Small Cap Value Report (Wed 27 Dec 2023) - WHI, ANIC, SDRY

27th Dec '23 by Paul Scott

77 comments 6217 reads

Good morning from Paul, and I hope you enjoyed the Christmas break.

Not a great deal of news today, but a couple of companies caught my eye, and also you need a place to discuss the day's news - so if the UK market is open, I'll write an SCVR.

There's also a lot of new content coming in the next few days from other writers, so I'll flag up those articles here at the top of the SCVRs, in case you miss them.

Here's a terrific article from Roland, explaining how he's set up a simple stock screen to find good small cap shares - I recognise lots of the companies in this screen as being decent small caps that we also like here in the SCVR. Highly recommended article!

Housebuilders - could benefit from press reports that the Govt is likely to introduce new incentives for first-time buyers. That's all very well, but will they be in office long enough to implement these measures, and would a new Govt repeal or support them? Who can say?!

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 (usually) between £10m and £1bn. We usually 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 (thumbs up) - means in our opinion, a…

Unlock with Email

Unlock with Google

Already have an account?
Login here

DAZZA64

27th Dec '23

Argo Blockchain (LON:ARB) Speculation on spot bitcoin ETF'sin USA. I don't hold ARB, but do hold DAGB. https://cointelegraph.com/news...

Zipmanpeter

Re Housing in 2024 - 25. I think the Builders and especially suppliers to construction (ie not just housebuilders will be very promising over next 2 years. Currently new builds are at multi-year lows and forecast to go down again next year - way below need level we need (whether we get more immigration or not!).

Infrastructure in areas from the water industry (sewage) to schools (RAAC) to tower blocks (cladding) to hospitals - almost all sectors are 'crumbling' and need repair, replacement or extending. The public will support 'investment' in these right now. Politically, Labour are also promising to bulldoze NIMBY's and will (rightly) shift the inter-generational balance back towards the young who really want more houses>

Furthermore, whilst it is said there will be 'no money' after the election that is never true: Govts can borrow, tax more or shift the tax burden. By taxing wealth, for example, they can realise money and not raise total tax even as they reduce or hold it for the young/lower income 'working families etc.

Construction also has a big domestic multiplier effect so will help get growth going (even if houses are really consumption items not investments!) so that'; so that's good for Labour too.

Housebuilders themselves are vulnerable here as they have arguably enjoyed excess returns in recent years (remember the Persimmon CEO) and will have lost the grip they have on the govt through political donations - they make start to give to Labour as they gave millions to Conservatives but probably to less effect. If they are 'forced' to 'build it or lose it' on land banks they will builkd even if asset values fall.....and construction suppliers like the brick companies will sell more and be able to protect their margins.

As ever, we will see!

donald pond

Remember, Burford Capital (LON:BUR) are a judgment debtor. They have a right to be paid in US dollars, and interest racking up at $1m a day until they are paid. They are not bond investors who have willingly assumed Argentine counterparts risk. They don't need to accept any bonds. Repsol did, but Repsol was under political pressure that doesn't apply to Burford.
The people I have spoken to who know international enforcement suspect Burford end up taking a haircut in the region of 10-20% maximum. There may be scope for creativity: if I was Argentina I'd be thinking of creating royalty bonds over the huge mineral wealth they are on the point of exploiting. But Argentina can only become the gas and lithium powerhouse it could be if it gets a lot of foreign investment. And that will be much cheaper if it pays its debts.

yiannos1

I can only assume that they will be similar to Gold ETFs but I am not sure if they will be approved. Recent price movement of Bitcoin and Bitcoin miners suggest that they will be approved. Who knows?

If ETFs are approved though and the upcoming halving in 2024 will drive the price of Bitcoin much higher.

I do not hold Bitcoin as I do not understand it , but something that will at some point have limited supply (21m Bitcoins by 2040) , and , if demand surges then the price will go much much higher.

Thanks

rmillaree

Burford Capital (LON:BUR)

They are not bond investors who have willingly assumed Argentine counterparts risk. They don't need to accept any bonds.

As per my prior post the argentinian pm has made it clear they simply dont have the money to pay this amount end of - thats the reality here.

If payment is to be made something like a bond offering or referred terms needs to come along. Its not like Argentina doesnt have history in defaulting on their obligations they do - and its time and time again. I think they have defaulted 9 times including 3 times in the last 20 years. In some respects i dont know why they arent defaulting again as they clearly dont have the money to pay.

Perhaps a positive spin would be a bond offering to get the funds now to pay pay the judgement - but one would have to be pretty mad to take on any of this "debt" imho.

Silver Moon

But it is your money that Jim was really after, I was a mug who was drawn in too.

Definitely one for hanging investors out to dry.

UKSHOE

Thanks for the heads up Paul Scott & Mojo regarding your insight into ANIC. Leopards don't change their spots!

TimS

davidjhill

Not a chance Donald imo. I've known Argentina for a very long time having traded its bonds professionally as far back as the 90's. People have short term memories and through that 30 year window have assumed leopards change their spots several times around debt repayments to no avail, so beware. The same goes for so called "international enforcement" experts who have generally consistently misunderstood the Argentinian effect (much in the same way they misunderstood Russia). And as for becoming a gas / lithium powerhouse - that has been going on for decades too (at least the oil/gas bit has).

Whilst the judgement is in $'s Argentina are never going to pay it in $'s in my view. they don't have access to that kind of money. They may well issue bonds, but the market isn't open to them to issue bonds in foreign currency as no-one will take them, and with the economic instability domestically (inflation and currency effect) it would be a catastrophe for the country to try and do so. History is not on their side here.

So the best thing they could do is issue bonds in Peso where they can deflate the debt effect, and there is something of a market (tho I seriously doubt $16bn worth). If Burford don't take a large chunk of them and sell locally at a discount then it probably won't happen at all. The alternative is this proposed Kicillof tax - do you have any idea how unpopular this will be in Argentina : locals having to pay a tax in USD when their own currency is devaluing and most are struggling? Most won't / can't pay. It will almost certainly be a failure imo, so would then have to be set at such a low level Burford will be getting a dribble of USD payments. Then Milei will get kicked out in a few short years as the next opposition leader will promise a reversal.

So by all means believe that Argentina will merrily pay more than 50% to Burford in the next decade but I'd be amazed if that happened. Then discount that back and work out the value of the rest of the business and is it really worth the current market cap? And how long will you have to wait versus the opportunity cost of not being invested elsewhere to really get anything?

I'd say the reality is that the talk will remain constructive whilst the action will be thin, watered down and long drawn out. We are not talking about a well financed country here, nor one that has a history of being able to honour its debt despite any good intentions, let alone pay that kind of repatriation from an international court.

Anyway all of this is just my opinion of course. I do not own Burford Capital (LON:BUR) and would not go anywhere near it at this kind of valuation. I do like the litigation space though and much prefer Litigation Capital Management (LON:LIT) which, I do own for what it's worth and consider much more reasonably priced.

Edit: Tendrils reaching everywhere, it's the dilution tool, stupid me. I hold Condor Gold (LON:CNR) and it bothers me.

On 5 December 2022, Condor Gold (AIM: CNR; TSX: COG) announced an update on the sale of its assets and a £1M investment by Condor's major shareholder, Galloway Limited, which is wholly owned by Burnbrae Group Limited which is, in turn, wholly owned by Jim Mellon, Condor's Chairman, by way of an exercise of warrants. The exercise of warrants will result in the issue of 6,666,667 new ordinary shares (Warrant Shares).

LeicesterPete

Renold (LON:RNO) is appearing in 6 screens now, so I think with that and positive commentary it's naturally drawing interest. Also note the increase in volume recently, a big tick for me especially as the share price continues to rise (I hold too!)

StrawberryDreams

He is also a controlling shareholder, and has loaned a fair amount, to Webis Holding (LON:WEB) .No idea why as the company has gone nowehere for ages!Perhaps it's a pet project for him.They've been banging on about their US horseracing licence in California potentially being extremely valuable for ages with the roll out of online gambling licences in US states in the last few years.

BenHazz

Hi Yiannos, I don't claim to know anything about Bitcoin so this is simply a hypothesis, but is there a chance that the approval of a bitcoin ETF would, after a period of adjustment actually have the inverse effect and bring the price down? At the moment there is a fixed limit to the amount of bitcoin available, which makes investors wary of not getting a piece of the pie, but once an ETF is in place, the fomo is gone and everyone can trade bitcoin just in a different manner, especially as it isn't a physical asset like gold or a stock that has asset backing.

JSLDUK

Renold (LON:RNO) looks a decent business in a specialist sector that I don’t think would be too adversely affected by a downturn + difficult for competitors to break in

Same with bitcoin miners in the US, Riot Platforms (NAQ:RIOT) and Marathon Digital Holdings (NAQ:MARA) over the pond.

I'm half wondering if Marathon Digital Holdings (NAQ:MARA) especially has been repeatedly heavily shorted recently as i'm sure they just constantly dilute their shareholders.On checking short interest is around 20%.US momentum once it gets going can be another thing!

extrader

I think that one scenario is Burford Capital (LON:BUR) finding a Sovereign Wealth Fund (SWF) that isn't subject to the commercial pressures (time, accounting, politics etc) that BUR itself faces and would take Argentina risk in pursuit of longer term not-necessarily-purely financial returns.

Take on Argentina debt for influence or a stake in the vast natural resources that the country has, for example : the Arabian Gulf has several SWF's who have a strategic interest in agriculture; an historic interest/expertise in hydrocarbons/petrochemicals; a current interest in 'green' technology; an economic /political interest in de-dollarisation and encouraging south-south trade. Argentina, along with Saudi and the UAE has recently joined the BRICS group, which is so far more an aspiration than a reality.

Some kind of a deal might tick a lot of boxes for an SWF investment committee, whether it be the one already working with BUR (identity unknown) or a.n.other.

The right deal would attract enormous publicity/kudos and could also - incidentally - be very profitable, which wouldn't harm its chances with the decision-makers...or (in the case of some of the Gulf SWF's ) the decision-maker.

I hold.

AFAICS/IMO etc etc

28th Dec '23

Ref wanting sovereign wealth funds to get involved - does the fact they and private equity arent involved now not tell you something? Seems wishful thinking wanting something other than positive free cashflow from your investment to do the job with regard to an investment. I dont think any of us know whether burford is a good investment or not but we do know up to now it has burned cash and had historic accounting issues and has recently been on radar of sec (clean bill of health for now?) and been on the radar of peeps betting against the company being a good investment.

if this is a real business though that can convert sales to cash then at some stage the proof of the pudding should out - looks like sales are expected to materially decline next year so that might be time at which cashflow perhaps starts to improve if they can deliver.

One question what is the hit to burford if Argentina completely defaults on paying a penny back here ? - eg if they simply fully default on all debts and reset the clock as they have I think done many times before? I kind of see what option would be more popular to your average Argentinian voter if there is an option to simply not force them to pick up the tab here long term.

ref bitcoin
You mention the limited supply of bitcoin being positive - is it a positive though ? Once supply of new bitcoins tails off as is already pretty much happened presumably transaction fees ramp up in % terms is that not the time when bitcoin is likely to implode once peeps realise that every sale (purchase too?) comes with fee to keep the whole house of cards going? if it’s static pool of intangible value with % of that value being removed from the system each year in ever increasing fees / higher than now fixed value it doesn’t sound like a great investment.
i have no idea how material these transaction fees are but it does look like these fees are already increasing materially compared to historical lows.

Pension Deficit

Agronomics (LON:ANIC) For individuals who may have an interest in Agronomics a new presentation has just been released: Agronomics presentation

I hold a position simply because it is rare to have an opportunity to gain some exposure to a new new industry at the venture capital stage.

All the best

Small Cap Value Report (Wed 27 Dec 2023) - WHI, ANIC, SDRY

Explanatory notes -

Unlock the rest of this article with a 14 day trial

About the Author

Paul Scott

77 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...