Small Cap Value Report (Tue 22 Oct 2019) - Volatility, OTB, PDG, FLO, MCB, GOCO

22nd Oct '19 by Graham Neary

17 comments 7160 reads

Good morning!

Quite a few bits to look at today:

On The Beach (LON:OTB)
Pendragon (LON:PDG)
Flowtech Fluidpower (LON:FLO)
McBride (LON:MCB)
Goco (LON:GOCO)
Gear4Music (LON:G4M)
Vianet (LON:VNET)
DNEG - Intention to float

Uncertainty prevails

I wrote an article last night about how the fortunes of currency specialist Record (LON:REC) (in which I hold a long position) appear to have picked up in the last few quarters.

Indeed, in its most recent quarterly update, published last week, Record said:

Economic, political and market uncertainty continues to prevail. The client engagement opportunities which this creates, in conjunction with our ongoing focus on enhancement and innovation, have contributed to the inflows we have seen during the period.

If you are selling forex services to corporates, I imagine that it must be quite straightforward to get a conversation going about the challenges posed by the present situation.

This got me thinking about other possible winners of recent volatility and economic/political disruption.

Anecdotally, I've noticed an increase in the number of friends who ask me what I think about the prospects for the pound sterling, the euro, etc.

The CMC Markets (LON:CMCX) share price has rallied, and IG Group (LON:IGG) (in which I hold a long position) and Plus500 (LON:PLUS) are looking firm, too. Spread betting/CFD companies should thrive in this environment. Because if the general public are talking about exchange rates, that means they are probably tempted to bet on these rates, too.

Other winners from recent macro trends

I'd have a strong preference for importers over exporters, given the direction that Sterling is headed in.

The next wave of insolvencies (or "creative destruction" as I like to call it) will throw up plenty of opportunities for those who clean up after other firms go bust, e.g. Begbies Traynor (LON:BEG) and Volvere (LON:VLE) (in which I have a long position).

Legacy retailers with a heavy physical presence are the most vulnerable sector, as value shifts to…

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MrContrarian

22nd Oct '19

My morning smallcap tweet:

Forterra (LON:FORT), K3 Business Technology (LON:KBT)

Forterra (FORT) guides FY pretax modestly down. Blames delays in a number of large contracts for precast concrete and weak non-res new builds.
K3 Business Technlogy (KBT) guides FY significantly below market expectations. Cuts adj FY op profit guidance to £1.5m due to a major new contract in the final process of agreement put on hold, a large customer going bust and slowing software licence sales.

GloucesterBob

Sylvania Platinum (LON:SLP) If you may please Graham

Q1 NET REVENUE INCREASED 54% TO $31.2 MILLION
Q1 GROUP EBITDA IMPROVED 106% TO $19.2

Its a Jim Slater, Stockranks pick, be nice to know if I am on the right tracks with this....Sounds promising

JonBirdy

Hi Graham, I’d be keen to hear your thoughts on Gear4music Holdings (LON:G4M) if you have time.

Back in June, Paul reported that revenue is forecast at £138m for FY 03/2020.

Revenue for H1 2020 is today reported at £49.4m. With an H2 weighting, management are confident FY forecasts will be met. Biggest increase in European and RoW sales. Finding it hard to guess! how Brexit might affect this.

The margin has also improved. Back in June, Paul saw this as worryingly slim.

Jon

InvestorJohn

I Hold this one Bob and is going OK so far

2 small points to note

The price may be suppressed by the fact that there is an ongoing legal wrangle in which Sylvania Platinum (LON:SLP) may be implicated
The shares they bought back are not being cancelled (benefiting their shareholders) but used for bonus share schemes for their staff

Otherwise has been positive so far...It is now one of my top 5 holdings

Paul Scott

Hi JonBirdy,

(I don't currently hold any position in this share)

Re today's trading update from Gear4Music (G4M) - I initially baulked at the low UK sales growth of only +3%. A short update from Equity Development today says that the timing effect (comparing 6m to 30 Sep 2019 with 6m to 31 Aug 2018) is immaterial. This does seem very modest growth, but the stated intention of the company is to focus on increasing gross margin - that was the main concern that many investors had - i.e. was the company becoming busy fools, chasing uneconomic sales growth at tiny margins?

The gross margin improvement is excellent, up from 22.7% to 25.2% - quite a big relative increase. Note that the average basket size is quite large with this company, over £100 from memory, so even though 25.2% is low, the actual cash profit on each transaction is good.

I think the company is absolutely right to decline very low margin business. Let competitors deal with that, and they'll probably end up going bust. Leaving more business long term for G4M, which can also out-spend smaller competitors on marketing.

Pausing the UK growth also gives the previously stretched distribution centre time to sort itself out. I know from personal experience how very rapid growth can build up all sorts of underlying problems with distribution, IT, etc, that can then collapse at peak periods.

Europe & RoW revenue growth of +33% is very good.

Gross profit is probably the most important measure, and is up 29%. This was the biggest worry in the recent past - constant pricing pressure from competitors, eroding (even eliminating) profitability. Therefore, that G4M has managed to successfully raise its gross margin, is good news.

Overall trading in line, so a reassuring, rather than spectacular update.

I was surprised to see the price spike up c.40p early on, but see it's come back down mostly, up 12p to 215p at the time of writing.

In my view, the price is attractive if you take a long-term view, but probably about right short term, given current nervous market conditions.

I'm intending to buy back in at some stage, it's on my list of possible future purchases, post-Brexit.

Regards, Paul.

jonno

Morning Graham

I would be interested in your views on the trading update from £FLO. To paraphrase the RNS it does appear to be a resilient performance in what are challenging markets. I hold and hopefully have not been naive in adding at recent lows. Given the absence of deferred consideration in Q4 and focus on working capital management, debt should reduce by the year end.

Trident

K3 Business Technology (LON:KBT)

With a major part of its investment case dedicated to Retail, its suffering along with the rest of the industry. Other parts of the business may be keeping it going, but it may have to face the fact it put a lot of its money on red on the roulette wheel, and is paying a price for a big bet that now may not come in. Not sure its wise to keep paying a dividend.

Graham Neary

Hi Jonno - thanks, I'll add that into the mix.

G

Sara Cooper

Hi, new to all this and wondered what you thought of Capital Drilling (LON:CAPD) ?

DWit199

Flowtech Fluidpower (LON:FLO) - I too would be interested in Graham's thoughts on this. This is one of the low rated shares I was thinking of adding for the Brexit bounce.

sharw

Sara - your first post - welcome.

Normally companies are only covered on here on the day they have put out results, trading statement or other important news - can't see any for Capital Drilling (LON:CAPD)

Hi Paul

I too was surprised by large discrepancy between UK and RoW sales. Thanks very much for your thoughts on this and your other observations.

ckidcurrie23

I would appreciate any comments on Devro (LON:DVO) footprint consolidation and trading update?

Ooops, apologies! Thank you for your reply.

Richard Goodwin

Unless someone wants to talk about it in the comments. £capd did put out an update a week ago. So you have a view?

https://www.investegate.co.uk/...

ISAallowance

I sold Goco (LON:GOCO) today.

When I bought them, about 11 months ago, they were on a single digit fwd p/e. Since then a 30% appreciation in the share price coupled with continuous forecast downgrades put them on a high double digit fwd p/e.

Clearly the management are very excited about weflip ("transformative to earnings, etc") and have put their money where their mouth is in respect of some significant share purchases over the last 12 months. However, what made me pull the sell button was my wife's car insurance renewal. This is the second one in a row, after mine 6 months ago, and from a different provider than mine, where the renewal premium has been in-line with the previous year, and cheaper than anything from a price comparison site. This is a complete change from previous years going back quite a long way, where the renewal quote was always taking the piss, and every year we would both use a price comparison site to switch.

Goco don't give a full breakdown of different sectors in the last annuals that I can find, beyond price comparison (the largest by far), vouchers and weflip, but they do state that car insurance is "by far the largest vertical". Car insurers are clearly hurting at the moment, looking at press reports and the Hastings Group (LON:HSTG) share price since IPO, and it seems to me that they might be figuring out that it is only the price comparison sites that are making anything from car insurance over the last few years, and that they are going to be a bit more canny about getting a bigger share of the pie. It's possible I'm being over cautious, but I'm happy to watch from the sidelines for a while and see how weflip turns out before committing again.

Otemple3

Hi isaallowance

I have to say that doesn't tally with my experiences in the last three months, with 2* car and home insurance renewals. As per usual, significant savings (c. 20-30% from memory) from comparison sites. No view on the company tbf, not a segment I have ever researched.

Small Cap Value Report (Tue 22 Oct 2019) - Volatility, OTB, PDG, FLO, MCB, GOCO

Uncertainty prevails

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Graham Neary

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