Paul's weekly SCVR summary - (w/e 11 Nov 2022)

SCVR Podcast 12 Nov 2022 is here, and on podcast channels.

Here is the transcript, for Stockopedia subscribers only.

My usual weekly summary of the SCVRs.

Just my personal opinions, not advice, please DYOR (do your own research).

Monday 7 Nov

Joules (LON:JOUL) – another business update. Financially distressed special situation. Another profit warning. Running out of headroom on bank facility end of this month, looking for bridging financing. Looking increasingly precarious. I hope they reach a solvent solution. A multimillionaire car dealer has bought a stake in it, so I imagine he might want a solvent solution, or is it just to get a seat at the table for a pre-pack administration?? We don’t know. Too uncertain. I’m nervous about the outcome here. Will look at it afresh if/when it refinances.

Loungers (LON:LGRS) – bar/cafe chain. Mgt highly regarded. Diversifying into roadside cafes, like Little Chef, called “Brightside”. 3 sites to open in the S.West in early 2023. Significant diversification. Quite an interesting development.

Appreciate (LON:APP) – Graham reported on takeover bid by Paypoint. Decent 70% premium. Mix of cash/shares. Paypoint is a good value business, mature, so looking to diversify. Good deal for APP shareholders.

DWF (LON:DWF) – Graham covered an acquisition.

National World – announced a big investment in The News Movement

Frasers – massive share buyback to be launched. [Correction: I got the figure wrong here, sorry about that. The actual figure is 10m shares, costing no more than £70m. Nowhere near my mistaken £3bn figure. Profuse apologies, I should have checked before saying a ridiculously wrong figure).

Tuesday 8 Nov

Housebuilders -most interesting sector, I think valuations have overshot on the downside, and are below NTAV. i don’t think a major housing market crash is likely, because long-term interest rates have already started falling, and there’s a long-term structural lack of housing. Plus sector balance sheets are now so strong, with net cash, as opposed to net debt in previous recessions. Stock amp; WIP are in at cost. I looked at Persimmon (LON:PSN) – yes it’s a mid-cap, not small cap, but we’ll look at anything that helps us understand what is going on in the economy, especially important right now. PSN looks interesting but I’m concerned at the scale of increase in its cladding remediation provision (£75m to c.£350m, could it be even more in the end??) – weighing on the sector. Housebuilder shares have rallied strongly this week.

Marks Electrical (LON:MRK) – very nice business. I don’t like the sector though, competitive amp; low margin. Keep overheads low, one warehouse, own vans covering c.80% of UK with no overnight stops, mgt come across well. But interims numbers (in line) don’t excite me. Bal sht OK. Cashflow all came from increased creditors. Forecast EPS is set to fall due to rising costs. Long term MRK shares could be good, but not cheap enough yet to tempt me in.

Hilton Food (LON:HFG) – profit warning. Shares didn’t drop that much, and partially rebounded after. End of a bear market, if shares stop plunging on profit warnings, maybe? I went through numbers, but can’t get excited about it – £4bn p.a. revenues, but little profit, only 1.7% adj PBT. Very low margin. Chart made a lovely upward trend in previous years, went up to a rating of PER c.20 – but was it overvalued? Doesn’t seem cheap even now, after falling by over half.

The danger for me as a value investor/analyst, is that when a share falls from a PER of 20, to about 12, I think that is just correcting an over-valuation. But the market may not see it that way, and it might go back up again, as people have anchored to the old valuation amp; rating.

A friend sent me an interesting email, suggesting that fund managers’ job is to just pick which shares are going to rise the most. Which may not be the best companies, or sensibly valued. Can fund managers spot a market trend, or is it just a case of some of them get lucky? Markets tend to be sentiment-driven – fashionable sectors, riding the wave? It’s only over very long-term we see which strategies are right, and which just got lucky.

Warehouse Reit (LON:WHR) – revisiting an old friend! Looked very interesting in a zero interest rate environment, but less so now. Divi yield is now 5.2%, which isn’t madly exciting. General sell-off of property investment companies – could be a really good sector (also with bonds), could recover in 2023, as interest rate expectations come down.

Graham looked at Argentex (LON:AGFX) – FX dealer, and Argo Blockchain (LON:ARB) (looks bust). Yannos (a loyal reader) mentioned that ARB’s bonds are almost worthless, which means equity definitely worth nothing! (as creditors rank ahead of equity).

Graham looked at Zoo Digital (LON:ZOO) – I agree with his comments.

Weds 9 Nov

MADE.com postscript – NEXT has bought IP for only £3.5m. Just shows, all the brand value amp; hype is worth next to nothing once they’ve gone bust. Inventories being disposed of by TK Maxx apparently.

Volex (LON:VLX) interims – looked quite good to me. Not sure why shares went soft. Volex seems to be holding up quite well. Bal sht amp; cashflows look OK, so I gave it a thumbs up. Good reader discussion.

Smiths News (LON:SNWS) – positive about this deep value for share for a while. Results pretty good for FY 8/2022. Legacy problems resolved, bank debt mostly paid off. Remarkable 11% dividend yield. But, is it a cigar butt stock? Higher cover prices help offset some of volume reductions for newspapers/magazines. Could there be new activities to bolt onto its distribution network that could trigger a re-rating? I’ve asked management to do an interview with me.

Graham – Purplebricks (LON:PURP) – requisition for EGM to ditch the Chairman. Nick Searle (podcast “A Different Perspective”, from Zeus Capital) interviewed the new CEO. She came across as eloquent amp; knowledgeable, but not what I look for in a CEO. Comes from an HR background, whereas I prefer hands-on entrepreneurs, so not for me.

GYM (LON:GYM) – Graham looked at this. Disappointing update. I’m not keen on this share, always looked overvalued to me.

National Milk Records (OFEX:NMRP) – tiny Acquis quoted company.

Thurs 10 Nov

BM European Value Retail SA (LON:BME) – interesting mid-cap retailer – focused on value products, from big shed stores. Interim trading update looked decent, profit guidance maintained for FY 3/2023. Improving trend, Q2 better than Q1. Good current trading. Net debt reasonable, and a decent divi yield. Must to my surprise, the market reacted negatively to a good update. Worth a closer look I think – decent quality business, at a reasonable price, I reckon.

Norcros (LON:NXR) – bathroom fittings group. Interim numbers. Shares look very cheap, I interviewed the CEO tomorrow. Good divi yield.

Graham looked at TT LEectronics, Smoove, and PCF – looks like it’s failed.

Friday 11 Nov

Works co uk (LON:WRKS) – in line H1 update. Confusing, as only mentions EBITDA (nor on what basis), and no broker notes. So v diff to value. Shares do look v cheap, but last year it benefited massively from business rates relief. Net cash, but very honest, saying that £5m cash went out the following day – honest in their reporting. Shares are cheap for a reason, might struggle to make any profit in a consumer downturn, but it does sell value products, so might be OK?

Highlight of my week was doing 2 CEO interviews.

Good to see more people creating podcast content, the more the merrier! Although I prefer it when people doing shares podcasts, keep it about shares, instead of straying off into half-baked ramblings about politics – waste of time. Keep it focused, and as short as possible!

Virgin Wines UK (LON:VINO) – I enjoyed interviewing Jay Wright, CEO. Seems a resilient business to me. Jay said they did well in a previous recession – 2008. People see wine at home as an affordable treat, and will cut down on other things – eg eating out. Sector leading EBITDA margin of 9%, falling to 8% this year. Has net cash, and customer cash is kept separate – ethical. Shares have bounced recently. Flagged in SCVRs in July, and about 2 weeks ago. One for our watchlists maybe? Up to you, your money. The fundamentals look quite good to me.

Norcros (LON:NXR) – I interviewed Nick Kelsall, CEO of this bathroom fittings group. Looks cheap. Acquisitions strategy has roughly doubled the size of the business. Recent large acquisition was unlucky re timing. So net debt a little higher than I would like at £59m. CEO reassured me that he’s keeping a close eye on net debt. PER is only 4.6, but legacy issues have largely been dealt with. Pension deficit recovery payments are only c.15% of adj PBT (including admin costs) – so much less of a problem than in the past. Super-mature pension scheme, avg age is 77. Business has improved a lot in 10 years, but share price has gone nowhere, so you’re getting so much more for your money. Perpetually cheap. Divi yield is over 5% now. China sourcing – the West is so dependent on China now, we buy practically all our consumer goods from China, so I’m worried our dependence (generally) on China, re sabre-rattling over Taiwan.

Macro news amp; thoughts

Huge rally in US amp; other markets. Has started feeding through to UK small caps, not quite to some of my micro caps, resolutely refusing to budge from the lows! Eventually it filters through to the bottom level.

Big question – is this a recovery, or a bear market rally? I don’t know! When you get spectacular rallies, e.g. NASDAQ up 7% in one day this week, that seems to me more like a bear market rally. What was the trigger? Inflation reading in US came in better than expected. Inflation peaking, so less pressure for interest rates to rise, and may even fall?

10-year gilt yields have fallen again, to 3.35%

Mortgages (based on longer term gilts) beginning to ease in the UK amp; USA (30 year mortgages, 7% dropped to 6% recently).

Discounted tracker mortgages might be better than fixed rates currently, if you can cope with the risk.

Telegraph article – Chinese deflation is coming. This chimes with my recent comments following interview with Andy Gossage of UP Global Sourcing Holdings (LON:UPGS) – dramatic fall in container freight rates, means much lower costs for importers. FRom peak of $19k to about $3k, could overshoot even further on downside. Massive positive tailwind for companies importing Chinese-made consumer goods. $50-100k product in each container, then $18k to $3k cost of freight, is a huge benefit. Could absorb all of factory gate inflation? Plus dollar has recently weakened too, which also helps UK importers amp; reduces inflationary pressures, with a time lag remember (6-12 months hedging?). Moving in lockstep with the Euro. So inflation may fall faster than Bank of England, and other forecasters might have thought.

So there are some fundamentals behind the stock market rally, but I am worried we’re maybe in another bear market rally, because we seem to be only at the start of an earnings recession. Company profits falling, so plenty more profit warnings, and they’re not being shrugged off yet.

Also GDP news in UK is quite negative, at -0.2%, worst in the G7. But some are +0.2%, not much of a difference, and they’re estimates that get revised. Rounding errors?

I’m not going to buy after this recent surge. I’m more interested in buying the dips, when good companies guide profit lower. There are probably going to be loads of those opportunities in the next year, I don’t think there’s any rush to pile in.

Fundamentals on company profits, probably getting worse, before they get better.

Mello London – this Weds, Thurs, in Chiswick. Lovely events, good community feel, very friendly. I love meeting the Stockopedia readers, do say hello. Not sure what the SCVRs would be like on those days though!

Govt policy seems haywire – introducing austerity measures is completely the wrong thing to do, will make a recession worse.

Corporation Tax rising a lot from 19% to 25%, impact on earnings. But probably in the forecasts already.

Reader comment of the week! Is from Jonno, who flagged Young Co’s Brewery (LON:YNGA) – very good synopsis of it, thank you for that. I’ll try to have a look at that. We love it when readers throw in your share ideas, with a well balanced post. Thank you to other readers, who are posting civilised, and interesting discussion every day.

Have a great week, and thanks for tuning in!

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