Not less than 5%”

So that is day 6% of 84 million call it 6 million per year on EXISTING developments expected to complete in next 24 months .

If it’s much less than this and anywhere near the 1% mentioned something not right .

Given the size of the land bank and location it’s still ticking all my boxes despite my first post being total nonsense .

Camtab

I think my general comment would be in the current macro environment I am just not interested in fishing in £15m mkt cap companies which are pretty illiquid. There are enough uncertainties in this world without taking on that level of risk. Although I do agree on a here and now it looks interesting. Let's see in 3 years time.

Bouden54

There were a couple of reader comments on Strix (LON:KETL) yesterday which may be worth checking. Personally struggle to see how much of a moat they really have and never been a huge fan - there are plenty of other producers of kettle safety devices.

The Phoenix

You're not far off no good answers for the West at the moment rumours all the bill bail outs could cost £200 billion Government doesn't have that money, bank of E can't QE it this time around so we need someone else to buy all the gilts.

With sterling falling yields will need to go up to attract buyers meaning anyone hold UK Gilts will be seeing a decrease in value at some point and most likely interest rates will have to track gilt yields higher leading to pain for anyone coming up to remortgage time.

Dicky Mint, I am indeed a Bristolian, living just south of the river

muckshifter

23rd Sep '22

Two points spring to mind on this, but I haven't seen the source of your original information and haven't seriously looked at HSP for a while as I'm generally negative on the company.

Didn't HSP float off a few years ago their renewable energy company? Perhaps that effects the rental income by a sharing mechanism.

If these prospective wind farms are on the old desolate and often quite remote opencast sites HSP own, which I would think are the areas most likely to obtain planning permission, there would be a further huge benefit to the landowner. In order to build and maintain these major structures you need a good network of well constructed roads, which would, imo, substantially increase the value of the land even as agricultural land.

Southern edge of Bristol myself - near Keynsham.

Small Cap Value Report (Thu 22 Sept 2022) - BEG, SNWS, AQX, MORE, JDG, PBEE, VLG

Agenda -

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Paul Scott

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