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Small Cap Value Report (Wed 20 May 2020) - macro, PMP, MCB

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Good morning, it’s Paul here. No silliness in today’s preamble. Just to reassure readers who posted concerned comments yesterday about me naming amp; shaming a young lady in Bournemouth – relax, as I made up the name!

Estimated finishing time – TBC

Here are a few interesting news items that have caught my eye, together with my comments;

CNBC reporting that 40% of Samp;P 500 companies have withdrawn profit guidance for 2020. (Paul: how can market be so buoyant, when so many large companies cannot predict their trading this year? Risk that markets may not be properly factoring in potentially very bad 2020 figures. We need to treat all UK broker forecasts as probably far too optimistic, unless a company has specifically confirmed it is trading in line. In fact, I’m basically ignoring broker forecasts right now, as they’re largely defunct – a very unsatisfactory situation. Just because it’s difficult to predict, doesn’t mean you should stop trying, if that’s your job!)

Walmart reported strong sales, but it’s incurring higher costs, e.g. additional cleaning, and staffing costs. (Paul: so even businesses that are trading well during the crisis, could see a squeeze on profits)

Chancellor of Exchequer has made ill-advised comments in a committee hearing – does he not realise these are televised? He described the UK as facing, “a severe recession, the likes of which we haven’t seen”. (Paul: if that’s what our top finance man in Govt thinks, then we should be very worried, and cautious, in my view)

Air travel – proposals being mooted for “air bridges” – i.e. reciprocal arrangements with other countries which are seeing low covid levels. (Paul: could be why Dart (LON:DTG) shares shot up yesterday?). Also, the UK 14-day quarantine period being introduced apparently will not have an exemption for France. I’ve no idea why it has taken so long to introduce this measure, when it was needed a couple of months ago.

Vaccine – news from $MRNS about its success in early stage covid vaccine trials, which is reckoned to have triggered the Dow’s 900 point rise yesterday, is apparently not so exciting after all. US markets gave back about a third of yesterday’s gains.

CLBILS (Coronavirus Large Business Interruption Loan Scheme) – Govt has raised limit from £50m to £200m, a very significant announcement. Large companies can borrow up to 25% of annual turnover. It’s a loan guarantee scheme. Divis amp; cash bonuses banned when using this scheme (good!). Higher limit available from 26 May. Note that N Brown (LON:BWNG) told us yesterday that it had borrowed £50m using this scheme, so perhaps the increase to £200m would give it extra possible funding, which is positive for the shares.

Let’s start with a few items left over from yesterday.

Portmeirion (LON:PMP)

Share price: 390p
No. shares: 10.64m
Market cap: £41.5m

Trading Statement (AGM)

Portmeirion Group PLC, the designer, manufacturer and worldwide distributor of high quality homewares under the Portmeirion, Spode, Royal Worcester, Pimpernel, Wax Lyrical and Nambé brands…

My notes from 16 Jan 2020 here are quite useful to bring us up to speed. 2019 results were in line with expectations, but broker forecasts had been heavily reduced during 2019. So the business wasn’t really firing on all cylinders even before Covid-19 began.

2019 results – headline PBT fell 24% to £7.4m in 2019, or 56.3p adj EPS. Final divi cancelled. Balance sheet not as strong as previously, due to debt taken on for acquisitions. I imagine it must be struggling to collect in receivables from its retailer customers.

A new joint broker (Panmure Gordon) was appointed recently on 12 May, which can be an indication that a fundraising might be on the cards perhaps?

30 March update – extending usual 1 week Easter factory shutdown to 3 weeks. Reduced customer orders from UK amp; USA. Strong online sales growth in March. Far Eastern markets starting to return to normal. Significant order book for overseas markets. Wax Lyrical (candles) subsidiary has converted production lines into making hand sanitiser amp; spray. Cash conservation amp; cost-cutting gone well. Outlook uncertain, but group is well positioned.

19 May update – partially re-opened factory on 6 May, so shutdown was about 6-7 weeks, not the previously planned 3 weeks. Capacity will be increased further in coming weeks. Warehouses fulfilling eCommerce orders successfully. Wax Lyrical to ship more than 1m units of hand sanitiser in Q2. Here are its sanitiser products, which seem to retail at typically £3-5m, so wholesale price probably not much more than £1 per unit, hence this doesn’t look material to the overall group results.

Business has been “significantly impacted” due to retailers being closed. Expected to continue in Q2. Export orders to Far East being shipped, as they are opening up again. Significant uplift in UK amp; USA online sales (up over 100% in April), expect this trend to continue. Cash burn in Q2 less than £1m. Sufficient bank facilities amp; headroom. Divis – will reinstate as soon as they can.

My opinion – this doesn’t sound too bad, in that solvency sounds OK. Although cash burn was only £1m in Q2, remember that the Pamp;L loss could be much worse, because companies are deferring many cash costs, e.g. delaying tax payments, etc.

Given there is so much uncertainty, and no profit guidance, I don’t know how to value this share. As with so many companies, we cannot rely on the now defunct broker forecasts. Actual results are likely to be far worse, but no indication has been given of how much worse.

Overall then, I don’t have enough information to form a view. There doesn’t seem to be any risk of it going bust, so long-term holders should feel reasonably relaxed about sitting tight, I think.


Mcbride (LON:MCB)

Share price: 62p (up 8% yesterday)
No. shares: 182.8m
Market cap: £113.3m

Trading Update

McBride plc (the “Group”), the leading European manufacturer and supplier of Contract Manufactured and Private Label products for the domestic Household and professional cleaning and hygiene markets, today provides a trading update for the current financial year, ending 30 June 2020.

McBride seems to be making products which are very relevant to the current crisis, which sounds positive;

Further to our update on 25 March 2020, demand levels in our Household business have moderated from the surge seen in many markets as countries went into lockdown but encouragingly remain above the run-rate levels seen before March. These higher demand levels are evident in most of our major markets and apply mostly to surface cleaning and dishwashing products, with more limited impact in laundry products.

This is all self-explanatory;

Our teams have worked well to address the early challenges of staff shortages, material availability and distribution blockages and all factories are currently operating at more normal activity levels.

As anticipated in our March update, we have seen lower input pricing in this period although some of this benefit has been tempered by one off COVID-19 related operating costs.

This company has also jumped on the hand sanitiser bandwagon!

Profit guidance - a bit of a positive bombshell here, very impressive;

As a consequence the Board now expects full year adjusted profit before tax to be approximately 15% ahead of current market expectations (*) and for net debt at 30 June 2020 to be lower than expectations.

(*)Current market expectations refer to a Group compiled consensus for FY20 of adjusted PBT £18.6m.

Lovely to see the company include that footnote, giving market expectations, that’s so helpful.

My opinion - this is clearly a positive update. Although if you check back, the company has been under-performing for several years, with EPS in steep decline.

I’m not madly keen on its balance sheet – this is quite a capital-intensive business, not generating much of return from a lot of fixed assets. Therefore it’s not really a sector, or company that interests me. However, it’s performing well in this crisis, and the valuation looks cheap. Therefore it might interest value investors at this level.


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