Three Further Small Cap SuperStocks To Consider Investing In

26th Jul '23 by Mark Simpson

8 comments 3596 reads

As part of the Stockopedia Strategy Map, I have been taking a look at some SuperStocks, stocks that score highly on all three Quality, Value and Momentum Ranks. Previously, I looked at Severfield (LON:SFR) , Costain (LON:COST) and Tclarke (LON:CTO) . This week I consider Alumasc (LON:ALU) , Ten Entertainment (LON:TEG) and Ramsdens Holdings (LON:RFX) .

Alumasc (LON:ALU)

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Alumasc is a building products supplier. It operates in three segments. The first is Building Envelope, where typical products look like this:

Until about a year ago, this division also included the loss-making Levolux, which they sold to management for £1.

The second division is Housebuiling Products under the brand Timloc:

The final part of the business is Water Management, where typical products include gutters, downpipes, drainage and access covers. This week they announced an acquisition in this space, buying ARP Group for £8.5m plus up to £1.5m in deferred consideration. ARP specialise in making metal gutters, pipes and fittings. This acquisition will increase the size of the Water Management division by about 50%.

The company has an exceptional 99 StockRank, which is driven by a strong showing in all three Ranks:

The market cap is £58m. £4.6m of lease liabilities and £6.8m net bank debt make up the rest of the capital structure:

However, these are pre-acquisition, which, if it completes, will see net debt increase by a further £8.5m, making the gearing on the higher side:

However, there doesn’t seem to be any issue with banking covenants, as the company says:

Following completion of the Acquisition, Alumasc’s balance sheet will remain strong, with 30 June 2023 pro-forma net debt representing approximately 0.75x EBITDA.

These figures don’t include a sizable pension deficit, which stands at £8.4m on an IAS19 basis. The company has been allowed to make lower pension contributions of £1.2m per year. However, the deficit has increased recently as the company hasn’t received the full benefit of rate rises due to being hedged with LDIs and having a large amount of scheme assets in equities.…

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PJY5

26th Jul '23

Interesting articles.. thanks.

Just want to question this statement from the Alumasc section...

"The Value rank is the lowest of the three here, with the Value metrics somewhat mixed:"

ALU value rank is 83, TEG 62, RFX 55. How does that make ALU the lowest?

Rusty2

Ten Entertainment (LON:TEG) if bowling declines then that will affect food and drink sales also. I would never eat there anyway, even if I was playing bowls.

portugull

PJY5 Mark means the lowest of the 3 Ranks relating to Alumasc as the other 2 Ranks are in excess of 90.

Thanks portugull.. I realised my mistake soon after I posted it. At least it shows I´m paying attention.. or trying to at least :-)

rmillaree

. However, the deficit has increased recently as the company hasn’t received the full benefit of rate rises due to being hedged with LDIs

i thought LDI's were the golden ticket to stop defecits increasing when rates changed- for them to be the case of increaisjng deficts .........

£TEN

Ref bowling - is there anything to suggest bowling has ben a fad? not that i have heard. Bowling aint exactly new.

All i could perhaps guess is that for price sensitive consumers its possibly decent value for money which i suspect is why they have done well - plus havcing decent lively offering - back in the day when i used to go most sites were poorly maintained so that customerer experience was worse than it should have been.

I have been expecting some dropoff of sales post covid as one would expect everyone went out doing stuff like this more post covid then would return to normal habbits by now - as a holder i am pleasantly syurprised there has ben no signs of dropoff yet. I would add caution though the the lfl's have ben so iompressive the last couple of years at soem stage they must run into headwins at some stage. From my point of view the market doesnt really rate this as highly as franchise rollouts can be rated anyway so the market seems to be taking the viewpoint that there may some dropoff or slowing of growth - the good thing here is that they are adding new outlets anyway which to a certain degree can cover up for poorer lfl figures when they do show up.

ref James Montier’s Trinity of Risk - short sell screen - interesting that company would get penalised for outperformance - guess there is a place for everything. Note this screen also fails the company on altman score - without being certain if i were a betting man i would guess this company only fails the altman test due to the ridiculous lease liabilities accounting treatment - so in suspect if one removes the lease liabilities excess (over asset) and recalcs then it probably wouldnt fail then altman test and therefore that screen wouldnt be activated ? - its only a very minor fail based on calcs done.

Note if one does old skool look at the balance ignoring lease liabilities - there is £14 mill of payables £1.3 other liabilities and cash and trade receivables £14.5 mill. So ignoring 57 mill of plant and ignoring inventories of £1.5 mill. This looks very simple not stressed soudn balance sheet factoring in current level of profits and then great cashflow benefit of getting paid pronto for all sales you book. I suspect if you asked great Ed altman whether his score is fit for purpose when lareg lease liabiloities are included he would say - no take em out - hmmmm i think he is still alive can we ask him ?

Mark Simpson

No they were designed to protect the liabilities from rates falling further by hedging, but also removed the upside from rates rising. The problem is that funds took the hedged position as an excuse to hold a much bigger proportion equities and eliminate the deficit by assuming higher expected returns. Those returns have been no where near those expectations in the short term. This has left the likes of Alumasc (LON:ALU) with no drop in liabilities from rate rises and big drops in assets due to equities falling = a big deficit and possibly the need to make higher recovery payments. Not a great place to be.

Negative Working Capital is a a risk factor for a lot of businesses, since it may mean a company is struggling to pay its bills or if sales fall then cash goes out the door quickly.

Same with rapid growth, it is well known as a risk factor, either for fraud, or simply as an indicator that a company has faced an unsustainable boom (combined with the fact that investors bid up high-growth companies to high multiples).

I don’t think either is the case for Ten Entertainment (LON:TEG) but I can see why the formulae tend to flag these sort of things as risk factors. It is why there is no substitute for looking into the details and considering the type of business being analysed.

Three further small cap SuperStocks to consider investing in

Alumasc (LON:ALU)

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