Small Cap Value Report (Thu 9 Mar 2023) - WAND, TTG, GFRD, JIM, IQE, NWF

9th Mar '23 by Paul Scott

203 comments 10801 reads

Good morning from Paul & Graham!

Today's report is now finished.

Explanatory notes -

A quick reminder that we don’t recommend any stocks. We aim to review trading updates & results of the day and offer our opinions on them as possible candidates for further research if they interest you. Our opinions will sometimes turn out to be right, and sometimes wrong, because it's anybody's guess what direction market sentiment will take & nobody can predict the future with certainty. We are analysing the company fundamentals, not trying to predict market sentiment.

We stick to companies that have issued news on the day, with market caps up to about £700m. We avoid the smallest, and most speculative companies, and also avoid a few specialist sectors (e.g. natural resources, pharma/biotech).

A key assumption is that readers DYOR (do your own research), and make your own investment decisions. Reader comments are welcomed - please be civil, rational, and include the company name/ticker, otherwise people won't necessarily know what company you are referring to.

I'm still reeling from the bombshell announcement of fraud at WANdisco (LON:WAND) - that's about a 10% hit to my portfolio. Once I can gather myself together, we'll start working our way through this list.

Update at 12:40 - I think we'll leave it there for today.

Paul’s Section:

NWF (LON:NWF)

Up 7% to 275p

Market cap £136m

Trading Update (significantly ahead)

NWF Group plc ('NWF' the 'Company' or the 'Group'), the specialist distributor of fuel, food and feed across the UK , today provides a trading update for the current year ending 31 May 2023.

A lovely update today -

Whilst final quarter trading continues to be subject to seasonal factors, the strong year to date performance together with the supportive backdrop entering March means that the Board now anticipates the Group's full year result to be significantly ahead of market expectations1 with full year headline profit before tax2 not less than £17.5 million .
1. Company compiled consensus headline PBT of £12.3 million; information for investors including analyst consensus forecasts, can be found on the Group's website at www.nwf.co.uk

That’s a lovely, substantial beat against forecast.

Looking at my SCVR summary spreadsheet, it says that on 1 Feb 2023 we flagged…

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johnsmith68

9th Mar '23

I'm sorry for anybody who has lost money with WANdisco (LON:WAND) today. I believe the lesson should be to harness the awesome power of the Stock ranking system for which we have all paid our hard earned subscription money to access. I would urge everybody to revisit the "Learn" section and watch any of Ed Croft's inspirational content as well as his recent excellent series of webinars.

Whilst the rankings would not have spotted this fraud, anybody with even the most passing interest or belief in the underpinnings of this website would not have invested in this company simply because it has been classified as a losing style at least as far back as September last year. People who argue that the Stockranks can be ignored for early stage, fast growing companies are really missing the powerful arguments that Ed repeats in every single webinar, article and video he produces. The first rule of investing must surely be to avoid losers and on average, investing in shares with such a poor ranking will damage your wealth.

I'm incredibly aware of the limitations of my own competence in all facets of investing from understanding what is truly going on inside businesses, in stock picking, in avoiding psychological bias, in analysing company reports and just about every other area of investing and yet, my portfolio continues to outperform after 6 years of using Stockopedia. The reason is that I trust the power of the rankings allied to good diversification to keep me out of trouble and keep my portfolio chugging along upwards and to the right.

I know that some people will argue that Patisserie Valerie had great rankings and that is of course true but it's purely a game of probability and there will always be more car crashes in the red rankings than the green.

Ed regularly debunks the myth that volatile, risky shares outperform "boring", balanced shares. It's worth repeating the Low Volatility Anomaly which states that low volatility stocks provide comparable returns to higher volatility stocks for less downside risk. Avoiding downside risk is the surest way to sustainably build wealth and Stockopedia charges us for access to such a simple and powerful framework for achieving it, that to pay the subscription and then invest in the Losing Styles is like paying a lawyer and then defending yourself in court.

mammyoko

An excellent comment and one that should be heeded whenever investing in illiquid small caps with dominant spivvy shareholders. Sometimes we get lucky and piggyback on irrational movements engineered by such players using other people’s money. But the risk is that the price is actually pure fantasy and although they can sometimes cover up the mistakes that they make by taking poor investments private, often they are just as likely to have their heads handed to them by the market

Cisk

"Richards said: ...'be the most profitable company the world has ever seen.”

If this is true - it reminds me of a more high-profile individual who regularly makes such grandiose claims and the promise of never-to-be-delivered functionality and / or products, in EVs, autonomous driving etc.

And once you've looked through the smoke and mirrors you realize the reality is very different.

Never has caveat emptor been more relevant - especially in stocks!

Just wish I could follow my own advice and buy mostly boring, safe things - yep they won't set the world alight, but also they won't burn the house down...

Rusty2

I did look a few weeks ago into Globo and "4 Nov 2022 — The Financial Conduct Authority (FCA) has commenced civil proceedings against the former CEO and CFO of Globo Plc for alleged market abuse."

Only taken 7 years.

jamesalastair

I think the crooks reside in the sales department; the top table are just mere idiots.

Well it's funny you say that because he is the spitting image of a farmer I know.....a perfect doppelganger in fact.

phoenixnight

re Rob Terry

Yes, you are correct. Nothing ever came of the SFO investigation. He's a free man. Not quite sure how much a vineyard costs, but I suspect it is beyond the price range of most of us.

Estate & Hotel | Quob Park Estate

I don't have plans to visit anytime soon....

tic_tac_toe

the difference is neither here nor there. if this resumes trading it will likely be at a price far below your stop loss, if you keep the stop in place it wont trigger anyhow as the open will gap down.

abtan

Jarvis Securities (LON:JIM)

Hi Shanklin100

Thanks for your comment today.

I think I'm the only person who doesn't think that today's results were deserving of a 12% drop.

Some thoughts:

Salaries were flat year-on-year and the remainder of the administrative costs were actually down.
In line with this there doesn't appear to any excessive cost for the exceptional audit/review.
I would imagine that these will be provided for in the FY22 results.
Similarly there doesn't appear to be any provision made for any fines so either they're not expecting one, or if there is one, it must be small.
Average client money balance is only marginally down versus last year (year end is December.)
I make the year end cash balance c.£330m, so roughly flat vs my H1 calculation.
AJB and HL both recorded AUA increases from July-Dec 2022 (and indeed from Jul-Sep and Oct-Dec too), so no decrease in AUA for July-December 2022 for any of these 3 companies as far as I can see.
The FY report mentioned there would be minimal impact on cash balances from Model B customers.
"The model B’s being exited are typically characterised as corporate brokers to low market capitalisation companies. The companies they act as brokers to are highly speculative.
Their loss will have an impact on trading volumes, but the impact on cash under administration will not be significant as their clients do not hold large cash balances at Jarvis."
4.00%-4.25% interest on the current £330m cash balance (which should hopefully rise throughout the year) = £13.2m - £14.0m
Even with fees/commissions trending down, I don't quite understand how there isn't going to be a big beat for FY23.
My basic model gives me a PBT of c£13m.
Bring this down to £10m for prudence and it still looks far too cheap for a company worth £65m with £5m of cash in the bank.

Harry Hindsight

Would be nice if balance sheet investigators gave some quick flags up on +1bn caps where noted on here. Not a deep dive, day job, just a quick squiz and insight into where Stocko algos may miss things. Current SR 95 so no red alerts. Forget DYOR don't have the time - rely on stocko.

Still holding Ferrexpo (LON:FXPO) so not divested East Europe just yet - hope lives eternal - said Warren Buffett, not.

Dojosan

Hi Paul, thanks for producing these reports, despite what you have been through today. It shows your resilience, professionalism and commitment to us readers.

MrContrarian

Mr Cooper from Goodness Gracious Me!

garbetklb

Globo - But no criminal proceedings........

stockorocko

10th Mar '23

Sorry to hear about WAND. What really stuck with me from Paul's podcast was when he spoke about the CEO, he said things like "if even half of what he says is true..." and called him "exuberant/energetic" (I may be paraphcasing here) vs. when he spoke about the Sanderson CEO for example, he called her "solid" and "impressive." There was clearly some doubt in Paul's mind all along so that and not understading the business at all helped me steer clear, but not to say I don't have other stocks with other issues:)

nathantrader

Agreed

jimrog64

I recently came across an insult made to a celebrity who is prone to spout nonsense.I think it is also a good description of some of the CEOs of the companies that we investigate. “He is a clattering fanny”

shanklin100

Its certainly useful to have a discussion about £JIM

In terms of "Cash under administration – annual average balance", Jarvis Securities (LON:JIM) don't state that the unit is £100m. What we can see from the relevant graph on page 3 is that from circa 3.6 units lin 2021, the average is down to circa 3.25 for 2022. One can also see, by going back through all the previous FY reports, that the average has never dropped previously, right back to 2009.

From the other graph of page 3, we can see that 2022 trade volumes were down 30% on 2021. This is a bigger percentage drop than any other year but on this occasion has not been mitigated by client wins.

So, its very difficult IMHO to know what's going on re "Cash under administration". Is the prime driver of this reduced trade volumes or the reduction in clients (Model B plus any who have moved because of reputational concerns).

They state "During 2022 cash under administration has decreased slightly, although balances remain close to their peak.". What I would really have liked is an idea of the average YoY figure for Q4 or for December, to better understand this.

If the year-end CuA is 3.25, and that is the average for 2023, I can certainly see 2023 interest income being twice that of 2022, at circa £11.5m. This would match the interest rate margins achieved in 2011, which is by far the best year in that respect since 2010. Given interest rates are much higher now than 2011, and probably interest rate margins also, your £13.2m - £14m, certainly seems very feasible.

Commisions being down circa 1/3 roughly fits in with trading volumes down 30%. What I don't understand is why fee income is down 14%; thoughts welcome on that?

And I agree, on the basis that they have lost few clients, and the outcome of the investigation is not onerous, that your £10m PBT figure would look very prudent.

Hi Shanklin

I understand what you're saying about the Cash Under Administration Chart on page 3, which is here for anyone interested.

http://www.jarvissecurities.co...

I was initially sceptical to use the horizontal lines to denote increases of £100m.

However, doing so actually makes sense when we compare this with the interim period end cash balances.

I'm sure, or rather hope, that you'll agree that these come to £325m and £330m respectively for H1 2021 and H2 2022.

Based on the £353m average CUA for 2021 - taken from the graph mentioned above - we can work out that cash balances should = c.£382m at the end of 2021.

The movement in cash balances in this time period conforms to the trends seen at HL and AJB, which also recorded AUA peaking at the end of 2021, before coming down in 2022.

Using the logic above the Q4 2022 figure you're looking for must surely be close to c£330m.

It can't be that much lower unless there was a material increase in CAU in Q3 (Jul-Sep), which doesn't really make sense when we consider that HL actually saw a decrease in AUA from Jul-Sep 2022.

So it seems like quite a lot of cash has left the Jarvis ecosystem over 2022, but it still remains high enough to create over-sized returns in 2023, either through increased volumes, higher interest income or both.

Fingers crossed for that prudent £10m PBT figure.

Hi Abtan

Where does your table come from please?

Thank you, Martin

Hi Martin

Uuhh...I made it.

I calculated the interim cash balances by using the 2013 interim report and then extrapolating forward (the company has disclosed % changes at their interims every year since 2013.)

You might be interested in this comment from a few days ago:

https://www.stockopedia.com/co...

Small Cap Value Report (Thu 9 Mar 2023) - WAND, TTG, GFRD, JIM, IQE, NWF

Paul’s Section:

NWF (LON:NWF)

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Paul Scott

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