Small Cap Value Report (Thu 17 Oct 2019) - BEG, NXR, IGR

Good morning, it’s Paul here.

Estimated time of completion – not sure yet, probably about 3pm.  Update at 14:40 – today’s report is now finished.

There’s not much to report on today. I’ll start by looking at trading updates from IG Design Group (IGR), and Norcros (NXR)  – both of which I rate as decent companies.

** Breaking News **

The Govt amp; the EU say they have reached a deal on Brexit. The question now, is whether it will get through Parliament or not? If it does, then I think we could light the blue touchpaper for a recovery in small caps shares. Maybe.

The above is a clickable link through to this interesting report for Q3 (as are all words shown in blue, just in case anyone didn’t already know that).

Unsurprisingly, this shows an increase in companies in financial distress.

No surprises on the sectors worst affected either;

… real estate and property, construction, retail and travel sectors the most severely affected.   

I find it useful to read these reports, as it helps to put my investing in perspective. In particular by showing us which sectors are suffering, that might enable us to exit from something which could be building up to a profit warning.

Share price: 223p (price unchanged today, at 11:24)
No. shares: 80.5m
Market cap: £179.5m

Trading update

Norcros, a market leading supplier of high quality and innovative bathroom and kitchen products will announce its interim results for the 27-week period ended 6 October 2019 on 14 November 2019. In advance of this, the Group is providing the following trading update.

I would have expected a bathroom fittings company to be suffering at the moment, due to the generally wobbly economic outlook. That doesn’t seem to be the case, which is encouraging for shareholders here;

Group underlying operating profit1 for the first half is expected to be in line with the Board’s expectations, a resilient performance reflecting the Group’s continuing success in winning share despite the challenging market conditions.

The stand-out growth in revenues of +24.5% in South Africa is purely due to the acquisition of House of Plumbing. LFL revenues were flat against last year’s H1.

The UK eked out a LFL growth in revenue of 1.3%.

Net debt – has come down nicely;

Net debt is expected to be approximately £42m (2018: £53.5m), in line with expectations following the acquisition of House of Plumbing in the first half of the year.

Management has done a great job in recent years, in balancing the funding of acquisitions, pension scheme recovery payments, and divis for shareholders. All achieved without overly stretching the balance sheet. 

 Outlook – solid;

The robust performance in the first half against the backdrop of challenging conditions in our two main markets demonstrates the resilience of the Group’s strategy and operating model. The fragmented nature of our markets continues to provide growth opportunities for the Group as we maintain our focus on winning market share.

The Board remains confident that the Group’s leading market positions, portfolio of strong brands and financial strength will enable further progress in line with its expectations for the year to 31 March 2020.

Valuation – looks superficially very attractive, but we do have to adjust for the humongous pension schemes. Although checking the last accounts, note 7(a) discloses that the pension deficit payments were £2.6m in FY 03/2019. That’s not actually too bad, and quite modest compared with £6.4m in dividends paid to shareholders. So maybe the pension deficit isn’t as bad as some investors might perceive?

The valuation figures look very appealing, and quality isn’t bad too;

The problem is that this share is permanently cheap. What would trigger a re-rating? Still, I would rather hold something that’s permanently cheap, than something inexplicably expensive!

Stockopedia’s computers absolutely love Norcros;

My opinion – the figures look great, this looks an excellent value share.

The trouble is, it never seems to re-rate, despite strong performance. So shareholders tend to get bored amp; drift away, when they spot something else with more immediate upside potential.

For the patient investor though, I see Norcros as being attractively valued, and you get a 4% (growing) divi yield while you wait.

There’s economic amp; political risk from having operations in South Africa too.

Performance in the UK has so far been resilient, but there’s no guarantee that will remain so.

Overall, this gets a thumbs up from me. It’s a decent group, with good management, performing well, and dirt cheap!

Share price: 620p (up 0.7% today, at 12:32)
No. shares: 78.6m
Market cap: £487.3m

Trading update

IG Design Group plc, one of the world’s leading designers, innovators and manufacturers of gift packaging, greetings, stationery, creative play products and giftware, announces a trading update for the first half of the financial year, which covers the six month period to 30 September 2019.

This group continues its excellent track record;

The Group is pleased to report a strong performance over the period; on track to meet full year market expectations, with the business delivering double digit year on year growth in revenue and operating profit.

The Group continues to deliver strong cash generation and as a result we expect year end average leverage1 to show further improvement against the prior year, reaching around 1.1x.

Note that the group has large swings in its leverage during the year, to cope with seasonal trading peaks. That raises the question of how we should value the shares? Personally, I would like companies to disclose the average daily net debt/cash figure. That is what should be used when calculating enterprise value. The problem with balance sheet figures, is that they’re a snapshot on one day, and all good CFOs make sure that the figure is nicely window-dressed to look favourable on the balance sheet date. Hence why enterprise value can be quite a dangerous method of valuing companies.

Outlook – sounds good;

As the Company begins the second half of the year it continues to benefit from a strong order book together with major commercial and operational initiatives and investments throughout the Group, which will support the growth going into FY21.

Acquisitions – described as an active pipeline.

My opinion – IGR gets a thumbs up from me.

It’s established an excellent track record, and there’s no sign of that faltering. Hence I think the forward PER of 18.5 looks fully justified.

Stockopedia’s computers also like it a lot;

That’s it for today, see you tomorrow.

Regards, Paul.

Stockopedia