Small Cap Value Report (Wed 2 Mar 2022) - VTU, RBG, HOTC, MMAG, FOXT

2nd Mar '22 by Paul Scott

46 comments 11818 reads

Good morning, it's Paul & Jack here with the SCVR for Wednesday.

Agenda - (also known as, what fresh nightmares will be visited upon us today?)

Paul's Section:

Vertu Motors (LON:VTU) (I hold) - adj PBT guidance is raised again, from £70m to £75m, for FY 2/2022. As the outlook comments make clear, this year is a one-off bonanza, due to a shortage of supply pushing up used car margins. Next year profit is set to more than halve, but the shares look very cheap, even on future reduced profits. Great value.

Revolution Bars (LON:RBG) (I hold) - interim results from yesterday look encouraging. RBG has moved back into profit, holds net cash, and is in expansion mode again. 2 new concepts have been successfully trialled. Shares have not yet reacted to the turnaround, and are barely above the placing price of 20p which refinanced the business during the pandemic. Stronger reasons than ever to be bullish here. I see 50%+ upside.

Musicmagpie (LON:MMAG) - share price is down 27% today, on wobbly outlook comments accompanying in line results for FY 11/2021. I can't see anything interesting here, and like many recent IPOs, it still looks expensive, even after plunging on a profit warning.

Jack's section:

Hotel Chocolat (LON:HOTC) - good H1 performance, with profit and EPS up c50%. Management is certainly ambitious here, targeting £500m of revenue by FY25E and investing to grow into a £525bn global addressable market. So there is a long term opportunity. But the stock remains expensive and I’m not that comfortable with the valuation at present.

Foxtons (LON:FOXT) - revenue and profits up, while cash inflows have increased. The company is returning to dividend payments and has been buying back shares. It has also been winning market share and is positive on the outlook. Things did go wrong here, and shares remain well down on IPO levels, but this update is more positive than the languishing share price might suggest.

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 &…

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Epsilon

2nd Mar '22

Re Vertu Motors (LON:VTU) , it is mathematically very difficult for a tangible asset rich business with 11% gross margins & 2% operating margins to create any growth at all in tangible equity.

JASVFS

Vertu's margins are in line with or better than other franchised dealer groups. Historically tight margins have sadly been the case which is why Vertu in particular run a tight ship and acquire on strict criteria. Cazoo claims a new dawn in used car margins -- I know which share I'm happy to be in and it isn't one making ridiculous claims.

Doug2b

The size of Vertu’s existing asset base is not relevant, as the growth in net tangibles (plus dividend and factoring in buy backs) is calculated as a % of the MCap not the existing asset base.

As for the margin, I agree, the turnover would have to be enormous relative to MCap to create a higher acceptable return. I have been into the sales office of our local Bristol Street Motors, it did seem very chaotic and does, I believe, have a high turnover of sales staff. I don't want to put too much weight on this impression as sales offices can often appear more chaotic than they actually are. But, car sales persons can be very turnover driven, even if sales were reduced by 20% but margins were up nearer 2%, that would be a dramatically better outcome, accept 20% less sales for a 1% increase in the sales price. If you give a car sales person a tiny profit bottom line price that they must not go below, then that is what they will sell for most of the time, i suspec that this is what is happening here.

abtan

Foxtons (LON:FOXT)

Thanks for the write-up Jack.

Like you I am struggling to understand the rationale for the current depressed share price.
There's lots to like in today's update:

Growth across all business segments vs both 2019 and 2020;
Historically strong contribution margins throughout the business (the lowest, in the mortgage business, is >40%);
Loss-making branches have now been closed and/or sublet;
Loss-making D&G Sales business has now been offloaded;
Revenue/lettings progress continued its return to pre-covid levels.
I am expecting this to continue rising in the short term.
Net cash on the balance sheet after paying for a material acquisition, dividends and share buybacks;
Cashflow positive;
2022 should be even more cashflow positive to account for the full-year affect of:
1. The D&G lettings revenues (it was acquired mid-year).
2. There were £2.3m of cash outflows in 2021 associated with the now sold off D&G Sales business, which will not repeat.
3. A £2.3m deferred lease payment from 2020 will also not repeat.
4. Lease liabilities are now smaller after branch closures.

---

If there was one niggling concern it would be on the company's outlook that 2022 Sales Operating Profits will breakeven.

I personally think the company is being too bullish in light of reduced housing supplies.

For reference I think the last time Sales made a full year profit was around 2015/2016. It was in fact what has put me off investing in recent months.

However, I've come around to the belief that I should be looking at Sales and Lettings Operating Profits together as a lot of the costs here are simply apportioned based on headcount. One can't simply close the Sales business as the branch rents - a material cost - will still need to be paid.

For reference one can see the progression of the lettings business over the last 3 years below (+ my guestimates for 2022.)
Note the big jump in Lettings OP from H1 to H2 in 2021 (£1.5m ---> £7.5m) as demand in London increased, rents rose to pre-covid levels and operating leverage kicked in.

I hope that I am being conservative enough in my modelling to show a very cash generative 2022 (£6m-10m) for a company with a market cap of £110m and net cash on its balance sheet (excluding lease debt) of c£20m.

I haven't bought a position yet, but I probably will. I would be interested to hear thoughts from others.
Am I missing something obvious?

Cheers

BnB

I'm interested to see that Ab Dynamics (LON:ABDP) has fallen to its pandemic lows. I know there are a few fans of the name amongst the Stocko crew yet the name has never been covered in any discussion - if the search function is to be believed.

At a market cap of £250m this name ought perhaps to be more widely discussed.

I can imagine why it has sold off recently as car production is being disrupted by the situation in Ukraine at a time when the business is looking for a new identity with products branching into defence and mining technologies. And what was once a business with excellent operating numbers has fallen away of late in terms of operating efficiencies. But revenues continue to rise even during the pandemic.

Any thoughts on the opportunity here everyone, especially from holders with a better handle on the name than I have?

Rusty2

Ab Dynamics (LON:ABDP) used to be discussed quite a bit a few years ago, looks like the search is only on the new site?

Actually looks like another system problem as Vertu Motors (LON:VTU) does not have any discussions on the search. I will report it.

nevilleaustin

When I go to the stockreport page of any company, and press the discussions tab I get nothing!

Are other users experiencing the same problem ?

sevenccc

If the under 30s that live at home start contributing to household costs then there might be a downturn in the going out trade, but chances of that being widespread with this generation?

GrahamF

Interesting comments. Certainly the 18-30 year olds have missed out on a serious amount of socialising and partying over the last two years which should be good for £RBG. (No position - but held in the past).

I was thinking about the roaring twenties a few days ago and pondering whether there were some similarities now to that period. In other words much more a prolonged period of high activity rather than a one-off partying like it’s 1999.

However, the roaring twenties was followed by the Great Depression. So, I’m asking myself how soon might a depression come after the post Covid partying?

My conclusion is this. Rampant inflation is a clear negative. The Ukraine crisis may keep energy prices high and we have no idea how long that will last - and high energy prices are a huge negative for disposable income. Furthermore, how will graduate debt affect this as the debt compounds at RPI+3? Will that affect the spending power of that demographic even more?

Seems like prospects for £RGB could be strong short term but we may find that is a much shorter length of time than expected.

sharw

Yes, the same even though I know there are threads. I have reported through green button.

Samsgrandad

We are back in the dark ages it seems, when the Vandals swept through Europe post Roman Empire.

No need to apologise Lee, from reading the link to Wired it isn't a consumable as such for chip production. Just used to manufacture the lasers, used in etching the semiconductor wafers, which presumably have a long life.

Paul Scott

Not a small cap but ...

Interesting comments from Asos (LON:ASC) re withdrawal from selling in Russia/Ukraine. Surprisingly large hit to profits -

ASOS Plc

Update on impact of the Russian invasion of Ukraine

ASOS is providing an update on the impact of the Russian invasion of Ukraine on its business. ASOS' priority is the safety of its colleagues and partners in the region. Immediately following the invasion, ASOS suspended sales in Ukraine as it became impossible to serve customers there. Against the backdrop of the continuing war, ASOS decided to suspend sales to Russia earlier today. In FY21 Russia and Ukraine represented c.4% of Group revenue and contributed approximately GBP20m to Group profit.

Boon

Wow, that was more than I was expecting too.

Do they have any infrastructure in Ukraine? Warehousing, logistics, etc?

Hi richwilko8796,

With Vertu Motors (LON:VTU), the operating margin is very low...

That's true, but most of the revenue is pass-through, i.e. the value of the cars being sold. So I tend to view gross profit as being more akin to revenue. The profit margin then looks a lot better.

Same thing with staffing companies, where revenues are huge because it includes pass through wages of the workers.

Regards, Paul.

Richard Goodwin

And perhaps for construction companies which sub outa lot of the work.

A_Private_Investor

3rd Mar '22

It is true for main contractors who are essentially project management companies co-ordinating the work of specialist subcontractors. IF things work out well, they make a decent ROCE, but on wafer-thin profit. However, if they do - and it only needs a few projects not to - then those margins can be obliterated. This suggests either invest in those companies which:

- have a niche as they tightly control and manage what they know ... and charge a decent margin for it, which in turn ...

- actually do the physical work, ideally having some defensible IP which implies

- they are also responsible for some elements of manufacturing rather than just installing (which is know-how).

Jack Brumby

Hi guys,

Thanks sharw and others for alerting the team via support. A bug card was written up yesterday and a developer continues to look into it, so we're on the case!

Asos (LON:ASC)

Hi Boon

ASOS has no infrastructure in Russia/Ukraine as far as I am aware.

Mulberry

25th May '22

Hotel Chocolat (LON:HOTC) look at my comment when this was trading in mid-high 400s. I know the chocolate industry. Hotel Chocolat is WAY overvalued, even now. Thinly traded, not great quality product, entirely dependent on marketing spend, and entering a recession when mid-priced chocolate will suffer. Yes, it's the only pure-play chocolate retailer on the market but Japanese and US expansion plans are at too early a stage to justify its current multiples.

Small Cap Value Report (Wed 2 Mar 2022) - VTU, RBG, HOTC, MMAG, FOXT

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Paul Scott

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