Small Cap Value Report (Weds 18 Sept 2024) - GLE, KETL, XAR, EYE. Briefs: VEL, CTG, MORE

18th Sep by Paul Scott

66 comments 7593 reads

Good morning from Paul & Graham!

USA interest rate cut is expected later today.

Aug 2024 UK inflation report - snippets of interest -

It's getting very busy now, with a deluge of June half year results coming through. So we'll keep flagging (almost) everything, with in-depth reviews for some of the more interesting items, eg. overs & unders (trading vs expectations), and the companies that you're collectively looking at (as disclosed by the home page "most viewed" widget). To keep expectations grounded, please remember that we can't cover everything in detail.

Explanatory notes -

A quick reminder that we don’t recommend any shares. 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, investment cos). Although if something is newsworthy and interesting, we'll try to comment on it. Please bear in mind the "list of companies reporting" is precisely that - it's not a to do list. We typically cover c.5 companies per day, with a particular emphasis on under/over expectations updates, and we follow the "most viewed" list of readers, so if you're collectively interested in a company, we'll try to cover it. Obviously with the resources available, we can't cover everything! Add you own comments if you see something interesting, and feel free to discuss anything shares-related in the comments.

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BnB

18th Sep

After FY23, the company was talking positively about meeting the rule of 40+ (Rev growth + adj EBITDA margin >40%)

The “real” rule of 40 is for cashflow margin + revenue growth, not some easily manipulated metric like adjusted EBITDA margin. I’m sure it’s a good product with a fine future, but that’s all that is keeping the SP high IMO.

DarwenLad

Paul had flagged up the dire straits of PZ Cussons (@PZC), the consumer goods business, at the time of its full year trading update in June. But today’s full year figures - a £83.7m operating loss and a 44% cut in the annual dividend – underscore the parlous state of its business caused by its continued over-exposure to the Nigeria economy whose currency has collapsed.

Back in April the company announced a major corporate shakeup to unlock shareholder value, including the proposed sale of St Tropez, its US beauty business said to be worth circa £100m, and a possible exit from Nigeria.

All it could say yesterday was that the sale of St Tropez was "progressing” and it had received a number of “expressions of interest” in the full or partial sale of its African business. No wonder the shares fell over 12% on the non-news to around 90p.

Progress in sorting out PZC’s balance sheet and Nigerian exposure has been far too slow. Whilst PZ’s relatively new top management team comes with lots of FMCG industry experience, it appears far less well equipped to navigate the political and economic cross currents of Nigeria’s volatile economy.

The only potentially good news was the announcement that Vivek Ahuja, who joined the board as a non exec in January, is taking over as PZ’s senior independent director. He has over 30 years experience in global finance having been deputy group CFO at Standard Chartered bank and currently chairs the risk committee of NatWest Markets.

Hopefully, he might be able to get to grips with the serious exchange rate challenges that have so damaged PZ’s long-overdue recovery plans.

abtan

LSL Property Services (LON:LSL)

Hi Mammyoko

can I ask why you would prefer LSL Property Services (LON:LSL) to Mortgage Advice Bureau (Holdings) (LON:MAB1) ?

It wasn't really a case of one or the other.

Most of my research was simply on LSL Property Services (LON:LSL) and I thought there was value here.

I did of course have a quick look at Mortgage Advice Bureau (Holdings) (LON:MAB1) , but it's quite clear that they operate differently, given that LSL states that its market share of the gross mortgage market is higher than MAB's (10.7% vs 8.3% FY23) and yet MAB's revenue is materially higher.

If it's of interest LSL have a JV called Pivotal (they own 47% of it) focussing on the B2C segment, so I imagine that they have seen MAB's success and want some of it. The ex-CEO of LSL (and 7% owner of LSL) recently left the board of LSL to focus fully on growing Pivotal.

---

I don't really look at share price ranges or P/Es so I can't really answer your next question I'm afraid.

As I mentioned before, however, if I look at each individual division and apply what I see as reasonable Operating Profit multiples, which I know is subjective, then the Sum of The Parts (SOTP) just seems too low.

For 2 of LSL's divisions - Financial Services and Estate Agency - I did work out the Operating Profit multiples of both Mortgage Advice Bureau (Holdings) (LON:MAB1) and Property Franchise (LON:TPFG) , and then reduce these both by 5 for my SOTP calculation - the LSL divisions are both comparatively smaller and therefore should not be trading at a premium.

For the Survey and Valuation division I assumed an Operating Profit multiple of x10.
With a 40% market share, and with it being so profitable, I would hope/assume that it is not lower than this.

On your point about comparisons, the LSL Property Services (LON:LSL) business model has changed so drastically over the last 2-3 years, it's hard to even compare it with itself before 2022 and I'm sure the Stockopedia ranks do not reflect the change properly yet.

However, it's very cash generative, has no debt, is growing through self-funded acquisitions and organic growth seems like it's coming - Quality (and Value?) do not seem to be an issue.

sevenmonks

You're lucky, my car insurance trebled this year despite 13 years no claims

davidjhill

Hi Threepeat,

My suspicion is the following (Planetx might have more evidential input)

1) freight shipping costs have been falling and given this was one of the reasons Shoe Zone (LON:SHOE) highlighted as a reason for the shortfall that could be reversing

2) Chinese manufacturing is struggling a bit so I do wonder if there is a deflationary input cost element being factored in

3) Rumours that the Chancellor will shut the VAT loophole on overseas competitors benefitting from being able to sell ex-vat when the like of Shoe Zone (LON:SHOE) can’t.

The two former should lower costs and offset some of the increased minimum wage impacts. The latter should reduce the benefit of buying from online Chinese competitors - particularly for the likes of shoes, where there is a significant benefit in trying them on/taking them back, or at least it should reduce the risk of online competitors making any significant inroads into ShoeZones market share.

Anyway let’s see. I suspect it is more the forward looking view driving the price rather than anything we might expect in the numbers themselves

Burnt Onions

Hi BnB,

It's an interesting concept the real rule of 40, without back testing it feels like a very high bar, do you know of any UK listed companies that pass this test?

psin

Did you compare???

Silver Moon

That should be very interesting and there ia another, Caesar by the two Goldsworthys. Here is a page that has relevance with current affairs. Soon to be assasinated, things went downhill thereon.

I've been rekoning on the Pound halving every ten years as a rule of thumb which is why all my savings are in shares.

Harry Hindsight

There is also some that consider seed oils, or the refining of such, is the cause of cancers and obesity which did not exist when we were all scawny little runts post wartime. Saw some 'no palm oil' bread which makes M P Evans (LON:MPE) (I got into when Ukraine was invaded) on the nasty list.

Trouble is when try to find 'non-processed' i.e. in their natural state foods we will end up living on about 10 products. Can't drive anymore, can't smoke and the 'pint' will soon be the 'beer shot' and now can't eat.

The only thing left is gambling on spread betting - hoping gold booms on a 50 points FED cut - well silver actually not so in the 'news'. Used in solar panels don't you know, our future energy supply apparently especially in the Midlands according to Ed. Interestingly Norway still exploring oil and gas fields, so their ability to keep the lights on for those fixated on doonboggles, and increase their sovereign funds is a good plan.

Doombar £3.12 a pint at the King of Wessex 'Spooners in Bath, £1.99 at the Bridge House 'Spooners in Chippenham just to keep the footfall in balance, nothing to do with inflation of course.

Apparently Robusta coffee is used for instant and Arabica for the beans 'proper' coffee. The Robusta has been hit but don't have the facts. Supply and demand works it out eventually, but its the growers get hit in the 'beans'.

It’s a bar that a lot of US high growth stocks hit. But I’m not sure about the UK.

Alphaflight

Haha thanks Silver moon

wolfspirit

harvest was poor

Daniel

"We are anticipating one or two acquisitions early in the new year, these will be bolt-on acquisitions. We do have some discussions about transformational level acquisitions, which we may be completing during 2025, but we will need to come back out to the market for those because they are beyond the cash and debt facility".

yep - exactly. Could be a really interesting year.

19th Sep

Spent a long time comparing, yes. Managed to get it down to a 2.5x increase by increasing my excess quite a bit.

TamzinPiworld

Great write-up on Eagle Eye Solutions (LON:EYE) FY24 results, Paul. Here is the presentation given to analysts yesterday morning video & podcast.

Equity Development

24th Sep

Strix (LON:KETL) - Investor Presentation video recording

Mark Bartlett (CEO) and Clare Foster (CFO) of Strix Group plc hosted an Investor Presentation covering their Interim Results for the six months ended 30th June. Management discussed key highlights of the period, including an increase in adjusted revenue, gross margins and EBITDA metrics. The team provided a comprehensive Financial overview with the return to balance sheet strength and reduced net debt leverage, as well as details on the restructuring and rebasing of the business over the past few months, streamlining it for the future. Management gave more granular insights on each business category and answered a range of questions submitted by investors.

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Small Cap Value Report (Weds 18 Sept 2024) - GLE, KETL, XAR, EYE. Briefs: VEL, CTG, MORE

Explanatory notes -

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Paul Scott

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