Small Cap Value Report (Thu 15 July 2021) - ALU, GFRD, JIM

Good morning, it’s Paul here today with the SCVR for Thursday. Jack’s busy with other things today, so you’ll have to put up with just me.

Disclaimer -

A quick reminder that we don’t recommend any stocks. We aim to cover trading updates amp; results of the day and offer our opinions on them as possible candidates for further research if they interest you. Our opinions will sometimes turn out to be right, and sometimes wrong, because it’s anybody’s guess what direction market sentiment will take amp; nobody can predict the future with certainty. We stick to companies that have issued news on the day, with market caps up to about £700m. We avoid the smallest, and most speculative companies, and also avoid a few specialist sectors (e.g. natural resources, pharma/biotech).

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Timing – TBC

Agenda – everything by Paul today

Alumasc (LON:ALU) (I hold) – another strong trading update for FY 06/2021. Outlook comments mention possible supply chain problems, as many companies are reporting at the moment. Note there’s a pension deficit here which sucks out a fair bit of cashflow each year.

Galliford Try Holdings (LON:GFRD) – a mildly positive trading update (towards upper end of analysts forecasts, with a footnote provided!). Cash is above market cap (although outweighed by creditors). Order book strong. Tiny profit margins though, on large complex projects.

Jarvis Securities (LON:JIM) Interim results – readers asked me to look at this, and I love it! Strong results, broker forecast goes up 15% today, divi yield over 5%, and on a PER of only 16.6, which seems good value for such a high quality, growth company. A big thumbs up from me.

(I hold)

274p (last night’s close) – mkt cap £99m

Trading Update

Alumasc, the premium building products, systems and solutions group, provides a trading update for the year ended 30 June 2021, ahead of publishing FY 2021 results on 7 September 2021.

How about this for a nice chart? Is it getting toppy though?

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Here are my notes from the last (positive, ahead of expectations) trading update on 13 May 2021.

Today’s update –

• Strong Q4 (Apr-Jun 2021)
• “…demand amp; margins holding up well in the final quarter”
• Revenues for FY 06/2021: £90m, up 18% on LY (last year)
• Underlying PBT (profit before tax) “ahead of the Board’s previous expectations” (I wish companies wouldn’t use the word “previous”, as it can be ambiguous)
• Growth achieved in all 3 divisions
• Resilient construction market
• Gained market share
• Cost price inflation has been successfully passed on to customers (a key point at the moment)
• Cost control amp; restructuring last year have boosted profits
• Levolux turnaround has worked
• Net debt almost eliminated, was £1.0m at 30 June 2021
• Bank facilities of £24m extended, to April 2023, and hints at acquisitions possibly?

VAT arrears – I don’t understand this, as it seems contradictory – but not a material figure, so doesn’t really matter –

VAT deferred under the Covid-19 support scheme was repaid during the year, with £0.7m outstanding at 30 June 2021, which is due for repayment in the first half of FY 2022.

Outlook – supply disruption, but demand sounds fine -

Demand remains strong entering the new financial year, which has started in line with management’s expectations. The Board is however cognisant of the potential for short-term disruption to our customers’ operations from shortages of building materials, labour and road haulage; and delays in the global container shipping industry.

Notwithstanding these risks, a strong platform is now in place which should provide the Board with confidence for another strong year.

Forecasts – Finncap has issued an update today, raising EPS forecast by 8% to 23.5p for FY 06/2021. That’s a PER of 11.7

A modest rise to 24.1p is pencilled in for the new financial year ending 06/2022. Let’s hope that gives scope for subsequent upgrades as the year progresses.

My opinion – bear in mind there’s a big pension deficit here, which sucks out cashflow, so the PER is low for a reason.

That said, the company seems to be trading well, and I’m minded to run my position, I seem to have bought some at 172p a while back. So far, so good.

Obviously supply chain problems could cause a profit warning if they worsen, but that should be a solvable, transitory problem, so is a risk I can live with. It’s more important that demand is strong, and selling prices have been raised to pass on cost increases – pricing power is key at the moment, and is a sign of a good company with good products.

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151p (up 3% at 10:12) – mkt cap £168m

Trading Update

Galliford Try Holdings plc, the UK construction group, today provides an update on trading for the year ended 30 June 2021. The Group expects to announce its results for the full year on 16 September 2021.

A mildly positive update -

…full year profit before tax expected to be towards the upper end of the analysts’ current range1.

1 The range of analysts’ estimates for profit before tax for the year ending 30 June 2021 is £9.0m to £11.2m based on forecasts at 1 July 2021.

• High quality and large order book of £3.3bn (up from £3.2bn a year earlier)
• Pots of cash – £215m cash at 30 June 2021
• Also provides the useful average month-end cash figure, of £164m
• Sites progressing in line with medium term margin targets (not stated)
• Previously announced resumption of divis in March 2021
• Supply chain problems (inflation, and shortages) have been navigated “without any material impact on trading”
• Strong balance sheet helps with winning high quality contracts
• Mentions a portfolio of PPP assets, no pension liabilities, and no debt
• Positive outlook, with Govt infrastructure spending on the rise

My opinion - this sounds interesting, could be worth readers taking a closer look.

Looking at the last balance sheet dated 31 Dec 2020, the cash pile seems to be due to favourable working capital – i.e. it receives cash from customers before creditors have to be paid. Of course nobody can guarantee that will always remain the case. The current ratio isn’t great, at 0.95 – i.e. creditors actually exceed cash + receivables. Strangely, I cannot see any inventories on the balance sheet, which seems odd for a construction company. Maybe everything is outsourced to subcontractors?

Overall, I can’t get excited about this, as it ekes out such a tiny profit margin. If margins were to meaningfully improve, then it would look more interesting. I tend to avoid big contractors, as sooner or later something bad seems to go wrong, and they frequently go bust, if over-indebted (which GFRD isn’t providing it can keep the plates spinning with its creditors).

Note below that the StockRank suddenly went from highish to lowish in Sept 2020.

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260p (up 6% at 10:35) – mkt cap £116m

Jarvis Securities plc is the AIM traded parent of Jarvis Investment Management Ltd. Jarvis has been providing retail and outsourced financial services since 1984.
Jarvis Securities plc is incorporated in England amp; Wales. Its shares are admitted to trading on AIM under ticker JIM. The company’s operations are principally carried out in the United Kingdom.
Jarvis operates a number of retail stockbroking brands that provide nominee, certificated, SIPP and ISA accounts to individuals and organisations. Jarvis also provides outsourced financial administration services to many investment firms, including some of the World’s best known financial names. Services include settlement, broking, ISA plans, SIPPS, regular savings plans and investment trust schemes.
[Source: company website]

Bear with me, as I’m not familiar with this company. Several readers have mentioned it in the comments, so thought I’d take a look.

I can see why you like it, these numbers are superb – with an amazingly high profit margin -

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Half-year Report

Interim Results for the Six Months Ended 30 June 2021

• H1 revenues up 19% to £8.1m
• H1 Profit before tax (PBT) up 28% to £4.6m
• Staggeringly high profit margin of 57% (that’s bottom line profit before tax remember, not gross profit!)
• Mentions favourable trading conditions on the stock market
• Sale of treasury shares for cash
• Distributable reserves being increased to allow higher divis (it already seems to pay out most of its earnings in divis)
• Balance sheet looks strong to me
• Broker upgrade – WH Ireland has raised its forecast for FY 12/2021 by 15% to 15.6p, a PER of 16.7 – not expensive for such a high quality, strongly growing business.
• Forecast divi for this year is 13.3p, giving a lovely yield of 5.1%
• Shareholdings – 52% owned by Andrew amp; Florence Grant

My opinion – this looks terrific! Thank you to readers who flagged it up in the comments. A very high quality business, growing strongly, at a reasonable price. What’s not to like?!

Providing profits are sustainable, then the big rise in share price looks fully justified, and could continue maybe? Although as with many other shares, profit-taking seems to have set in in the last couple of months. I see that as a healthy market correction, and it provides a buying opportunity in quality companies like this, in my view.

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