Read the Beforeitsnews.com story here. Advertise at Before It's News here.
Profile image
By Stockopedia (Reporter)
Contributor profile | More stories
Story Views
Now:
Last hour:
Last 24 hours:
Total:

Small Cap Value Report (Thu 26 Aug 2021) - VLX, WJG, BMS, D4T4, MACF, LTHM

% of readers think this story is Fact. Add your two cents.


Good morning, it’s just Paul here today, with the SCVR for Thursday. Jack’s off galivanting, and I’m dog sitting today, just to keep you in the loop! Today’s report is now finished.

Agenda -

Paul’s section:

Volex (LON:VLX) (I hold) – brief comment on another acquisition, looks an excellent deal.

Watkin Jones (LON:WJG) (I hold) – diary date for a Capital Markets Day (CMD) – 2 Nov 2021.

Braemar Shipping Services (LON:BMS) – a vague, but reassuring trading update. Looks potentially interesting, still modestly rated, in an interesting sector.

D4t4 Solutions (LON:D4T4) (I hold) – an in line AGM trading update. 2.0p final divi to be paid on 17 Sept. A difficult share to value, but I like the story.

Macfarlane (LON:MACF) (I hold) – very good interim results. The usual uncertainties amp; headwinds are mentioned, but despite that FY 12/2021 earnings expectations are raised. Broker upgrade. Looks good value to me.

James Latham (LON:LTHM) – a stunning trading update, with 4 months current year trading making the same profit as the whole of last year! Boom times won’t last forever though. I crunch the numbers, and conclude that it looks priced reasonably.

Explanatory notes -

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).

A key assumption is that readers DYOR (do your own research), and make your own investment decisions. Reader comments are welcomed – please be civil, rational, and include the company name/ticker, otherwise people won’t necessarily know what company you are referring to.


Paul’s Section Volex (LON:VLX) (I hold)

Another acquisition, of Irvine Electronics, in the USA, for $16.4m. Looks a cracking deal – low multiple of EBITDA (current run rate $3-4m pa). Good strategic fit, with most of Irvine’s customers being in the defence sector.

Watkin Jones (LON:WJG) (I hold)

Capital Markets Day – 2-4pm, Tue 2 Nov 2021.

Trading update on same day, and presentation slides will be on website.


Braemar Shipping Services (LON:BMS)

291p (pre market open) – mkt cap £93m

Trading Update

Braemar Shipping Services Plc (LSE: BMS), a leading international Shipbroker and provider of expert advice in shipping investment, chartering, risk management and logistics services…

We’re given a brief update today, ahead of its AGM -

‘The board is pleased with the financial and operating performance of the Group for the first five months of the year.

Trading has been good across all three of the Group’s divisions and the breadth of the Group’s business model, the diversity of the broking operation and the markets in which the Group now operates, have insulated the business well from any ongoing pandemic weakness.

The board is united in seeking to develop further the Group’s growth strategy and we look forward to the remainder of the financial year with confidence.’

There’s precious little useful information in that.

I assume it means the company is trading in line with expectations, or maybe a bit ahead?

Looking quickly at the StockReport for BMS, I can see some attractive metrics, especially the forward PER of only 11.5

.

My opinion – I’ve not properly looked at this share for a while. It could be worthy of further research, because the valuation looks cheap, and of course shipping is a very lucrative sector at the moment, due to sky high freight rates from the Far East. Hence it seems logical to expect BMS to be grabbing a slice of the action in its sector.

Today’s non-specific, but positive-sounding update, probably makes it more likely that the company would meet/beat profit expectations.

Overall then, this one looks quite interesting.
.

.


D4t4 Solutions (LON:D4T4) – I hold

370p (unchanged) – mkt cap £149m

Trading Update (AGM)

D4t4 Solutions Plc (AIM: D4T4, “the Group”, “D4t4″), whose software enables businesses to make smarter, informed decisions via Celebrus, its flagship first party product suite, gives the following update ahead of its Annual General Meeting being held today at 9am BST.

An in line update, nothing exciting -

The Group continues to trade in line with the Board’s expectations; the business is delivering against its key KPIs and is well positioned in its core markets.

Other points -

  • Roll out of new software continues
  • Prickly Cactus acquisition is going well
  • Marketing campaign in the USA
  • Recruitment of specialist staff is going well
  • Ash Mehta joining as CFO on 1 Sept (I recognise that name from a previous investment)
  • Diary dates – H1 trading update in mid-Oct, Interims in Nov.

My opinion – sounds like costs are rising, which is fine by me, providing the money is being spent wisely.

This is a difficult share to value, but what appeals to me is that the products sound good, and highly relevant – with impressive clients internationally. So if it can build recurring revenues, then the business could scale up.

Looks expensive on a forward PER basis, so this is definitely not a value share. There was a bout of profit taking recently, as with so many shares, but it’s recovered quite well since.

.

.


Macfarlane (LON:MACF) (I hold)

135p (up 13% at 08:29) – mkt cap £213m

Interim Results

This is a packaging manufacturer amp; distributor group.

As readers have noted in the comments below, the headline numbers for H1 (6 months to 30 June 2021) look superb (whilst bearing in mind that the 2020 comparators are soft due to covid). The commentary points out that profits have also doubled on the 2019 pre-pandemic numbers.

.

.

Also, thanks to martinck1 who points out in the comments that apparently for the first time, the company provides an adjusted profit figure, stripping out acquisition-related amortisation (which is standard practice at most companies).

This was an anomaly which I remember flagging up here before, in that previously MACF has hidden its light under a bushel, by reporting overly conservative EPS. That enabled us to buy the shares too cheaply (I got in at 95p a while back, after spotting the amortisation anomaly).

Acquisitions - 2 recent deals have boosted H1 sales by £8.1m, and operating profit by £1.9m, which is a good part of the £5.6m increase in operating profit.

That’s fine by me – buying up nicely profitable bolt-on acquisitions, using existing resources (no new shares seem to have been issued since 2018) is a very good strategy. We’re seeing a similar thing from Volex (LON:VLX) (I hold). Management that execute acquisitions well (i.e. buying good quality businesses at reasonable prices, with a good strategic fit amp; cost synergies, etc), can build significant shareholder value in that way, providing nothing goes wrong of course.

Outlook -

The Board expects that the Group’s full year outlook for 2021 will be ahead of its previous expectations, despite the challenges we are expecting in H2 2021.

The challenges all sound generic, that we’re hearing from so many companies in many sectors, including -

  • Inflationary cost pressures
  • Raw materials supply constraints
  • Staffing pressures

The key thing seems to be that some companies are navigating these problems better than others, and if demand is strong then that outweighs the problems, as seems to be the case here. Also it gives companies a reason to raise selling prices, if customers are struggling to find alternative supplies. Hence I’m beginning to see opportunities as well as threats from widespread supply chain difficulties.

Broker update – many thanks to Shore Capital for sharing its research update today, very helpful. Shore raises its profit forecast by 14%, a meaningful upgrade, to 10.2p adjusted EPS.

The commentary indicates that Shore sees this as a cautious forecast, so reading between the lines, we could see forecast raised again in H2, providing supply problems don’t get too bad.

Valuation – the broker consensus figures on the StockReport are now way too low, and should rise as new forecasts come through. Using the current share price of 135p, and the 10.2p latest adj EPS forecast from Shore, we get a PER of 13.2good value I think, for a decent quality business that’s now generating a decent operating margin, and growing.

Shore says that MACF looks unduly cheap compared with giant competitors Bunzl (LON:BNZL) and Ds Smith (LON:SMDS) . Being large caps, I don’t know anything about them! The StockReports here show BNZL on a fwd PER of 19, but DS Smith at 13.9, which looks similar to the rating of MACF. I prefer a smaller, growing company, as the growth rate could be much faster than the giants. At least they give us some idea of a valuation benchmark.

Manufacturing division – performed badly last year, but has since been turned around, back up to a decent level of profitability – £2.0m in H1 2021, vs just £168k H1 LY (that’s pre-amortisation operating profit). It’s encouraging to see this division back on track.

Net debt is modest, with plenty of headroom on bank facilities, this looks absolutely fine to me -

Net bank debt at 30 June 2021 was £8.7m, an increase of £8.1m from 31 December 2020 following £12.2m of investment in the acquisition of GWP and Carters. The Group is operating well within its existing bank facility of £30.0m which runs until 31 December 2025.

Balance sheet - is adequate, but not great, in my opinion.

NAV of £87.0m is mostly goodwill (of £77.0m). Strip that out, and NTAV is £10.0m, which requires some reliance on bank debt.

Working capital is not great, with a current ratio of 1.0 – personally I like to see a bit more of a balance sheet buffer, but it’s not a deal-breaker because the business is decently profitable, and cash generative – which naturally strengthens the balance sheet over time.

Lease asset/liabilities figures look quite high.

The pension scheme has moved into an accounting surplus, of £4.6m, but accounting numbers are often very different from the reality of actuarial figures, which is what drives cash payments, hence matters more.

The deficit recovery payments seem to be ongoing, at £1.2m in H1 (see cashflow statement), so I’m taking the pension surplus on the balance sheet with a pinch of salt. It’s cashflows that matter.

Cashflow statement - all looks fine to me. It’s a decently cash generative business. Last year benefited from working capital movements, which have gone the other way this year, as I would expect.

Acquisitions saw £12.2m paid out in H1.

Also note that due to big lease commitments, there’s £3.36m relating to rents paid, in the financing section near the bottom of the cashflow statement. Hence all the numbers above that line are over-stating real world cash generation. This is one of the many problems created by IFRS 16 that investors need to be aware of, and manually adjust the numbers if you want them to make sense!

My opinion - very good numbers, and no serious issues with the balance sheet or cashflows.

Valuation still looks modest, so I like this share, and am happy to continue holding.

If the company is able to make more acquisitions at reasonable prices, then it could be a long-term winner and see a re-rating onto a more aggressive PER perhaps? It’s not the type of share to shoot the lights out, but I do like to have some reasonably-priced, well run value shares like this in my portfolio.

MACF also seems to have some favourable tailwinds for its products, e.g. protective packaging for eCommerce, a structurally growing niche.

.

.


James Latham (LON:LTHM)

1320p – mkt cap £262m

Latham’s is a family company which sells timber products in the UK.

It’s a long-time favourite value share here at the SCVR, and its ludicrously strong balance sheet in particular is a joy to behold.

Many thanks to Discodave4 for flagging up a remarkable trading update from yesterday, which LTHM annoyingly issued during market hours at 12:24, which is a really bad thing to do, putting out price sensitive information when the market is open. I wish they would stop doing this. All trading updates should be issued at 07:00, especially planned updates, so that everyone has an equal opportunity to read amp; digest the news before the market opens at 08:00.

Unpacking the update, it looks as if Lathams is enjoying a trading bonanza at the moment.

Revenue for the first four months of the current financial year, namely 1 April to 31 July 2021 is £127m. This represents an increase in sales per working day of 34% compared with the three months ended 31 March 2021…

Volumes per working day are up 11% from the three months ended 31 March 2021

This sounds good, but I would expect a seasonal trading surge for timber products in April-July, compared with Jan-March. Therefore without any context, it’s not possible to say whether a 34% uplift is good, or as expected.

If my sums are correct, the above implies that selling prices have risen by 20.7%

Market conditions – striking comments here -

Global demand for timber remains high, which has resulted in increased prices and shortages that have not been seen in the industry before.

Sea freight – as we know, costs have shot up for everything imported from the Far East -

We continue to see large increases in container rates which have caused significant increases in the costs of our imported products.

No surprises there, everyone is saying the same thing. What matters is whether the increased costs can be passed on to end customers? Logic dictates that if there are shortages, then selling prices can be raised. Basic supply amp; demand.

Margins - have gone up, not down – this reminds me of the car dealerships, where supply constraints combined with high demand, have resulted in a stunning rise in short term profits. It looks as if the same thing is happening at Lathams -

Our ability to secure enough volume of products from our key suppliers and the unprecedented high demand has resulted in improved margins.

Overheads“well controlled”, bad debts “very low”, and a shortage of haulage drivers “continues to be difficult”, but customer service levels are being maintained.

Profitability – a very striking statement here -

This revenue and margin increase together with our control of overheads has resulted in profit before tax for the first four months of this year being approximately the same as we achieved for the whole of the last financial year, namely a profit before tax of £18.6m.

That’s astonishing! Looking back at pre-pandemic trading, Lathams was making about £7m per half year, split fairly evenly between H1 and H2. So to have made about £18.6m just in the first 4 months of this year, shows that company is absolutely coining it in right now.

Higher inventories have been required to meet demand, and are taking longer to arrive in the UK.

Shortages of other building products could cause delays to Latham’s customer orders.

Outlook -

…at this stage we are cautiously optimistic that demand will be strong for the rest of the calendar year, but that margins will come under increasing pressure.

This is a reminder that current trading should be seen as a one-off. Generally speaking, shortages and higher prices eventually unwind, and can often reverse into a glut, and collapsing prices.

Diary date – 25 November, for interims to 30 September.

My opinion - a pretty stunning update! It seems to me that shareholders in companies like this, which are making hay whilst the sun shines, should be treating these one-off bonanza profits due to external problems, as a temporary aberration, and not valuing the shares based on the profits in a one-off boom year.

Booms often turn into busts, so this year’s party could be next year’s hangover. Who knows when the party is likely to end?

How to value it? Personally I would largely ignore this year’s bumper profits, and put it on a PER of say 15 times last year’s 75p EPS, which gives a valuation of 1,125. Plus an extra uplift of say 20% to reflect the strong balance sheet, cash pile, and bumper trading this year. That gets me to 1350p, compared with a current share price of 1320p – hence my conclusion is that this share looks reasonably priced.

Stockopedia loves it too, with a very high StockRank.

Stockopedia


Source: https://www.stockopedia.com/content/small-cap-value-report-thu-26-aug-2021-vlx-wjg-bms-d4t4-macf-lthm-858759/


Before It’s News® is a community of individuals who report on what’s going on around them, from all around the world.

Anyone can join.
Anyone can contribute.
Anyone can become informed about their world.

"United We Stand" Click Here To Create Your Personal Citizen Journalist Account Today, Be Sure To Invite Your Friends.

Please Help Support BeforeitsNews by trying our Natural Health Products below!


Order by Phone at 888-809-8385 or online at https://mitocopper.com M - F 9am to 5pm EST

Order by Phone at 866-388-7003 or online at https://www.herbanomic.com M - F 9am to 5pm EST

Order by Phone at 866-388-7003 or online at https://www.herbanomics.com M - F 9am to 5pm EST


Humic & Fulvic Trace Minerals Complex - Nature's most important supplement! Vivid Dreams again!

HNEX HydroNano EXtracellular Water - Improve immune system health and reduce inflammation.

Ultimate Clinical Potency Curcumin - Natural pain relief, reduce inflammation and so much more.

MitoCopper - Bioavailable Copper destroys pathogens and gives you more energy. (See Blood Video)

Oxy Powder - Natural Colon Cleanser!  Cleans out toxic buildup with oxygen!

Nascent Iodine - Promotes detoxification, mental focus and thyroid health.

Smart Meter Cover -  Reduces Smart Meter radiation by 96%! (See Video).

Report abuse

    Comments

    Your Comments
    Question   Razz  Sad   Evil  Exclaim  Smile  Redface  Biggrin  Surprised  Eek   Confused   Cool  LOL   Mad   Twisted  Rolleyes   Wink  Idea  Arrow  Neutral  Cry   Mr. Green

    MOST RECENT
    Load more ...

    SignUp

    Login

    Newsletter

    Email this story
    Email this story

    If you really want to ban this commenter, please write down the reason:

    If you really want to disable all recommended stories, click on OK button. After that, you will be redirect to your options page.