Small Cap Value Report (Wed 19 July 2023) - WJG, RTN, FIF, CHRT, SPR, PGH

19th Jul '23 by Paul Scott

129 comments 10184 reads

Good morning from Paul & Graham!

Today's report is now finished.

News today from the ONS that UK inflation has dropped a little more than expected, but is still way too high of course. Here are the main points (with thanks to the ONS) -

The Consumer Prices Index including owner occupiers' housing costs (CPIH) rose by 7.3% in the 12 months to June 2023, down from 7.9% in May.
On a monthly basis, CPIH rose by 0.2% in June 2023, compared with a rise of 0.7% in June 2022.
The Consumer Prices Index (CPI) rose by 7.9% in the 12 months to June 2023, down from 8.7% in May.
On a monthly basis, CPI rose by 0.1% in June 2023, compared with a rise of 0.8% in June 2022.
Falling prices for motor fuel led to the largest downward contribution to the monthly change in CPIH and CPI annual rates, while food prices rose in June 2023 but by less than in June 2022, also leading to an easing in the rates.
There were no large offsetting upward contributions to the change in the rate.
Core CPIH (excluding energy, food, alcohol and tobacco) rose by 6.4% in the 12 months to June 2023, down from 6.5% in May, which was the highest rate for over 30 years; the CPIH goods annual rate slowed from 9.7% to 8.5%, while the CPIH services annual rate was 6.3%, unchanged from May.
Core CPI (excluding energy, food, alcohol and tobacco) rose by 6.9% in the 12 months to June 2023, down from 7.1% in May, which was the highest rate since March 1992; the CPI goods annual rate slowed from 9.7% to 8.5%, while the CPI services annual rate eased from 7.4% to 7.2%.

This was the brilliant presentation/Q&A by veteran, renowned fund manager Christopher Mills at Mello Monday that I was on about - it starts at 2:36:35

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…

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19th Jul '23

It's been 4.5 years since we covered Watkin Jones (LON:WJG) you can't hold us to that!

Mark L.

A major uplift in share prices of housebuilders and property companies today, such as Persimmon (LON:PSN) and British Land (LON:BLND) .

I guess this is because of today's UK inflation figures, which were slightly better than forecast. I hope the bank of England pauses base rate increases for at least a month, to see if this inflation beat is a trend or more of a one off.

It will take a few months to know, but there's a chance that the 18 months of base rate hikes might finally be having a sufficient effect. (Along with last year's commodity increases dropping out the year on year index.) Clearly, the hope that base rates are closer to their peak is behind today's rally.

My view is that things could still go either way and we won't have a real idea until at least October. There a numerous medium and small cap firms in the building supply chain. A couple if mine are Genuit (LON:GEN) and Forterra (LON:FORT) . Neither have been great investments recently. I think the 'learnings' for me are either to avoid cyclicals or at least insist they have very low gearing so they can ride out recessions.

mojomogoz

...just getting my charcoal grey suit and dark blue tie out of wardrobe...

Evening all, a lively discussion in the comments section today and we welcome it all. Some of you know us well, others less so. Ed and the team, if there is something we can do to make our status as paid for content clearer, we would welcome that discussion. We would like to stay in the comments section though, we enjoy it here!

As we have already touched on, we are regulated to the hilt and have no desire to go to prison, so you won’t find us front running. On the more nuanced point of whether the research adds value, you will all have your own judgements. We don’t carry Buy/Hold/Sell recommendations because they would only invite incredulity, and rightly so. We do carry detailed models and forecasts which you can then use to conclude your own fair value – we offer our interpretation, but DYOR will always apply. Use us as a tool, not the gospel.

Finally, to the many of you who have supported us on here, thank you. We at ED are all active private investors ourselves (within the compliance rules!) and spending our days looking at interesting growth companies is what gets us out of bed. It’s heartening to know so many of you appreciate that.

Wolf of Small Street

Good on you ED, I for one appreciate you posting.

There's lots of posts I have no interest in reading for various reasons every week so I just scroll past (some are ED's ). It's no big deal. I'd suggest others do the same if they don't like a post, there's no need to fill the board with yet more disclaimers.

Maybe the 3% move in the markets has given everyone altitude sickness:)

Brilliant Leader

Here’s an idea ED (and I’m a big fan, btw), just put your disclaimer about being paid for research in your profile. Then it is clear who you are for anyone who cares to look. And then maybe we can all move on!

andrewjames

I tend to agree with your analysis about brokers, but Charles Stanley Direct is one of the very few ways that an investor can hold shares direct rather than through a nominee account (I think this route may no longer be open to new investors) and that has a number of advantages.
I mainly use Interactive and Jarvis for regular share trading. Both are relatively cheap (particularly II) and efficient. HL are very expensive have slipped a lot in my view. Accordingly, I rarely use them.

cheeky_minnows

OK ;o)

davisj99

Well the Chairman thinks so - he's just bought £200,000s worth. Isn't the problem from a PI point of view that the business model is based on a 'lumpy' income stream that is exaggerated by present credit conditions?

NewInvestor1972

Even that stinks, they do a trading update without a sniff of good news and the Chairman buys £200k worth on a 40% drop..

Dodgy as

Great idea! Done.

BnB

A couple of mine are Genuit (LON:GEN) and Forterra (LON:FORT) . Neither have been great investments recently

I like and have bought both recently. I think they’re strong, cash-generating, dividend-paying companies with good climate, regulatory and demand drivers. I think patience will be rewarded. The charts certainly suggest as much. In the meantime there’s not a lot to worry about in terms of debt or negative P/L - though I don’t have a crystal ball.

Paul Scott

Hi topvest,

I managed to cover both your requests today! :-)

Both interesting companies I think too!

Regards, Paul.

topvest

Thanks Paul - much appreciated.

Personal group (LON:PGH)'s main insurance product is a hospital plan but it only pays out a fixed amount when there is a claim, I believe, so its relatively low risk. Sales were hit during the pandemic as at that time they were largely offline.

Cohort (LON:CHRT) - a good summary. It's been on my watch list for years, but never quite caught my attention as cheap / attractive enough to buy.

On another topic....I have just frustratingly noticed that the takeover of Curtis Banks (LON:CBP), which I hold, is being looked at by the CMA. Is anyone else impacted by this? Not even a proper RNS today!

This maybe underlines Paul's point of taking less money when its announced rather than waiting for completion in this environment. No dividend and now possibly no deal!

This seems a bit excessive for a combined Nucleus/CBP £80bn AUM given the SIPP market is worth c£500bn in the UK. UK regulators seem to be getting a bit of a reputation for being too slow and way too onerous. Seems to me that they are too often destroying: value for shareholders, customers (through obvious cost savings) and the UKs reputation.

Hi again Snowbum,

After reading your reply I decided to do a bit of further digging, it is of course why we are interested in investing - and you have got me interested purely on the fine wiskey level.

So.. watching their latest annual presentation, I can see now why they want to draw the comparison with Diageo, as they have managed to get a new FD who has worked for them. I did not know until now that 'premiumisation' was a word, shows how out of date I am. They are very keen to emphasize this trend to more premium products, pointing out the market is $7.6bn and growing... so plenty of headroom there then for their £22m revenues.

If I understand it correctly the quoted figure of £493m is an estimate of the value of their current whiskey stock in casks, is only if bottled and sold at the retail value. They quote the 60% margins (with an expectation of 70% if things go well), but this is gross margin and does not include all of the costs included in the sale of those bottles.

From a quick estimation of a linear growth, it seems like their existing stock of whiskey is good for another approx 12 years.

I have tried to be somewhat optimistic (or at least neutral) concerning what their future costs might be and here are my figures (I couldn't put the whole table on, as it was too small to read, but you get the idea);

So, I get a better forecast EPS than they are quoting for 2023, my estimation is that they will spend about £300m in costs to sell the £493m of their existing stock if all else is equal. I think that they have some good measures in place to reduce these costs, which will all show up as profit - all to the good.

My bull case would be that if they can keep a tight control on costs then the gross profit will filter down very quickly (if you excuse the mixed metaphor), and it is a big market as they point out.

My bear case is that the costs have remained high for a number of years now, and the if the people shopping at Waitrose are now considering Aldi, the whiskey membership will already be down the pan.

Monty Carlo

Yes indeed...but how many times did small cap luminary Christopher Mills use the term "EBITDA" in his Mello spot (link to vid posted at the top of today's SCVR)?

I lost count.

Snowbum

Great work cheeky_minnows, I appreciate you putting in the effort to pull some numbers together. In your bull case, you may also wish to consider the following points:

The existing Whisky stock in casks is an asset which is increasing in value each year as it matures.
They have recently completed their own bond facility to store and bottle the product.
Expansion into the USA is planned - it’s my opinion, this is most likely to be in the form of a venue roll out in key cities.
They have ownership of the JG Thomson brand, which also includes Gin & Rum hence expanding the market opportunity.

In your bear case, you may wish to consider that I shop at Lidl, and drink premium Whisky, as do many of my friends and family. I may look to save money in some areas, but like many, I don’t tend to be so discerning when it comes to entertainment and enjoyment.

From a chart perspective, I’d like to see a bounce around the current level, but if it drops further I won’t be arguing too vociferously with Mr Market!

20th Jul '23

I had a think this morning, and have changed my bull thesis.

Looking at the figures, they would make more money selling the wiskey out of the back of a transit on Glasgow market. What they need is someone poached from Diageo, who knows how to do it.... cue the new FD ! That must be the read-across :o)

Michael Tee

Correct Roger Baron

I am referring to flexiable stocks and shares ISAs.

Barclays SmartInvestor has been terrible in the past but it is much better these days and dealing costs are just £6/deal. If you have a query, you can ring up, they answer and they do deal with the query.

As with everything, you need to be an expert in what you are doing, monitor it properly and also say when you are unhappy.

Sheru The Vegan Westie

26th Jul '23

Thanks Paul for this detailed article ;-)

I have just bought some Watkin Jones (LON:WJG) as in my opinion it is now fundamentally and technically undervalued and oversold :-)

I also notice that one of the Directors has recently bought more shares :-))

A good long term hold :-)))

Small Cap Value Report (Wed 19 July 2023) - WJG, RTN, FIF, CHRT, SPR, PGH

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Paul Scott

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