Small Cap Value Report (Thu 18 Feb 2021) - RNO, TRI, WIL
Good morning, it’s Paul here with the SCVR for Thursday.
Thanks to everyone who attended the StockSlam (via PIWorld, 3 minute pitches for people’s favourite shares, with 10 shares covered) last night, an amazing turnout of about 1,000 people. My stock idea was Renold (LON:RNO) (I hold) – where a big pension deficit seems to be obscuring strong fundamentals, and a turnaround plan that’s working. Here are my notes from Renold’s most recent trading update. There’s a persistent seller in the market, so hopefully my comments don’t trigger a spike up in price, it’s awkward when that happens.
The next StockSlam is on 7 April.
Agenda -
Trifast (LON:TRI) – Q3 trading update sounds reassuring. Although worrying comments about raw materials inflation
Wilmington (LON:WIL) – Impressive interim results, but the weak balance sheet rules it out for me
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Trifast (LON:TRI)
139p (flat, at 08:22) – mkt cap £188m
Leading international specialist in the design, engineering, manufacture, and distribution of high quality industrial and Category ‘C’ components principally to major global assembly industries … Trifast plc (Main market LSE Symbol: TRI) issues the following unaudited Trading Update covering the Q3 financial period and up to the date of this announcement.
Trifast has a 31 March 2021 year end.
Trading continuing to strengthen
H2 revenues up 5% for the four months to 31 Jan 2021
FY 03/2021 revenues expected to be slightly ahead of market expectations
1. Company compiled consensus shows market revenue expectations of c.£172m
Particularly noteworthy points are -
- Border issues (logistical challenges) re Brexit
- Well-known problems with transport costs amp; container freight are mentioned
- Global shortage of steel is causing price rises, and delays – leading to “additional margin pressure which we are working hard to mitigate”
Dividends – will be reinstated.
Outlook - sounds reassuring -
The Group’s continued recovery, in addition to a strong pipeline and high activity levels, provides a solid base for the business to move forward…
My opinion – I find that Trifast tends to focus too much on revenue, and not enough on profitability, in its trading updates.
As you can see below, earnings expectations for this year and next year, are still way below (about half) of pre-covid forecasts. Note that forecasts were reducing before covid struck, so it looks as if there were existing issues.
I suppose the opportunity here is that, over time, earnings could recover back to pre-covid forecasts, which would provide good upside on the current share price.
The comments about raw materials price rises, and a shortage of steel, plus freight issues, are similar to what we’re hearing from lots of companies at the moment. This worries me, that we could be entering an era of persistently higher inflation, and possibly interest rates rising? That could hurt earnings (margins under pressure from higher costs), and hit high PERs in particular, if interest rates rise. All this new money sloshing around from massive QE, has to logically end up in higher inflation, eventually.
There do seem to be some macro warning lights beginning to illuminate.
Overall, TRI shares look priced about right to me.
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Wilmington (LON:WIL)
175p (up 4%, at 12:00) – mkt cap £154m
Here are my notes from 4 Nov 2020, where I saw potential in this education company’s move to online delivery.
Interim results today are for the 6 months to 31 Dec 2020.
Wilmington plc, the provider of data, information, education and networking services in Risk amp; Compliance, Healthcare and Professional knowledge areas, today announces its half year results for the six months ended 31 December 2020.
The financial highlights look really good, I’m impressed.
Revenue held up very well, considering no face-to-face events or training, down 7.4% to £55.1m
Adjusted profit before tax actually up slightly, to £7.0m – that’s a decent profit margin at 12.7% of revenues
This stands out as impressive too -
Cost savings from the move to virtual were greater than the fall in revenue
Dividend reinstated at 2.1p, and furlough monies (no figure given) to be repaid.
Balance sheet - this is a concern, it’s very weak.
NAV of £47.4m, less intangible assets of £94.4m, gives NTAV of negative £(47.0)m. It seems to me that reinstating the divis, when the balance sheet is really weak, seems reckless.
The working capital position looks unusually weak. Current assets are £33.5m, but current liabilities are £57.2m, giving a very weak current ratio of 0.59. Normally I consider anything under 1.0 as being weak. Trade creditors seems unusually high, at £54.5m (which includes £8.0m deferred VAT).
Perhaps this business has a negative working capital setup, where it receives money up-front from customers, but even so, I feel this looks a dangerously stretched balance sheet.
Long term creditors includes £30.4m in borrowings too. So the business is totally reliant on debt funding, rather than equity. That’s fine in the good times, but leaves the business dangerously exposed, if the bank decides it wants its money back.
My opinion – if you’re not bothered about balance sheets, then this might be an interesting share to look at. The trading performance looks strong, and very resilient given the sector it operates in. Switching to entirely online, is very impressive.
Management doesn’t seem to have received the memo that, post-covid, companies need to be building up their financial reserves, not resuming divis prematurely, funded effectively from debt.
For me, the very weak balance sheet, and too much debt, rules it out, but I can also see why other investors might put more focus on the positive performance amp; resilience re covid, which are good.
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Source: https://www.stockopedia.com/content/small-cap-value-report-thu-18-feb-2021-rno-tri-wil-764764/
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