Small Cap Value Report (Mon 16 Nov 2020) - Paul's recent buys, NCYT

This part written by Paul

Good evening (I’m writing this first section on Sunday evening). I promised to follow Jack’s comments last week, on what he’s actually been buying recently, so somewhat belatedly (with my apologies), here it is.

EDIT: I’ve put this up on Sunday early evening, in between binge-watching (The Crown, I love it!) and binge-drinking (Freixenet!), to give subscribers some time to digest things at leisure, rather than trying to combine it with the usual 7am deluge of RNSs on Monday morning.

Also, I have to take one of my dogs to a cancer specialist tomorrow, to see if we can save him, so won’t have that much time for writing. Also whether we can justify spending money on an elderly dog, or if it would be better spent on saving the lives of pensioners in Zimbabwe via my favourite charity, ZANE. Lots to think about. It should be a simple, logical choice, but it’s not when emotions are involved. Anyway… here is Paddy below

(we caused chaos in the De Beauvoir Arms N1 just before lockdown 2, when my dog Paddy kept vigorously trying to climb onto the table. I kept shouting at him to get down, Paddy, get off the table, Paddy FFS, etc, and this poor human on the nearby table kept jumping out of his skin! Turns out he was called Paddy too, so we had a good laugh and I bought him a pint by way of an apology for fraying his nerves!). He thought it was hilarious in the end, so no harm done. Here’s my Paddy

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This section written by Paul

I promised last week to update you on my recent “buying frenzy”, so here goes, and sorry for the delay. In recent months I’ve been building up positions in a number of shares that looked too depressed, and should benefit from a likely gradual recovery from covid in 2021 (better treatments, testing, and vaccines). However, I suffered heavy losses on these shares (the worst being Revolution Bars (LON:RBG) ) as they fell, and fell, and fell. So my portfolio, which had been looking quite healthy earlier this year, was starting to look sickly again recently.

Pleasingly, I’ve recouped all of my losses from Sept amp; Oct, in one week, last week, and am now back to a more comfortable level that I was at in August, in terms of portfolio performance..

Two pieces of significant news recently, led me to start buying heavily. Firstly, the news from Rishi Sunak that he was extending the furlough scheme from end Nov 2020, to Mar 2021, is highly significant for many struggling companies in the worst affected sectors of retailing, hospitality/leisure, and travel. This means that some, many even, could survive through to the other side of covid.

The second piece of news happened a couple of days later – the positive vaccine results from Pfizer. This put an astonishing rocket under the market on 9 Nov. Was this just a spike up? I feel it’s more important than that, and it gave me the confidence to start going through my watchlist and working out which shares to buy. I think we are likely to get more good news generally on treatments amp; vaccines, so even if shares slip backwards in between news, there should be regular fillips from here onwards, possibly? That has to be set against worsening daily figures on infections amp; deaths – nearly all of the deaths having underlying health conditions, the data clearly shows.

Moving on to individual shares, NB, as we always emphasise, we do not ever give recommendations here. Why would we? You blame me if they go down, and take the credit yourself if they go up! I know how this works, I’ve been doing it for over 20 years!

These are ideas for subscribers to research yourselves, and debate. Negative views are just as important as positive ones, I’m not looking for confirmation comments, but actually like it when people throw up bearish comments. Please remember that I get some stock ideas right, and some wrong. In particular, my more speculative ideas tend to go wrong a lot of the time!

I’ve just updated my spreadsheet, and thought it might be helpful to share my top 10 holdings with you, to put things in perspective, as this shows the level of conviction I have, for general interest. Then you can laugh at me in 6-12 months time, and beyond.

You might notice that I’ve moved up the market cap size level a bit, with 4 out of my top 5 being fairly liquid. I’m trying to avoid taking very large positions in micro caps, as then I’m stuck in them, which isn’t great when things go wrong.

As you can see below, I deliberately run a highly concentrated portfolio. That’s just my choice, as I want to back my highest conviction positions heavily. It works great when my picks do well, and can be a nightmare then big ones go wrong! So please bear in mind I see myself as a higher risk investor.

Boohoo (LON:BOO) (by far my largest holding, at 26%) – we’ve debated this one ad nauseam, so to recap my view: an astonishing growth company, now with 9 brands, and there’s really no limit to how many more it can bolt on. Selling globally, growth is actually accelerating. How many companies produce growth like this?

I think the forecasts are possibly too low (the lighter blue blobs), and the PER multiple is also right at the bottom of the 5 year range – currently rated at 27 times forecast EPS for 2021/22, on forecasts that are usually thrashed.

We all know about the supply chain issues, which have had no impact on trading. I think the company’s comprehensive response deserves credit, and it’s really just background noise, now that the issues are being addressed. The press vendetta, and repetition of the same material, must surely hit the law of diminishing returns soon? Its frightened off the auditors, who cares! The auditing profession has plenty of reputational issues of their own to deal with, which might possibly explain why they’re so sensitive to more bad news? Just my theory!

BOO’s supply chain is arguably far more ethical than its competitors, many of whom are buying from sweatshops in Bangladesh, where workers are paid 50p/hour and live in slums (see recent BBC TV report on this subject). So a massive amount of hypocrisy exists in the sector. Everything in our wardrobes was made by people who were paid a pittance. So spare me the virtue signalling. 50p in Bangladesh, or £4-6 per hour in Leicester (allegedly) – which is worse? Maybe the Guardian writers might like to think about that a bit more?

My theory is that many fund managers are subject to quite strict ESG rules, so they have possibly become forced sellers of BOO, due to the adverse publicity. Once those sellers are gone, it opens up the path for a share price recovery, in my view. Beautiful conditions to make money. Thank you for the opportunity, ESG sellers – why did you buy a fast fashion stock in the first place? Probably because you’re clueless, but so what, as it’s someone else’s money, and if you could do this well, you would be able to do it with your own money maybe?

As we’ve seen , BOO shareholders need strong nerves, to be able to cope with the share price volatility. But volatility is very different from risk, so I don’t let the volatility bother me too much, indeed and I’ve been buying heavily on every dip.

Intercede (LON:IGP) (11% of my portfolio) – this is a long-term holding, which I bought in mid-2018, because it looked under-valued, and has a very sticky client list of huge organisations, with mainly recurring revenues. It’s now profitable, and has traded fine throughout covid. I’m really backing the CEO here, who I think has a very clear plan, and is executing well. So far so good. There’s a IMC presentation coming up on 26 Nov. It wouldn’t surprise me if someone bids for this cyber-security company.

Saga (LON:SAGA) (10% of my portfolio) – I’ve researched this a lot (see the archive) and reckon it’s valued completely incorrectly at the moment. If you analyse the debt, it’s really not a problem. A £250m loan note is cheap, and doesn’t mature for several years. The company reckons it can pay if off from future cashflows. The cruise ship loans of c.£550m are fine, as the lender has waived covenants until June 2021, and once the ships can start work, then they are forecast to generate £80m EBITDA, more than enough to cover the c.£25m p.a. Loan interest costs, plus capital repayments above that, over c.12 years. Customers are itching to get onto the 2 brand new cruise ships, which have fresh air ventilation, all balcony rooms, and well-planned social distancing procedures. Bookings are high, and SAGA will be fully segregating client funds shortly. So zero risk, a great selling point. Plus its insurance division is a lovely cash cow, worth a lot more than the group market cap, in my view.

The former CEO (founder’s son) has injected £100m of his own cash in recent £150m fundraising, most of it put in at 405p per share! The balance was put in at 180p per share, which was also the open offer price. A takeover bid of 495p was recently rejected. Yet we can buy now at c.190p – it’s crazily cheap IMO.

Once the travel division is working again, then I reckon earnings could bounce back to c.100p per share in 2022 maybe. Put that on a PER of say 12, and you have 1200p per share price target. Hence I reckon this could be a multibagger, if things go well. Not without risk of course, but I don’t see the risk as anywhere near as high as the market seems to think. I’m probably more excited about the scale of the upside here than for anything else.

Volex (LON:VLX) (7.6% of my portfolio) – cracking interim results are just out, and broker forecasts seem too low. Hence I reckon the actual PER could be in the low teens, or less even, once the latest acquisition is added into the numbers. Three more acquisitions are in the pipeline, and can be funded from cash, and a new enlarged bank facility. The balance sheet is great, and it’s paying divis still. I agree with SCSW that a sensible price target is 400p, 60% upside from here. Cannacord has just initiated coverage, with a 382p target. I’m not bothered by the recent departure of the CFO, as management indicated this was a planned transition, as he told the Board he wanted to retire 2 years ago. The CEO has plenty of skin in the game – his personal holding is worth £94m!

Redde Northgate (LON:REDD) (5.7%) – many thanks to subscribers who flagged this one up to me. It just seems the wrong price! The white van hire business is in a great place, with the rise of internet amp; delivery services needed. The accident management business is struggling, but should recover. The balance sheet is fine, with debt under control, and heavily asset backed. We had recent confirmation of broker forecasts, giving a PER of just 7, and a dividend yield of 7%. To me, that just seems the wrong price. Hence 300-400p seems a sensible target price. It’s currently 220p.

Revolution Bars (LON:RBG) (5.4%) – obviously this one has been a disaster, but it’s turning the corner now. It bottomed out at c.8p, and has now doubled to c.17p. The CVA was approved last week, which jettisons the problem sites. I got forced out of some of my spread bet positions in it, when it dropped below the 20p placing price, but managed to grab some of them back at c.11p when the furlough extension was announced.

Once it can trade normally again, I reckon this business could produce maybe £15m p.a. EBITDA/cashflow, which would allow it to reduce debt fairly quickly, which I reckon should peak at c, £22m – not disastrous at all. Pent-up demand to party is likely to be huge in 2021. Not without risk, but nowhere near as risky as the market seems to think, in my view.

Quiz (LON:QUIZ) (4.0%) – this is another special situation, which did a pre-pack admin in June. All the shops are now on turnover rents. Experienced management are rebuilding the business, and still have cash in the bank. Miniscule market cap, so there could be nice upside here, taking a 1-2 year view.

Bigdish (LON:DISH) (3.0%) – not one of my better ideas so far! Hugely speculative, but operating in a very interesting space. It has changed strategy several times. This one is a complete punt, but with money I can afford to lose, if it goes wrong.

Shoe Zone (LON:SHOE) (2.7%) – I’ve been building up a long position here recently. It’s another recovery story. Historically the company has been highly cash generative, and management have big shareholdings. It has incurred heavy losses in 2020, but looks financed adequately to survive, and come out of the other side. Tiny market cap now, which I think looks too low, recovery not yet priced in.

French Connection (LON:FCCN) (2.4%) – another special situation, which is funded to survive covid, with a recent £15m asset backed facility provided by turnaround specialist Hilco. Valuable brand licensing revenue, should give a profitable exit at some point. Loss-making shops being gradually closed. Miniscule market cap seems far too low to me.

Other things I’ve been buying, and why

On a smaller scale, I also like these;

Portmeirion (LON:PMP) – good strategy under new management. Focusing on growth, in particular online, which appeals to me. I’ve done very well on a few other businesses that successfully transitioned online, e.g. Best Of The Best (LON:BOTB) (only a very small position for me now). So as soon as I hear of turnaround plans based on growing online, then I sit up and take note.

Walker Greenbank (LON:WGB) – I’ve topped up after the recent news of a collaboration with Next (LON:NXT) . Looks cheap I think.

Marks And Spencer (LON:MKS) – I like the major efforts underway to turn it around. This seems much more decisive than previous half-hearted turnarounds. See the webinar on its website. Recent interims were OK in the circumstances, and it has tons of liquidity.

Watkin Jones (LON:WJG) – I decided to take the plunge here, even though the valuation is still too high on a balance sheet multiple basis. But, this niche property developer has a great track record, and a good pipeline. It’s not a big position, but I wanted to dip my toe in the water.

Loopup (LON:LOOP) – the price got whacked recently, when the Pfizer vaccine news came through, unfairly I thought. Most recent trading news was fantastic, and I think some of that could stick, even if people do gradually go back to working in offices.

Finally, a few tiddlers, which are very illiquid, so probably best ignored;

United Carpets (LON:UCG) – tiny, but cheap

Pci- Pal (LON:PCIP) – looks awful on historic numbers, but could have breakeven in sight, due to strong growth

Gattaca (LON:GATC) – quite surprising recent results, and balance sheet strength.

I’ve written about all the above shares in recent SCVRs, so please just search the archive if you want more detail. It would take me too long to put in all the links.

I hope you find some of the above interesting, to have a delve into yourselves.

A word of warning though, a lot have risen quite a bit recently, so the danger is that, if we chase them up in price further, we could end up buying disadvantageously, into a short term spike. Hence why I generally try to wait for a red day, and then nibble away at the ones that fall.

In particular, Saga had a couple of big spikes in price last week, but fell back each time, so it looks like there are willing sellers around.

Things I’ve sold

I churn my spread bet accounts quite a lot, as volatile prices amp; gearing can force me into trimming positions when I’m on margin call. Not ideal, but as mentioned before, I’m really not very good at managing my own portfolio, because my personality is too excitable to make rational decisions consistently.

These are the things that I had to sell on down days;

Hollywood Bowl (LON:BOWL) – really annoying, as I had to sell near the recent lows, to free up margin to hold on to my higher conviction positions. It shot up last week, so much that I feel it’s not worth chasing it higher by buying back in.

Newriver Reit (LON:NRR) – I still like this one, but feel that landlords are suffering carnage from all the CVAs, that I don’t really want any exposure to retail or hospitality landlords. I know all the arguments about the upside case, but would rather steer clear for now.

Purplebricks (LON:PURP) – talk about legal action re tax did spook me a bit, so decided that this made it too uncertain, so I exited a small, recently acquired position.

Somero Enterprises Inc (LON:SOM) – again, more a forced disposal, due to margin calls. I’d like to buy back in at some stage, but feel there could be more % upside on other things for now.

Works Co Uk (LON:WRKS) – it does look cheap, and liquidity looks OK for now. But is that good enough reason to hold? I decided not. If it does a CVA to thin out amp; reduce the cost of its gt;500 shops, then I would look at buying back in, possibly.

Best Of The Best (LON:BOTB) – I still hold some, but have reduced it from a large, to a small position. That might have been a mistake though, as the company seems to have really cracked digital marketing, with great results amp; growth. If bid talks fall through (likely I think), then I’d be looking to buy back on any downwards spike, possibly. Very illiquid. Terrific, honest management.

Short positions – none. I find that shorting is so risky, and your timing has to be near-perfect, that I’ve decided to run a long-only portfolio at the moment. I made big profits from shorting the indices in Feb-Mar, but gave it all back over the summer. Probably best to stick to what I have some kind of edge in (small caps).

I hope you found that interesting, and welcome all discussion on the stocks mentioned (positive or negative) – preferably rational views, backed up with facts amp; figures, rather than how you “feel” about something, which doesn’t really matter! Over-riding our feelings is a good skill for investors to learn, in some cases anyway.

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Share price: 844.11p (-5.9%)

Shares in issue: 70,626,248

Market cap: £596m

(I hold)

It’s been another remarkable week for many of the Covid testing stocks, with last Monday seeing many of them plummet by almost 50% in value in a single day.

You can get a sense of the news-driven volatility from the Novacyt Sa (LON:NCYT) Heiken Ashi chart below – see that the body of Monday’s ‘stick’ shows a reasonable open and close – but the long shadows of the intraday high and low tell the real story.

That’s a lot of volatility to handle and it’s not for everyone.

That said, Novacyt’s share price has subsequently rebounded. It can be differentiated from its listed peers by its considerable government contracts and the manufacturing base it has rapidly acquired and scaled up.

Last week, following the drop on Monday, directors bought more than half a million pounds’ worth of Novacyt stock. To recap, we had:

• Edwin Snape, NED, buying 1,080 shares at a price of £7.15 per share for £7,712 on 11 November,
• Graham Mullis, CEO, buying 60,875 shares at a price of £8.17 per share for £497,349 on 12 November,
• Jean-Pierre Crinelli, NED, buying 1,541 shares at a price of €9.70 per share for around £13,453 on 13 November, and
• James McCarthy, corporate consultant, buying 10,000 shares at an average price of £8.953 per share for £89,530 on 13 November.

So an RNS from Novacyt almost every day of last week and we have another one to dig into today.

Ramp;D Update

This announcement should be encouraging to holders but I wonder if more guidance on actual trading is required in order to actively convert neutral onlookers to the investment case.

That said, Novacity has certainly been busy. Highlights include:

• Encouraging interim data from the ongoing care homes trial,
• Launch of PROmate™, a new product to improve the workflow efficiency of Novacyt’s NPT system for COVID-19 testing,
• Development of a loop-mediated isothermal amplification (LAMP) test for COVID-19,
• Development of an antibody lateral flow test (LFT) for COVID-19,
• Development of a research-use-only (RUO) test for a new strain of COVID-19.

Of the above, perhaps PROmate is the most significant in the near-term.

Care home trial

Queen Mary University of London (QMUL) has completed an interim review of Novacyt’s near-patient testing (NPT) system in the ongoing care home study.

Over 4,000 samples have been analysed with ‘gt;99% clinical sensitivity and specificity when compared to a standard central laboratory system.’ The clinical trial is being expanded and Novacyt’s NPT systems are being deployed into additional settings.

PROmate™

This is a new CE Mark approved product ‘designed to further improve the workflow efficiency of COVID-19 testing when used in combination with the Company’s q16 and q32 instruments’ – a move possibly in response to reports that some hospitals were struggling to operate the company’s testing products. Novacyt says:

The reagents involved in its COVID-19 RNA extraction and PCR test products have been repackaged to reduce operator complexity and improve cycle times. In addition, PROmate™ uses a viral inactivation methodology validated by Public Health England for potential use outside of laboratory environments.

LAMP COVID-19 test

Loop-mediated isothermal amplification (LAMP) technology is a low-cost alternative to detect COVID-19 (and other diseases).

Novacyt is currently developing a LAMP test for COVID-19 that is designed to be compatible with its q16 and q32 instruments and ‘is also in active discussions with several potential partners who are seeking support to develop, manufacture and supply LAMP tests for their instrument platforms.’

Antibody lateral flow test for COVID-19

The Company is also working on developing an IgG antibody lateral flow test (LFT) for use as a rapid antibody test for professional use, which is expected to launch during Q1 2021 and is expected to take approximately 20 minutes or less to give a result.

RUO test for a new strain of COVID-19

Novacyt is developing a research-use-only (ROU) PCR test for a specific new strain of the virus found in mink. It expects to launch this novel test in December 2020 should clinical demand arise.

Graham Mullis, Group CEO of Novacyt, commented:

Not only do the additions to the portfolio broaden the Company’s ability to support clinicians and laboratories through the pandemic, they also strengthen our position in infectious disease diagnostics as we continue to redefine our Ramp;D pipeline for the next three years, in line with our long-term growth strategy.

Conclusion

The Ramp;D work significantly broadens the Covid testing portfolio. Importantly, Novacyt is already trusted by the government and embedded into the NHS with proven ability to manufacture at scale.

Priority number one must be to deliver strong organic revenue growth in its core business though, and the market is likely waiting to hear a confirmation of the revenue trend hinted at in the group’s half-year results. On this point, directors believe demand for its products will continue to grow well into 2021 and Novacyt has submitted 15 new patents to protect its Covid portfolio.

This is a volatile part of the market and I imagine a lot of investors have had their hands burnt recently, so these stocks should come with a health warning. There’s a risk that Pfizer’s vaccine announcement could lead to some delayed selling pressure and shareholder churn.

What’s more, we will hear more news on vaccines in the coming weeks. How will Novacyt’s share price hold up?

And then there is the longer term ambition to use Covid cash to build a sustainable £1bn+ diagnostics company. It’s promising but there is execution risk in my opinion, and that should be considered by potential investors and reflected in the share price.

This is an experienced management team but rapidly assembling a diagnostics company of substantial scale via Mamp;A is no small feat. It will be a tricky task to accomplish this at the same time as scaling up and testing for Covid.

That said, I continue to hold and believe that of all of these listed companies, Novacyt is the one that is already profiting and enacting significant transformation.

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