Paul's SCVR podcast - written summary - episode 17 (22 Oct 2022)

Episode 17 of my weekend podcast has just been published – it’s on podcast platforms (search for “Paul Scott small caps”). Or also audio is available here  on my website here.  My style is relaxed amp; conversational. 

I thought it would be a nice service for Stockopedia subscribers if I also type up a summary for you, which also makes clear what the “mystery shares” are – these are my best ideas from the week’s results/trading updates.

Weekend Podcast Summary

Another tumultuous week, with Liz Truss’ resignation. A shares blog should be about shares! So no half-baked political views from me here. John Authers (Bloomberg) brilliant daily email pointed out that political factors are now irrelevant, because the Gilt amp; forex markets now dictate policy.

CEO interviews – I’m doing more of these (audio), and putting written summaries for Stockopedia subscribers only. I only approach companies if they demonstrate -

• Strong current trading
• Strong balance sheet
• Good business model
• Strong management, executing well
• Shares reasonably priced.

Many things meeting my criteria are dirt cheap. Rich pickings, if you’re prepared to look through macro. I’m super bullish on many individual shares. Companies with recurring revenues, contract wins, could sail through.

Monday -

Interview with Lisa Montague at Sanderson Design (LON:SDG) – excellent CEO, good turnaround. Good recent update. I must buy some shares myself, but haven’t got any spare cash. Very impressive amp; entertaining interview – she’s a strong character, and good fun too.

ASOS (LON:ASC) – ominous press reports of bank negotiations amp; trade credit insurer reducing cover.

Made.Com (LON:MADE) – hanging by a thread. Needs interim funding from anyone that wants to buy it. So why not just wait for it to go bust, and buy it cheaper from the administrator? Very high risk.

Audioboom (LON:BOOM) – Q3 update. Could struggle against tougher LY comps from now. Advertisers pulling back? Cash position OK. Mgt doing a good job. Crowded space (podcasting), low margin. Someone might buy it though, for US revenues.

Graham looked at Eve Sleep – gone bust, no surprise, we concluded in Jan 2022 that it was a dead loss. Rubbish business model, and well-funded competition. Graham also looked at Victoria (LON:VCP) and RM (LON:RM.)

Tuesday -

Mystery share no.1 – for Stockopedia subscribers only! (it’s Sosandar (LON:SOS) )

finnCap (LON:FCAP) – received bid approach from Panmures. Finncap is great at getting research out to private investors, so I’m a big fan. Also I’ve had lots of meetings to meet companies at their office. So I hope Panmures don’t stop this if they do acquire Finncap.

Revolution Bars (LON:RBG) – June 2022 annual results weren’t bad – profitable again, and generating cash. Brought it home to me just what a tough sector bars are right now. I’m not convinced the debt-funded acquisition of Peach Pubs was a good idea – wrong time amp; wrong price? Refurbs are good, but customers trash the place, so they need constant maintenance. But RBG shares now look so cheap.

Graham looked at 888 Holdings (LON:888) (fascinating situation), and Saietta (LON:SED) – a recent IPO.

Wednesday -

Link to my written summary of my SDG interview, took hours to type up!

ASOS (LON:ASC) results – I’m quite worried about it. £4bn revenues, but loss-making, lots of adjustments to the accounts. Big inventory write-off, but used a technicality to push it into FY 8/2023, which I don’t like. I explain how stock provisions work (lower of cost, or net realisable value). Asos now looks financially strained, but have got leeway from the bank, covenants relaxed. It has big problems, and needs a major sort-out. Dash for growth has built up all sorts of problems. Problems with internal culture amp; management? V low gross margin only 43.6%. £25m fee for consultants! Crazy. £20m benefit from forex hedges, wasn’t adjusted out, so I don’t like the way figures are being presented. Balance sheet not great, and dependent on bank debt. Problems, but it is a helluva lot of business for the money. Could bounce if animal spirits return?

Graham looked at Provident Financial (LON:PFG) and Liontrust Asset Management (LON:LIO) – very interesting sections.

Thursday -

Graham looked at Jupiter Fund Management (LON:JUP) and IG Design (LON:IGR) (interesting turnaround), and International Personal Finance (LON:IPF)

Once you’ve sold something, you’re not always so keen to buy back in.

Luceco (LON:LUCE) – profit warning, but I complain broker forecasts were slashed a lot more than seemed apparent from the RNS. Bank debt concerns me, but was reduced a lot in Q3. Bonanza profits in 2020 amp; 2021 are not likely to be repeated. So the rise to 500p last year was spurious. LUCE is a good example of how distributors are now reducing excess inventories, as supply chains improve. Maybe priced about right now?

Naked Wines (LON:WINE) – poor track record, but has made some progress. Massively over-stocked, but maybe needed for the sector? EBIT forecast £9-13m is very good. But stock provisions are excluded from that figure. I can see bull amp; bear cases.

Gear4music Holdings (LON:G4M) – looks very cheap, but debt-fuelled acquisitions made. In line H1 update, but seems to me it could beat expectations, as broker forecast looks light for H2. Good value I think.

I posted a review of Boom Battle Bar in Bournemouth (I hold, via XP Factory (LON:XPF) ) – subscribers seemed to like it, so why don’t you post some of your own mystery shop reviews?!

Friday -

Another CEO interview, with Zotefoams (LON:ZTF) – takes a lot of preparation, but I love doing them! I pick the companies, so only the best stuff I’ve found in the SCVRs. PIWorld is also selective, I’m a big supporter, Tamzin is wonderful! The more I research ZTF, the more I like it, as a long-term investment. Doubled size of business in last 5-6 years. Claims to be the only company in the world using this technology. The Rezorce blue sky product looks very interesting. CEO David Stirling seems a solid, experienced CEO. Signal wasn’t great, as he was on a mobile, at a trade show in Germany. There’s audio and written summary posted on Stockopedia here. Owns freeholds to all 3 factories, a huge capex programme has revamped machinery. Pricing power has passed on cost rises. I need to buy some shares personally, on my list.

Mystery share no.2 – this is Wickes (LON:WIX)

Trifast (LON:TRI) – mild profit warning. At 65p it looks cheap. Balance sheet is strong, but working capital is large (receivables amp; inventories). H2 weighting.

Market commentary -

Nice bounce in the US, has fed through to UK small caps. Seemed some decent buying in UK small caps this week. Is sentiment turning positive? I don’t know, as it’s driven by unknown factors, like Ukraine, inflation. Could be another bear market value. But I do feel we are starting to see some decent quality small caps bottoming out. CockneyRebel loves his “bowls” on the charts! There’s a lot to be said for momentum-following strategies – maybe I should take a leaf out of their book?

I’m finding so many lovely companies, priced for low earnings this year. But once the economy recovers, I could see many shares being worth double the current price. Many are on half price sale. Tempting to put some of your cash piles to work? Valuations are so attractive – once in a cycle valuations – IF you can cope with the risk of another short term drop.

Bonds are looking interesting, some good yields, and inflation falling next year could lock in a nice income now, and a possible capital gain if/when yields fall. Interesting area.

Inflation – probably will fall next year, because companies I cover are reporting that inflationary pressures are beginning to ease. Freight costs have also collapsed from the peak (for containers from F.East) – a big number for some companies, improves margins. Availability is beginning to improve in some sectors, but shortages still in chips/tech – e.g. companies saying they want to install solar/LED lights, but can’t get the kit. Luceco might do well from LED lighting. UK energy wholesale prices are plunging due to mild weather.

Hence there are some positives coming through – conditions building for a market bottom, perhaps?

I’m still very worried about the financial system overall – huge drops in equities, bonds, property is bound to cause leveraged issues within banks/shadow banks?

Pension deficits – yes liabilities have shrunk due to bond yields rising. But the real world liabilities have NOT fallen, the pensions payable are actually going up, due to inflation. Yet the assets have plunged in value. So I’m worried about pension schemes.

Thank you for listening, and spread the word! Thank you to Stockopedia subscribers for funding the time for me to do the research amp; write about it. (hence why I hold back the best ideas each week as mystery shares).

Stockopedia