Small Cap Value Report (Weds 2 June 2021) - TND, BMY, DISH, BRCK, HSP

Good morning, it’s Paul amp; Jack here with the SCVR for Wednesday.

Timing - there’s not much news today, and I have an investor lunch to attend, so we’ll be finished by mid-morning today.

Agenda –

Paul’s Section:

Tandem (LON:TND) – trading update for Jan-May 2021, says revenues up 24% vs LY, and profit “considerably ahead”. No outlook guidance, and no broker coverage, so we’re in the dark. Cost/margin pressures amp; supply chain problems mentioned, but nothing is quantified.

Insurance sector – FCA ruling on “price walking”

Bigdish (LON:DISH) – operational update on its new meat-free food startup. I’ve decided to drop coverage, as it’s too small amp; speculative now.

Brickability (LON:BRCK) – big Director selling. Plus a primary placing to fund a significant sized acquisition.

Jack’s Section:

Bloomsbury Publishing (LON:BMY) – third profit upgrade of the year, with momentum carrying on into the new year and expectations revised upwards.

Hargreaves Services (LON:HSP) – transformation continues here but a good run sees the shares priced at around net asset value

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665p (pre market open) – mkt cap £35m

Trading Update

This share has had a remarkable run since the covid low in March 2020, rising nearly 6-fold.

The current financial year is FY 12/2021.

Tandem Group plc (AIM: TND), designers, developers, distributors and retailers of sports, leisure and mobility equipment, announces a trading update, arrangements for the 2021 AGM and Board change.

Trading has “remained robust” -

… Group revenue to 31 May 2021 was approximately 24% ahead of the same period last year.

Profitability was also considerably ahead of the prior year augmented by our cost base not yet returning to pre-COVID levels.

• Tougher prior year comparatives, from lockdown 1 (which boosted Tandem) – see update on 28 May 2020, which said bicycle sales were up 77% on 2019
• Bicycle sales this year are up 21% on 2020 – impressive against tough comparatives
• Ebike revenues up 112% – clearly a strong growth area
• B2B division (which I think must be sales to UK retailers) revenues up 32% on last year, for Jan-May 2021 – impressive
• Ben Sayers golf business doing very well – revenue more than doubled vs LY, and order book strong (“well ahead” of last year)

Supply chain problems -

One of our biggest challenges continues to be stock availability, particularly on bicycles, which once more is being hindered by worldwide shipping capacity and container availability.

Freight costs have increased again in recent weeks and global demand for components, particularly for bicycles, remains high which has impacted our margin.

We also continue to be concerned by ongoing cost increases, with significant rises in input costs such as steel, oil, plastic and cardboard all of which also put pressure on margin.

Further, we remain mindful that COVID-19 is a continuing problem in some of our supplier countries.

Broker forecasts - there doesn’t seem to be anyone covering Tandem, so we’re in the dark. The company really does need to give some guidance to the market.

Today’s update tells us that 2021 has gone well so far, but gives no indication about full year outlook.

The comments about supply problems amp; margins coming under pressure is a concern, but the company doesn’t say if cost increases are likely to be passed on to customers or not.

Valuation - last year Tandem delivered a very good result, of 68.5p EPS (up 69% on 2019 result of 40.5p EPS). We’re told that for Jan-May 2021 the company is “considerably ahead” of prior year. However, we’re not given any guidance on how the rest of 2021 is likely to pan out. Therefore the range of outcomes for 2021 as a whole is unknown. So valuing this share is guesswork at this stage, not very satisfactory.

My opinion – based on the current share price of 665p, the PER on 2020 earnings is 9.7, which looks about right.

Given that 2021 so far is “considerably ahead”, then an optimist might pencil in say 80p for 2021, which would drop the PER to 8.3 – quite cheap.

Or, if you’re worried that cost increases amp; supply chain disruption could damage H2 trading, then maybe 2021 could see a fall in earnings, maybe to 50-60p? That would raise the PER to between 11.1 to 13.3 – still reasonable.

Divis – it paid out 8.62p last year and is committed to a progressive policy. The yield is only 1.3%. Note that divis are linked to pension deficit recovery payments, which is a nuisance.

Balance sheet – when last reported at end Dec 2020 looked OK, with NTAV of £11.1m

Pension deficit required £477k funding in 2020.

Overall then, we don’t have enough information to accurately value this share, due to lack of guidance from the company, and no broker forecasts available. It looks to me to be valued in the right ballpark. Note the very high StockRank below -

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This article from Shares Magazine last week caught my eye.

The FCA ruling is designed to stop the process of “price walking” – where a cheap deal is offered to new customers (of e.g. car insurance), then the price goes up each year on renewal.

Under the new rules, insurers will have to re-jig their prices, to be fairer to existing customers. The new rules come into effect on 1 Jan 2022.

It seems to have given a small boost to insurance company shares, because the FCA stopped short of imposing penalties for past price walking.

Saga (LON:SAGA) (I hold) has felt a little more perky of late, so this could be a factor helping investor sentiment there too maybe? I can vaguely recall on a previous results webinar, SAGA management said they were expecting to be able to mitigate a lot of the impact of this widely expected ruling.

It strikes me as a good move to eliminate this unfair practice of price walking, and removes an uncertainty for insurance company shares.

I’ve just looked at a couple of them, and the dividend yields look remarkable – e.g. 8.4% forecast yield on Direct Line Insurance (LON:DLG) , 6.6% forecast yield at Legal amp; General (LON:LGEN) , 5.7% at Admiral (LON:ADM) – this could be a good sector for income seekers to look at maybe?

Here’s a screenshot of the insurance sector, which I’ve selected “Value” view, then clicked on dividend yield as the column to sort in descending order. This is a quick amp; easy way to rummage around in a particular sector, looking for ideas.

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(I hold – small position)

There’s an operational update today, on its latest new venture – a meat-free food company.

The market cap is now only £5m. I’ve sold most of my previous position here. After giving it some thought, I decided that I’m not interested in holding a food production start-up company. I liked the original concept of the BigDish discount dining app. It wasn’t their fault the hospitality sector had to shut down for the best part of a year, so that just didn’t work.

Illogically, I’ve kept a small position remaining, just in case it multi-bags again.

Going forwards, I have zero appetite for any more moonshot type shares – blue sky things that promise the world, but hardly any of them actually succeed. Apologies to anyone who followed me into this one, we all knew it was high risk, but it just hasn’t worked, so time to move on. Hence unless something transformational happens, we won’t be covering this share anymore here.

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100.5p (down 3%, at 09:18) – mkt cap £231m

Acquisition, Placing amp; Secondary Placing

A fairly substantial acquisition is being made, of Taylor Maxwell, a supplier of timber amp; non-combustible cladding. Consideration is up to £63m, that’s 27% of BRCK’s market cap (pre issue of new shares).

Placing – of £55m, being 57.89m new shares, priced at 95p, an 8.2% discount. Cenkos has done the deal.

Secondary Placing – this is a sell down by insiders, taking £38m off the table by selling 40m existing shares to institutions.

Directors amp; management are reducing from 54% to 28.3% of the company – that’s a big reduction, although also still a big remaining shareholding.

My opinion – I’m not keen on large Director sales. If the people who know the business best want to bank their profits (or some anyway), then that seems to be telling us that risk:reward may not be that favourable from here on?

Share price: 309p

Shares in issue: 84,122,346

Market cap: £260m

Bloomsbury Publishing (LON:BMY) is the Harry Potter publisher but it also has a growing portfolio of non-consumer and consumer titles. Today the group is focused on international expansion and diversifying its revenue streams so that it is less dependent on the UK market.

There’s a lot to like about Bloomsbury. It publishes good books. It has a long heritage. And it also figures well quantitatively speaking as a potential investment, with a StockRank of 91, reassuring financial health scores, stable quality metrics, and steady revenue and profit growth over the years.

In fact, the StockRank has remained strong throughout the Covid crisis but, as with so many shares, we are seeing a full recovery to pre-pandemic levels with shares surging to multi-year highs.

So where to from here?

It looks like the easy money has been made. I say ‘easy money’ loosely – at this point in 2021 the hindsight bias is kicking in. It all felt quite different back in October.

Nevertheless, the rebound to previous levels has occurred. So now Bloomsbury has to show that it can grow from here as, on a forecast PE ratio of 18.9x, it is not obviously a bargain.

Preliminary results

Excellent revenue and profit performance; Third profit upgrade this year; Special dividend declared

Financial Highlights

• Revenues increased by 14% to £185.1m, (162.8)
• Adjusted profit before taxation grew by 22% to £19.2m and unadjusted PBT grew 31% to £17.3m,
• Diluted earnings per share +15% to 18.68p, cash conversion of 142%
• Net cash of £54.5m, up 74%,
• Final dividend of 7.58p and special dividend of 9.78p.

That combined final and special dividend is worth just over 5.6% of yesterday’s share price, and the 18.98p of diluted earnings is comfortably above the 17.3p penciled in with the Stockopedia estimates. It’s a beat of nearly 10% and gives an historic PE ratio of 16.3x.

Meanwhile, cash conversion is exceptionally strong at 142% and the group’s comfortable net cash position further bolsters its quality credentials.

Bloomsbury’s Consumer Division grew revenue by 22% to £118.3m (64% of group revenue, up from 59%). PBT at this division jumped 61% to £14.2m (74% of total PBT, up from 57%). Within the division, Adult Trade performed well (revenue +17% to £43.7m revenue and PBT +145% to £3.9m). Children’s Trade was also up 26% to £74.6m of revenue and +42% to £10.4m of PBT.

Non Consumer was ‘resilient’ – read notably less impressive – with revenue growth of 1% to £66.8m (36% of group revenue) and PBT down 19% to £5.4m. Within this segment, Bloomsbury Digital Resources (BDR) revenues growth of 49% to £12.4m (2019/20: £8.3 million) and profit jumped from £0.7m to £2.9m. Digital format sales now make up 33% of Non-Consumer revenues, a CAGR of 31% over four years. The recent acquisition of Red Globe Press‘ assets in April 2021 for £3.7m, should add further momentum to this transition.

On this note, the group adds:

Bloomsbury has a strong and successful track record in strategic acquisitions, with 17 acquisitions completed since 2008. We are actively targeting further acquisition opportunities in line with our long-term growth strategy.

And Bloomsbury adds that the start of the new year has seen a continuation of strong trading, which ‘increases our confidence in the strength of the business and long-term strategy.’ Impressively, ‘considering the ongoing momentum and strength of our business, Bloomsbury expects revenue to be ahead and profit to be comfortably ahead of market expectations for the year ended 28 February 2022.’

Current consensus market expectation for the year ending 28 February 2022 to be revenue of £177.5m and profit before taxation and highlighted items of £17.4m.

Conclusion

It’s a very good update from a worthy company that does its bit to make life more enjoyable. But is it still a good investment above 300p?

The momentum and longer term quality attributes suggest it might be, although it could be more a case of steady growth rather than shooting the lights out. Bloomsbury’s IP-led strategy and the potential to augment organic growth with selective acquisitions could be sustainable, and digital is growing well.

The publishing portfolio will have to be sufficiently robust as to avoid any ‘faddiness’ though – to take the biggest and most obvious example, imagine how different life might have been for Bloomsbury if J K Rowling had never written Harry Potter.

But she did, and so here we are. Bloomsbury benefits from being the publisher of what is, at this point, almost its own little fictional wizard-based industry. This has helped to drive fairly consistent top line growth over the years.

But there’s much more to Bloomsbury than just Harry Potter. This is a company with a lot of IP, which communicates well with the market, has been around for a long time, and is, at present, consistently surprising the market.

Given the attractive mix of longer term quality and ongoing trading momentum this share is worth looking at in more detail, assuming it can maintain current growth rates and is not benefitting too much from a temporary lockdown reading boost.

Hargreaves Services (LON:HSP)

Share price: 282p (-0.52%)

Shares in issue: 32,311,606

Market cap: £91.1m

Hargreaves Services (LON:HSP) is a bit of an oddity that has shapeshifted over the years into the provider of industrial services we see today.

In the past, Hargreaves was largely dependent on the coal and industrial sectors, with the company specialising in transporting coal from mines. Following the decline of the coal industry the company has been working to drastically reshape its business and is now focused on its earthworks and property and land divisions.

Quantitatively, this stock stacks up well in terms of Ranks (with a StockRank of 90) and it’s classified as a Balanced Super Stock, but it’s a company whose individual history demands attention.

Long term shareholders have not been well rewarded for their patience here.

For many, it might just be too risky or too complicated to spend time on. Others might spy a potentially attractive special situation. Today’s update is short, and is unlikely to sway your view.

Trading update

The board expects to report results in line with market expectations which have recently been materially upgraded in the light of the very strong performance at its German Joint Venture (HRMS) and the accelerated completion at the Unity Joint Venture in Hargreaves Land.

Hargreaves ended its financial year with no bank debt and cash reserves of £28.3m, compared with a net bank debt of £13.5m at 31 May 2020. The group has approximately £12.0m of leasing debt relating to specific assets, resulting in an overall net cash position of £16.3m compared with £28.1m of net debt at 31 May 2020.

More detailed preliminary results for the year ended 31 May 2021 will be released on Wednesday 28 July 2021.

Conclusion

There’s not much new in this update, save for Hargreaves re-emphasising the ‘very strong’ performance at HRMS.

Hargreaves is moving on from its past and it looks like the financial health is improving. But after a good run, shares are now trading at around book value so the margin of safety has closed and this is no longer in bargain territory.

There are signs of positive momentum here and a notable 5%+ dividend yield, but the share price has been strong recently.

I’d be looking for more of a discount to compensate for the patchy track record, poor longer term share price performance, and significant shift in strategy.

Stockopedia