Paul's weekly SCVR summary - (w/e 25 Nov 2022) - episode 22

Episode 22 – week-ending 25 November 2022

Audio is here, or on most good podcast platforms (and some bad ones!)

Monday 21 Nov

Accrol group (LON:ACRL) – H1 TU pretty good. Expecting FY results at least in line with mkt exps. Substantial growth in volumes, and prices raised a lot. Flaw in business model is it’s low margin, and can’t control input prices, and time lag in passing on price rises. Although a reader did comment they’re now better matching input amp; output prices with improved contracts. Net debt of £30.5m still a lot for a co making only £7m profit this year. Earnings expectations have been lowered a lot, over two thirds, so easy to beat now. I think it’s not a very good business, and shares don’t seem particularly good value. But this update was positive.

Pod Point group (LON:PODP) – my first review. I wouldn’t go near it, not a viable business model. One-off sales, with little to no recurring revenues. Heavily loss-making. Installs one-off EV charging points, mainly residential. Commercial division has little recurring revenue. 55% owned by EDF – why did it float? To get someone else to pay for EV charging point roll-outs? I wouldn’t touch it, looks doomed to failure. Lost ¾ of value since floating, grinds down to zero eventually maybe? Still has lots of cash though.

TT electronics (LON:TTG) – Graham reviewed. Very interesting development – buy-in of pension scheme with Lamp;G. If other companies follow suit, could be v good news. We need to do some more work on this amp; compare it with other pension schemes.

Polar Capital Holdings (LON:POLR) – Graham reviewed, he has experience amp; knowledge on finance shares, as a former fund manager.

Tuesday 22 Nov

I was preoccupied selling my Porsche Taycan, wanted to try out an EV. Amazing car, v quick amp; superb handling, but charging infrastructure inadequate. I barely used it, as working from home. So big amp; wide, difficult to place on the road. Range anxiety is a big thing with EVs. Sold it for more than I paid for it! Replacing it with an Audi A4 petrol, boring, but sensible.

Forterra (LON:FORT) – brick maker, looks interesting. In line with expectations. Downturn from housebuilding? Maybe not, because there’s a shortage, being filled by lower quality imports. So with new factory coming on stream, £100m investment, biggest in Europe, FORT could do well even in a downturn. Heavy energy user. Customers prefer to buy domestically made bricks. New capacity. May be able to maintain, or increase production, and displace imports? Finances look good – almost ungeared balance sheet. Starting to look interesting.

Van Elle Holdings (LON:VANL) – TU to end Oct 2022, so H1 update. Strong, largely ungeared balance sheet. Outlook encouraging for FY 4/2023, although I’m worried about after that, as piling is early stage in construction. VANL owns most of its kit outright. Will large, new building projects be quite so plentiful from now on? Graham looked at Tclarke (LON:CTO) which is fit-outs for large offices, so later stage in the building cycle. With higher interest rates, big building projects might take a while to reduce. So the outlook for CTO might be fine for now, but could reduce maybe? But VANL might see a slowdown more quickly, being at an earlier stage in building projects (piling is for foundations). So at this stage in the economic cycle, VANL doesn’t appeal to me, for risk:reward. I think if you ignore the economic cycle, then you’re taking a big risk. The same factors play out every time there’s a recession. Although none of us know exactly how the economy will go, but some sectors are best avoided when the economy is going into a downturn.

Osirium Technologies (LON:OSI) – tiny, why did we look at it? The product looks interesting, cybersecurity, selling to credible customers. But heavily loss-making. Waited for a refinancing, small one done now, 50% discount – shows the risk. Funding window has more-or-less slammed shut, and fresh funding often comes at a deep discount, so throwing money away for existing holders owning it before a refinancing, as mentioned before.

AO World (LON:AO.) – Graham reviewed this, he’s no longer bearish. Neither of us see value here though. Delusional founder seems to have finally realised that it needs to make a decent profit, not just chase market share. All this tech boom nonsense has to be unlearned now. VC money was being thrown at tech startups, maybe winding down now? We could see a lot of tech startups fail. I don’t think AO will fail, and it did refinance recently. Shares still look too high. Chart looks encouraging.

Graham also looked at Carr’s (LON:CARR) , Altitude (LON:ALT) , and M Winkworth (LON:WINK)

Wednesday 23 Nov

Reader complaint about the companies we reported on. I can’t tell you how deflating amp; demotivating it is, when we’re trying to cover as much as possible, then people occasionally moan about the companies covered or missed. We can’t cover everything, and we do c.500 companies overall, so plenty to choose from. If we don’t cover something, it’s probably because the update is only in line with expectations, so not price sensitive. We covered 9 companies on Weds. End of moan!

If you think something looks really interesting, then tell us about it in the comments! We read all the comments, and take on board everything, even if we don’t directly reply.

Knights group (LON:KGH) – TheFloatingInvestor flagged up a £1m shares purchase by its CEO. Legal services group. But, he previously sold £61m of shares at 4 times the price! Shrewd CEO! Already has 21% of the company. Good trading update – H1 in line, outlook upbeat. Looks interesting, super low PER amp; major CEO shares buy, well worth having a closer look.

Intercede (LON:IGP) – old favourite of mine, turnaround began in 2018. I’ve moved on now, but interim numbers look good – PAT of £1.2m in H1. Negative tax charge – Ramp;D tax credits? Chancellor recently said something about this, less generous in future maybe? Strong dollar has helped IGP, as its customers are mainly US large organisations in public sector. £10m net cash is about a third of market cap, keeps growing. Slight negative – I’d like to see faster organic growth. Interesting recent small acquisition, broadens product range. Fundamentally a good company, excellent CEO.

CML Microsystems (LON:CML) – good interim numbers. Ah! I was going to make this a mystery share, sorry! One of the best things I spotted this week. Substantial increase in broker forecasts. Outlook comments vague, but concluded “we see a very positive outcome” for FY 3/2023. About a third of mkt cap is surplus cash, and 16 acres of surplus land, being developed into a business park, nice upside.

Fonix Mobile (LON:FNX) – nice little company. Floated in Oct 2020, not put a foot wrong. Does text voting, etc for TV reality shows. Aside - I just laid off my bet on Matt Hancock in the jungle! Very sticky customers. New products, and international growth. Not cheap. Pays out all the earnings in divis, as capital-light. I spoke to CEO just after it floated, came over very well, and mgt has skin in the game. Gets on with its niche activities, does well.

Best Of The Best (LON:BOTB) – an old boom or bust story. Tedi Sagi has taken a 29% strategic stake, possible international expansion. Founders banked a lot of profits at the peak. Shares back down again, and valuation now looking attractive again. In line expectations. PER only 7. Online ads getting cheaper again. But still not agreed a deal with Sagi over international expansion – is relationship panning out as hoped? Risk it might turn sour. Worth putting negative sentiment to one side, and revisit this share? Could have another bull run maybe? Looking interesting again.

accesso Technology (LON:ACSO) – positive update. Revenue a little ahead. Favourable margin mix, and cost savings. Quotes “cash EBITDA”, meaningless metric, so difficult to value shares. But could be worth a closer look.

Graham looked at DP Eurasia NV (LON:DPEU) , Dialight (LON:DIA) , Ab Dynamics (LON:ABDP) – interesting little consulting group.

Thursday 24 Nov

Headlam (LON:HEAD) – one of my favourite shares (no holding personally). On my to buy list. Very mild profit warning, neither here nor there, for FY 12/2022. Slightly below expectations. Shares fell 10%, but recovered. Volumes are down, as consumers retrench, partially offset by commercial recovering – quite nice counterbalance. Also doing a lot of self-help measures. There is a new listed competitor called Likewise (LON:LIKE) – run by former HEAD CEO, looks quite good, but on balance I’d want to hold HEAD shares. Owns huge freehold property, and benefits from scale. HEAD has bounced quite a lot from the lows. Any pullback looks a good opportunity to top up, so still a thumbs up from me. 2023 might be a tough year, but that’s already priced into the shares.

Michelmersh Brick Holdings (LON:MBH) – another brick manufacturer. Nice update. Acquisition. Doing share buybacks. Lovely balance sheet. Thumbs up from me.

Macfarlane (LON:MACF) – in line update. I like it, valuation is undemanding, well worth a look.

Dr Martens (LON:DOCS) – a mid cap, but lost over 20% on a profit warning. I still don’t see value in the shares. Makes most of its profit in H2.

Consumer stocks are really struggling still. Sunday Times pointed out many retailers are over-stocked, pain amp; profit warnings likely to continue in retail. I’m supposedly a sector expert in retail, but don’t seem to be much good at picking winners/losers, so maybe my experience is now out-of-date? I’m still wary about the whole sector.

Graham – looked at XPS Pensions (LON:XPS) , Hornby (LON:HRN) and Tclarke (LON:CTO) (mentioned above).

Friday 25 Nov

Another busy day – we covered 7 companies, and I wrote a section about de-listings – we’ve had 3 this week alone – Parsley Box, SourceBio, and DeepMatter.

We’ve mentioned delisting risk a lot in the SCVRs over time. There are maybe several hundred shares listed in the UK which are too small, and can’t be economic to remain listed. Stock market just isn’t the right place for small, jam tomorrow companies. In the boom years, brokers will float anything, and have killed the golden goose, floating overpriced junk. But why would companies want the expense amp; hassle of a listing? More amp; more I think it’s best to avoid IPOs. But some of the 2020-21 floats were desperately bad, but are now down 80-90%, so some could be interesting value now.

I wrote a checklist, to help you assess which shares you hold might be at risk of a delisting. If no liquidity, or it needs to raise more money, then what’s the point in being listed, if they can raise money privately? Delisting is a key theme/risk right now.

Motorpoint (LON:MOTR) – H1 results, difficult to value. Going for market share, but only just above breakeven. Car supermarkets. Turn on the profit engine at a later date – doesn’t work for me at the moment, so am on the fence.

Surface Transforms (LON:SCE) – jam tomorrow, but really good newsflow. Seems a genuine world leader in ceramic brakes. Large order for £100m, displaces main competitor – really interesting. £290m order backlog. Very interesting, so take a look? Outside of my expertise, difficult to value, always loss-making in the past, but reached a commercial inflection point. Mkt cap nearly £100m. Looks a credible growth company.

Videndum (LON:VID) – new name for Vitec. Shares held up well. In line update. I don’t like balance sheet, taken on too much debt for acquisitions, at wrong stage of cycle.

Mystery share for Stockopedia only – high StockRank, strong balance sheet, and great divi yield – this one is SCS (LON:SCS)

Devro (LON:DVO) – generous cash bid at 65% premium. Well done to holders! Graham flagged this share in August 2022 as good value. Decent quality company, priced very reasonably. A lot of it is luck with takeover bids, as often they’re not value-based bids, but an acquirer can see positives that are not obvious to investors.

finnCap (LON:FCAP) – possible deal with Panmure Gordon has fallen through, I’m very pleased, as Finncap is a big ally to private investors – giving us lots of research, and making access to companies easy. Good that they’re staying independent. Shares are bombed out. Feast or famine earnings, so now is a good time to be buying. Balance sheet good. Costs flexible – staff earn less, or made redundant in a downturn, unfortunately.

LSL Property Services (LON:LSL) – stating obvious, that housing market is going into a downturn. Don’t seem that positive about 2023 either, no surprise there. My main issue with LSL is that earnings forecasts still look too high. 2023 forecasts should be well below 2022. But they’re not with LSL, so it’s at risk from another profit warning I think. I’m not buying anything where 2023 forecasts still look unrealistically high – it’s always worth checking the graph on the StockReports. Also affects stock screening – be careful with very low forward PERs – could be based on an unrealistically high broker earnings forecast maybe? Esp with small caps, where they often lag behind.

Macro news amp; views

Pension scheme buyout at TTG – could have important read-across for other companies.

Valuing companies on this year’s earnings – could be under-valuing the shares, if we apply a low PERx to low cycle earnings. Buying opportunities longer term? But feels too early to be calling a bottom in earnings for small caps.

Product substitution – this thought arose from ACRL results – it’s offering value products, so doing well in displacing branded products with cash-strapped consumers. Once they’ve switched, maybe consumers might stick with cheaper, but hardly different products? Any company selling value products might weather this storm better than branded products.

Debt – becoming more expensive. TimeOut had to do expensive debt refinancing, looks a basket case to me. Will companies be able to refinance debt at all? And if so, it could be a lot more expensive.

USA – expecting slower interest rate rises, as risk of recession rises. Bullish for main indices – good for other assets too (bonds, equities), if this cycle turns out to be not as bad as people feared?

Shareholder votes – I’ve noticed many institutions are now acting like owners, and voting no to AGM resolutions – latest example is Foxtons (LON:FOXT) where significant s/h no votes re NEDs, and 2 NEDs then resigned. Interesting, and great to see ESG resulting in institutional shareholders starting to act like shareholders. Let’s hope more institutions vote against remuneration reports – far too many Directors are absolutely taking the p*ss on excessive remuneration, LTIPs, bonuses, etc. Why give huge bonuses to CFOs – why? They only keep the score. NEDs also overpaid, for turning up once a month for a board meeting. Bravo to instis that properly consider, and vote against AGM resolutions.

Profit warnings – quite a few this week, eg MJ GLEESON (LON:GLE) (no big deal), De La Rue (LON:DLAR) (sorry still not finished my review of this), Alliance Pharma has really crashed (former Mark Slater stock, don’t know if he still holds), Headlam (LON:HEAD) (mild), Tclarke (LON:CTO) and Dr Martens (LON:DOCS) – lots of profit warnings. Hence why I’m wary that small caps might not necessarily have bottomed out.

It still looks to me like a bear market rally (in small caps). Don’t know about the wider market.

Interest rates – I don’t think we’re necessarily in an era of higher interest rates. Once inflation has come down, interest rates could also drop most of the way back down again – bullish for asset values.

2008 recession – I’ve been looking back to see what happened to results, and share prices, in that recession – although that was more about withdrawal of credit. Results were often OK, but PER ratios greatly fell. Many shares then 5-10x bagged in the recovery. So it’s worth looking back, to see how sectors were impacted in a previous recession.

Charts – they all seem to look the same! A year-long fall, then an “everything rebound” in the last month or two. So if one of our shares does well, important to remember that it’s not down to good stock-picking necessarily – we could have picked anything! Worth bearing in mind.

Reader comments – polite request – could people refrain from just announcing they have bought or sold a particular share? It doesn’t add any value, and nobody cares! Try to add value with your comments, tell us something interesting about the share. Otherwise it clutters up the reader comments section.

Broker forecasts – I noticed that SCS broker maintained profit forecast unchanged, but EPS dropped. The reason was changing Corp Tax rate to 25%. I had assumed this would already be in forecasts, but it seems not in every case. So when relying on broker forecasts, do check the tax rate being used. It’s gone up from 19% to 25%, that’s a big chunk of earnings being diverted to HMRC, so should be negative for share prices.

Community comments this week have been fantastic! My/Graham’s articles are initiating the discussion, but it’s not all about us. Many readers add tremendous extra detail amp; research, so thank you for all your comments. Graham amp; I just hurl share ideas at you, 25-30 per week, and then it’s up to you to decide if any float your boat. We absolutely love it when you post your own additional detail on interesting companies, thank you.

Debt – much more difficult to refinance. I’ve been slightly worried about Superdry (LON:SDRY) – cutting it fine refinancing. In normal times, a seasonal stock financing facility would not be contentious, but it might be now.

Building inventories – this is NOT cash burn! It’s turning an asset (cash) into another asset (inventories) temporarily, then selling the inventories subsequently, back into cash. If you think building inventories is cash burn, you’re just wrong! It would only be cash burn if the inventories turned out to be worthless, which is rare.

Sunday Times – says unsold stock is clogging up retail warehouses. They built up inventories during supply chain disruption, but have now ended up over-stocked as supply chains ease, and consumer demand drops. Hence why…

Container rates – importing goods from Far East, a reminder, have dropped from a peak of c.$18k last year, to just c.$2k now! Big tailwind, helping gross margin (with a time lag) for retail/distribution businesses. Typically $50-100k of kit in each container, means a saving of $16k on sea freight, is a huge number, which will really help margins. But in the meantime, too much inventories in the UK, capital tied up.

Seraphine (LON:BUMP) (I hold) – I spoke to management but it was an off the record call, so I can’t really say much. But they reiterated what last RNS said – have too much product, so winding it down gradually. The beauty is, 70%+ of product is “continuity” product – i.e. not fashion product, but stuff that sells over continuous years. I think BUMP is a fundamentally good business. But, it is risky, no denying that. Will it be the next Joules? It’s possible, but I suspect not. Is there de-listing risk? Yes, definitely. It’s spending a lot on the listing, and if I were in the Board Room, I’d ask what are we getting from this expenditure on the stock market listing? The share price has collapsed over 90% since it floated, but that’s their fault, because they’ve under-performed. Anyway, BUMP is up against some big macro headwinds that are not its fault – mainly that the cost of marketing has shot up (but now starting to ease). Also inventories built up, but now being shifted gradually. They’re not trashing the brand by over-discounting, which is what killed Joules by going into permanent discount. I think it should be OK. Only has £3.5m of net debt. I know Seraphine is now a risky investment, but £5m market cap is a joke. Trouble is, it has one major shareholder, Mayfair Private Equity, with 43%, who are said to be very supportive. Also Christopher Mills has bought 8%. He doesn’t have enough to swing the decision making, but he has a nasty habit of de-listing companies without paying a proper premium. Although I have to say, his latest de-listing SourceBio looks a very fair price (the tender offer). He thinks the private market will value it more highly. I hope Mills doesn’t do the same thing at Seraphine (de-list it). I did ask management about this, but obviously they can’t reveal anything that might be price sensitive, so I didn’t get anywhere on that point. Even if Seraphine does de-list, I think it’s so cheap, that it probably wouldn’t drop any more. Ludicrously cheap already, and only 15% free float, £750k in total. One buyer could buy the whole lot! I’m prepared to take a risk on Seraphine, I’m aware of what risk:reward is – if it works, a 5-6 bagger, if it goes wrong, potentially a zero. So as long as you know what risk:reward is, you can make a judgement.

Run out of time, byeeeee!

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