Small Cap Value Report (Wed 19 April 2023) - PRV, LIO, REDD, DSCV, WINK, PDG, PROC

19th Apr '23 by Roland Head

32 comments 7825 reads

Good morning! It's Roland and Graham here with today's report.

Today's report is now finished (10.40). Have a good day!

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.

Graham's section

Porvair (LON:PRV)

Share price: 600p pre-market (-2% yesterday)
Market cap: £278m

We had an AGM update from Porvair yesterday, “the specialist filtration, laboratory and environmental technology group”.

You can read more about what they do on their website. They have three divisions: “Aerospace & Industrial”, “Laboratory” and “Metal Melt Quality”.

Yesterday’s update was typically brief, as AGM updates often are:

In the four months ended March 2023, like-for-like constant currency revenue growth was 8%. Order lead times are shortening to more normal levels as supply chain disruption eases, notably in Laboratory and certain Industrial segments. The Group order book is however currently higher than in all previous years.

Not much to criticise here, as 8% like-for-like growth is likely enough to keep up with inflation, more or less.

I don’t think we ever quite got around to covering Porvair’s most recent full-year results, so here’s a brief overview of how the company performed.

It was a year of “unusually strong currency tailwinds”:

Revenue +18% to £173m,…

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Camtab

19th Apr '23

I wanted to give a shout out to James Cropper. I am not a holder as very tight market and difficult to build in size. I think the management should look at this. Family participating business, Mark Cropper has around 20% with other family members involved too. Involved in paper and packaging (ugh I hear you say and I agree) but they are exploring the depths of recycling which I think is massively underprovided for in this country. Colourform uses recycled products and is fully recyclable. They have one of the biggest roof mounted PV arrays in the UK. Anyway margins low which I don't like and it has hurt them as revenues fell in 2021, always the problem of a low margin business. However they have kitchen sinked it and announced this morning that profit before tax this year will be at least £2.2m (i think I saw a previous target of £2m) and analysts expectations are rising. The Balance Sheet is fairly robust, certainly not under immediate pressure and they have only increased shares in issue from around 8.5m to 9.5m since 2012. So minimal dilution over a tricky period. Share price has fallen from £15 to £6 in last 18 months. Strategy announcements seem okay but quite marginal to me, but they probably felt they had to do something (not unfair).

So why do I like them? I think recycling has got to improve as does our approach to packaging. So they are placed for future developments. Low margins have driven firms out of paper. Valuation has improved. Family ownership. Solid financials. Management is focussed on margin.

Downside? For me is the liquidity of the shares, i like to be able to get in and out, if necessary.

Interested to see what the guys make of it.

I should also mention Stocko has it as a fallen star with a stock rank of 36.

JohnDoe2378

Markets have been strong recently, just wondering if a malaise will set in heading in to May. Traditionally a weak time of year. We are still in a bear market!

Silver Moon

Do you mean you are not thinking of selling in May and going away, John?

No I mean I'm thinking my recent buying is finished for now.!

RDHOWARTH

Today I received an email from a small private investment I made. It qualified for tax relief although not much use to me. The business had been growing strongly but struggling to hit profitability. It was valued at a multiple of revenue which is aggressive by quoted equity standards....but it was interesting to me and I had small investment ... under 1%.

Their important backers are obviously frustrated by constantly financing working capital and have asked for a more aggressive route to profitability. The long and short of it is a 90% write down in value of the business and a refi with preferred rights to the new holders should path to profit be achieved. For me, I take the hit on the chin and lose 50bps or so.... thank my lucky stars I didn't invest more etc and chalk it all down to experience.

I mention this sorry tale because obviously all is well until it isn't. In the quoted space share prices have already fallen significantly for the hardly profitable companies. In the private space it is less clear what marks have been taken and where they need to be taken. I think it will be a tough few years in the private space....the start up space...the venture space ... and the growth capital space. The higher interest rate environment will bite slowly but will have already made it very difficult for some companies to continue to finance their business.

Im telling the tale to illustrate how quickly things can change and obviously when markets are experiencing a period of strength it's a good chance to reorganise things if you need to.

I'm not turning bearish and continue to believe the investment backdrop is very good but also likely to be volatile, and favour defensive cash generative businesses not speculative growth. As further losses emerge following the growing list of casualties, defensive assets will get more attractive. I hope the ones I have made prove defensive. Last year BT (LON:BT.A) did not, nothing is guaranteed and the lesson here is there is nothing defensive about missing numbers!

best wishes

bohenie

I wonder if anyone has tried some sort of screen on businesses with significant family holdings. On the face of it - should do well but like so much these days I'm not so sure. I fear that in some cases the family are more concerned about themselves and their job - than the wider share ownership

peterthegreat

Thanks Graham for your coverage of Porvair and Discoverie today. These companies have a certain amount in common as engineering is a significant part of their businesses and they supplement organic growth with acquisitions and both are rated quite highly by investors. If you get the time, it would be great to do a "compare and contrast" article about these two businesses as I think this would be useful to bring their strengths/weaknesses into sharp focus. For what its worth, I agree with you that they are good businesses and hold shares of both, but I slightly prefer Porvair because I think it is run in a more conservative manner.

timarr

Historically the research shows that family controlled firms outperform , although I haven't seen anything recently. Families - as opposed to founders - tend to have an eye to the long term and are willing to sacrifice short term gains for long term stability. Companies like Associated British Foods (LON:ABF), Nichols (LON:NICL), Goodwin (LON:GDWN), James Halstead (LON:JHD), James Latham (LON:LTHM), S&U (LON:SUS) and FW Thorpe (LON:TFW) have very good long term records.

However, to see the value in these you need to be prepared to hold for the very long term, they're rarely trading plays.

Lucky dip

Family hold companies can be very big and still hold values. Look at LVMH.

Thankyou RD. Always difficult to acknowledge a loss but extremely useful for other investors (like myself) to hear this.

Family hold companies can be very big and still hold values. Look at LVMH

True, although I'd say that LVMH is founder controlled. Companies controlled by a single individual are very much at the whim of their personalities. When the individual stakes are smaller and spread around the family the companies tend to be more cautious and better custodians of wider shareholder value.

Sadly, for every Bernard Arnaut there are a few Robert Maxwells around.

portugull

I have just read the post yesterday by planetx relating to National World (LON:NWOR) which I hold. I so agree this is a total disgrace. I have quite a decent holding at an average of 28.7p.

On 9th Sept 2021 the share closed at 40.5p. 19 months later the mid price is 21p. I am down 27% and this latest RNS really makes my blood boil.

I just looked at the Company Website and looking at the photograph of David Montgomery Executive Chairman I have to say would I trust this man with my Investment?

I think I know the answer. Very close to selling up. I invested in 2021 after listening to Richard Leonard on P I World.

I am going to write to Mr Montgomery. Will I get a reply???

Graham Neary

re: PRV/DSCV

Thanks for the comment, Peter - I'll try to watch out for them both more often in future. Cheers. G

Snazzytime

hi Graham

Most of the tags on yesterday's SCVR are still missing. This was pointed out yesterday and today but still not corrected. Could you please remedy this. Thanks.

Snazzy

BenHazz

Afternoon all,

On Beach group (LON:OTB) (I hold) fell around 5% today following a quite significant downgrade from broker Stifel, from Hold to Sell, with a price target of 120p (they currently trade at 145p at todays close). This downgrade was despite them upgrading a number of airlines including Ryanair Holdings (ISE:RYA) , easyJet (LON:EZJ) and holidaymaker TUI AG (LON:TUI) .

I am no expert in the sector, however I find this all a little confusing as On Beach group (LON:OTB) is showing solid booking growth and I'd expect more correlation between them and the airlines. Am I missing something here? My cynical side is thinking maybe a bit of price manipulation is taking place by the broker to provide an entry point for a buyer but I was hoping someone with more expertise in the sector (Boon? maybe) might be able able to share their thoughts.

Many thanks,

planetx

If you check the last few months of RNS you will see that yet more zero cost options have been issued to the management team .

Sad to say I have been selling mine in the past week or so, there are other companies with management that I think are working for shareholders and I’m just happier there .

Really disappointing that a clearly very wealthy guy with an existing very healthy shareholding keeps rewarding himself with free share options .

Just not right and he clearly feels National World is “his” to do what he wants with and rebuild his empire .

White collar crime and self entitlement, the worst management ethics I have had the unfortunate experience of holding shares in , should have spotted this at the start and it was very lazy of me but was wearing bull market rose tinted glasses .

Muppet move by me .

piersmahoney

I suggest in future you stick to well seasoned companies which have a listing history of at least 5 to 10 years. IPOs (Initial Public Offering) are usually very risky. Research by Professor Ritter at the University of Florida indicates this fact. IPOs also have a second meaning "Its Probably Overvalued". I hope this helps.

Piers

National world wasn’t really an IPO and I think still great value overall but can’t tolerate that nonsense from Montgomery .

Funnily enough it is one of only three main market companies I have a decent position in (Bloomsbury, Georgia Capital the others)

I am actually much happier in small caps and micro caps where I can usually engage with them if I choose and the illiquidity , big spreads and wild price swings on no volume don’t bother me too much .

It’s definitely an unusual investment choice and I don’t think applies to others but it’s where I feel comfortable .

I know a lot of readers are ok with zero cost options and management incentives but I was a skin in the game balls in the fire business owner for 30 years and that’s why I’m not really into management zero cost stuff .

Just me I’m a weirdo

20th Apr '23

Hi Snazzy, I've fixed that now. Thanks for the reminder! G

Small Cap Value Report (Wed 19 April 2023) - PRV, LIO, REDD, DSCV, WINK, PDG, PROC

Graham's section

Porvair (LON:PRV)

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Roland Head

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