Small Cap Value Report (Fri 11 Nov 2022) - WRKS, VINO, NXR

Good morning from Paul!

There are some amazing rallies going on at the moment, in many sectors. The trigger seems to be reduced expectations for inflation, and hence interest rates. As discussed in my recent interview with UP Global Sourcing Holdings (LON:UPGS) factory gate prices in China are easing, as orders from the West have dried up. Also there’s been a plunge in shipping container costs, which is a positive tailwind for margins. Plus the dollar has partially weakened, which again is good for us, as it reduces inflationary pressures over time. 

All of that looks encouraging. However, my worry is that we’re possibly only at the start of an earnings recession. So if we buy shares now, we could get clobbered with profit warnings. Powerful rallies are normal in bear markets, so this could be another bear market rally.  Personally I like to buy the dips, not buy the rallies, so am trying to avoid becoming over-excited by surging share prices right now. Will they hold, and continue rising, or fall back again? Maybe it would be a good idea to trim some positions, to give some firepower for if/when markets roll over again? 

Agenda 

Works co uk (LON:WRKS) -  H1 trading update looks in line. Although it’s not clear what actual profit will be (it only mentions EBITDA). Broker consensus is for only slightly above breakeven this year. Shares look very cheap, but it’s not a very good business, so it should be cheap.

Today I’ll be mostly focused on doing 2 CEO interviews, being -

Virgin Wines UK (LON:VINO) at 11:00 – this is now published (audio) here, and on my podcast channel. I’ll type up the transcript (just for Stockopedia subscribers) over the weekend. I thought this went well, and it looks an interesting company, on a reasonable valuation. As always, please DYOR, it’s not a recommendation, just my personal opinion.

Norcros (LON:NXR) at 16:00 – this audio interview is also now published here. Transcript to follow over the weekend, hopefully.

Explanatory notes -

A quick reminder that we don’t recommend any stocks. We aim to review 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 are analysing the company fundamentals, not trying to predict market sentiment.

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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30.5p (down 11% at 10:11)

Market cap £19m

H1 Update (26 weeks to 30 Oct 2022)

“Increasingly challenging consumer environment”

H1 LFL sales up 0.6% (split +3.5% LFL in stores, and -16.9% online [but still +50% vs pre-covid])

May 2022 saw an impact from cyber attack.

Recovered from June onwards, and summer was good.

Last 6 weeks trading has softened (against strong LY comps)

Online sales – rate of decline has slowed.

Net cash position of £11.0m, but £5.0m cash payments went out the next day, so it’s really £6.0m net cash – good of them to disclose this.

Outlook for FY 4/2023 unchanged.

For reference, the Company compiled estimate of the market’s expectation for the FY23 Adjusted EBITDA result is approximately £9.0m.

Interim results due on 20 Jan 2023.

My opinion – I wish they wouldn’t quote EBITDA, as it’s not real profit. Also it’s not clear whether the £9.0m H1 EBITDA is pre, or post IFRS 16, which makes a big difference. Last full year, pre-IFRS 16 adj EBITDA was £16.6m, which translated into £10.2m PBT. That was heavily boosted by business rates relief, since ended.

I can’t find any broker notes, but the StockReport shows consensus of a wafer thin profit after tax of £1.4m, or 6.4p EPS. So I have to assume the company must be trading in line with that. PERs don’t make a lot of sense when companies are this close to breakeven.

The market cap is very cheap at only £19m, but it doesn’t look a very good business, and might struggle to make profits at all in future, as consumers retrench. There again, the products are value-orientated, so maybe demand could hold up? Who knows? I don’t see anything much to attract me to this share, other than cheapness. It’s likely to be squeezed by higher costs, and potentially reduced demand. That could eradicate profitability altogether.

It could be a beneficiary from much cheaper sea freight costs, and easing input cost inflation maybe?

Note that performance was poor, before the pandemic. 

The StockRank seems surprisingly high.

Stockopedia