Small Cap Value Report (Tue 23 May 2023) - EMR, PMP, AVON, ETP, CLX, WJG

23rd May '23 by Paul Scott

65 comments 9197 reads

Good morning from Paul, and I'm joined by Roland today, to free up Graham for presentations at Mello Chiswick, which starts today. I'll be wandering over this afternoon, to catch up with everyone!

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.

What does our colour-coding mean? Will it guarantee instant, easy riches? Sadly not! Share prices move up or down for many reasons, and can often detach from the company fundamentals. So we're not making any predictions about what share prices will do.

Green - means in our opinion, a company is well-financed (so low risk of dilution/insolvency), is trading well, and has a reasonably good outlook, with the shares reasonably priced.

Amber - means we don't have a strong view either way, and can see some positives, and some negatives. Often companies like this are good, but expensive.

Red - means we see significant, or serious problems, so anyone looking at the share needs to be aware of the high risk.

Lots of news today - we'll do our best with this lot, focusing particularly on the news that's moving prices the most, and less on things that are only in line with expectations and not moving prices -

Summaries of main sections below

Avon Protection (LON:AVON) down 8% to 889p (£267m) - H1 results, downgrade -…

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rmillaree

23rd May '23

Eneraqua Technologies (LON:ETP)

Just be careful of the massive increase in receivables
Yep 100% agree - just had a quick look and there is a more than doubling here FY23: £29.2m, FY22: 12.4m - note that includes accrued income.

29.2 mill with only 55.1 mill of sales has all the alarm bells ringing for me - they better hope their customers are happy to pay up. In their defence they say 54% of accrued income has been paid over as cash now and they expect 100% cash conversion this year - so they have some sort of "plausible" explanation as to why it is what it is.

Personally exactly the kind of company i feel no need to risk my money with at present.

Does anyone know if there business is reliant on government handouts? i could easily see scenario where these eco handouts if they exist are withdrawn en masse at some stage in the future. Howm many businesses would want to invest without government freebies ?

MichaelFBS

Apropo of nothing in particular, had need to sell a little bit of physical gold today and thought I would look at returns from other assets since October 2019 when I purchased.

Gold +19.68% in 3 years 7 months

BRK.A +60%
S&P +42%
Dow +25%
AIM -13%
BTC +228%
FTSE All share +5%
NASDAQ +80%

This of course is one snapshot in time between two random dates but when one can get 42% and 80% on the S&P and NASDAQ respectively is there any point, apart from the increased “excitement”, of fishing in the micro cap pond?

Hope this isn’t heresy to post this here?

Regards

Michael

Wolf of Small Street

When I looked at various fee charging funds the vast majority cannot beat the S&P. Whats the point in them when they cannot even match a tracker ETF.

I guess the joy of small cap investing is hitting on a golden nugget which multibags. I had YU Group and Billington in the last year which gives enough incentive to keep plugging away. At some point therell be a bull market/big profits to be made again in small caps.

BnB

As far as I’m aware they sell pumps and flow control technology and their customers are local authorities and housing associations. I have no inkling that their income is materially dependent on grants, or indeed comprises any grants at all.

Having a small starter position I don’t owe management any favours here but I think that a company whose directors own 55% of the shares probably has an owner’s eye and will endeavour to right the ship. All this talk of misleading investors and suspicious revenue accruals is a bit moot when the main investors they are “pulling the wool over” sit on the BoD!

Liberum put out a note post-TU at around 9am with a target price between 300p and 400p, which to me is a stretch given the recovery of PBT to FY23 levels will take to the end of FY26 (March)

That said, I put in a sell order early this morning and it failed to execute so it’s not just management I’m pissed off at. Market makers are a rule into themselves.

JASVFS

Thank you for your comments and analysis on WJG Paul, they were disappointing results but we're in there with you. We will buy a few more today as I think the sell-off might be overdone and their's an excellent business in there imo waiting for better times.

yiannos1

It is not one snapshot between two random dates. It is exactly what has been happening for the last 20-25 years and there is no point in investing in the UK micro cap (except from a a few quality companies).

I am now looking forward to read Paul’s bullish (probably) analysis on XP Factory ; another one that will end up close to nothing in the future.

illiswilgig

is there any point, apart from the increased “excitement”, of fishing in the micro cap pond?

Of course its not heresy.

It's certainly depressing. I imagine that few will be enjoying the 'excitement' right now? The last few years have been a painful time to be invested in UK small and micro-caps. Though a big dose of luck can make all the difference? I did very well until the end of 2019 - and its very seductive to believe that I could have made the decision to sell before it all went wrong. My 20/20 hindight is always perfect.

It was a mistake for me to think that because I'd done well for a few years it would continue. Likewise I don't know if I will continue to do badly because I've done badly for the last few years? Recency bias makes it seem all the more plausible?

I've used the time to focus my somewhat smaller (in size and number) portfolio on UK small caps that where I have a good level of conviction that they will do well in the next few years (just about) whatever is thrown at them. A tailwind will help but I'm not counting on it. For me this cycle is only just starting, the fat lady is not yet singing, indeed she's not on stage yet?

cheers

Mark

mbarnard

@ LON.XPF It's a long statement to read through and it reads well until near the end , after the auditor's report when you discover they made a £1.1million loss

Epitychia

If Nasdaq is up 80% doesn't that mean it is now expensive? Just askin...

No , it does not mean that. Just answering.

ryanc106

What are your thoughts on XP Factory Paul?

Cheers

NewInvestor1972

My thoughts are how on earth is that down today as well now?!..

JohnDoe2378

Hello All,

Yu (LON:YU.) down a lot today. Is this retail investor panicking because of no TU this week thus far? ( Been one TU at AGM last 2 years ). Or something else amiss? Never good to see a constant trickle down over past few days.

Tortoise investor

Worth also remember though that US is around 40% of sales so 'some increased caution from US customers during recent weeks in relation to near term ordering' is not great. Also flat sales so far this year not great in the context of an inflationary environment.

24th May '23

This puts a bit more meat on the bones XP Factory (LON:XPF)
DirectorsTalk @DirectorsTalkXP Factory expects a very significant increase in numbers this year (VIDEO) Watch the interview here:

https://t.co/qTEgxX8VHD

That sounds very much like me. Until December 2019 it had all gone rather well (my CARG was 15.6%). But the last 2 1/2 years have been pretty awful.

I started having money to invest around 2012 and got caught up in the “excitement” of micro caps. And I had some good years (6%, 79%, -24%, 16%, 31%, 28%, -10%, 27%, 0%, -15.4 & -19%) and made some good investments but I think it was largely a case of a rising tide lifts all boats. Those figures might look good but the equate to 7.5% CAGR. So on a risk adjusted basis I suspect they are horrible.

In hindsight I should have split the money 30% in each of NASDAQ, S&P and BRK (long term I don’t see the U.K. as a good place to put money to work - it is cheap for a reason as they say) and kept 10% for the “excitement fund” (the stupid thing is I learnt this early on as The Intelligent Investor prescribes this and it was one of the first investing books I read but what does Ben Graham know).

Rusty2

I'm surprised you only have 19% gain on gold, is that based in $s, because the charts based in £ are showing considerably higher gains.

I tend to agree about the UK markets, my US folio is doing considerably better, although last year was not so good. 80% on the Nasdaq beats most fund managers.

25th May '23

Hi Rusty

That was sterling to sterling but an actual trade of physical gold. Looks like the broker took a good slug, as Sharepad shows 31.9% for G£.

2nd Jun '23

Mulberry

14th Jun '23

I love companies like Watkin Jones (LON:WJG) . Big fall, but on analysis, strong sales, strong balance sheet, established off-takers like KKR, supportive markets (student accommodation), long track record, stable management, strong cashflow. Bought at 71p after they tanked on deferral of revenue, and again at 64p. Will see if I have misjudged this, or if the market has.

Small Cap Value Report (Tue 23 May 2023) - EMR, PMP, AVON, ETP, CLX, WJG

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Paul Scott

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