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Small Cap Value Report (Tue 8 Nov 2022) - AGFX, PSN, ARB, MRK, HFG, ZOO, WHR

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Good morning! It’s Paul amp; Graham here with you today.


Paul’s Section: 

Housebuilders – I want to know what’s going on in the housing market, so have strayed out of small cap territory, to look at a trading update from Persimmon (LON:PSN) today. It’s guiding down expectations for 2023, which shouldn’t be a surprise to anyone who watches the TV news. There’s a large increase in its cladding provision, which is unsettling, so that’s an important issue not to overlook. The whole sector looks dirt cheap to me, with many well below their own NTAV. Again, fairly obviously, a cooling property market is bound to have read-across for other consumer sectors – e.g. furniture, estate agents, DIY maybe?

Marks Electrical (LON:MRK) – interim figures are as expected, and the outlook comments seem encouraging. Balance sheet looks fine. Cashflow has almost all come from increasing creditors, so that might reverse in future perhaps? It seems a good, well managed company, but in a horrible low margin sector.  It’s difficult to see much immediate upside on the share price, after a recent 25% bounce.

Hilton Food (LON:HFG) – it’s another profit warning. I can’t see any appeal to this share, now that earnings have stopped rising. That’s caused the shares to de-rate this year from a PER in the twenties, to now about  12. Why was it ever valued so highly in the first place? It seems to me that the valuation has reset to something more sensible. There’s a fair bit of debt on the balance sheet too. It’s not for me.

Warehouse Reit (LON:WHR) – I refresh my memory on this property REIT which specialises in owning amp; renting out warehouses. Asset values have fallen, although the shares trade at a 20% discount to net asset value. The dividend yield of 5.2% isn’t exciting, in a higher interest rate environment, so it doesn’t float my boat unfortunately, despite the recent plunge in share price.

Graham’s Section:

Argentex (LON:AGFX) (£136m) – excellent H1 results from this FX broker, as expected after a terrific trading update in October. Cash conversion has cooled down but in exchange for this the company is enjoying the excellent margins that are achievable when dealing in forwards and options contracts. Looking ahead, I expect that forex conditions will normalise and perhaps result in calmer market demand for brokerage services (think of all the dramatic headlines around the pound in recent months). Despite that prospect, I think there is good underlying momentum at this business which should continue even in normal circumstances. A dividend will be declared with the next set of results, for the period ending December 2022. Plenty of reasons for continued optimism here.

Argo Blockchain (LON:ARB) (£34m) (-6%) [no section below] – we reported recently that Argo was in danger of an equity wipeout, due to its overly aggressive growth strategy. It is currently suffering from a) bitcoins that are increasingly difficult to mine – this is a design feature of the bitcoin system, b) higher electricity prices and other input cost inflation, c) the bitcoin price being stuck around where it was in late 2020 (Argo seems to have assumed that that Bitcoin price would rise forever), d) over £100m of borrowings. Today the company reports that it has finished selling the mining computers that it recently bought, and that its mining capacity is unchanged at a “hash rate” of 2.5 (it previously planned to reach 5.5 by the end of 2022). It also reports an improved “mining margin” of 32%, but this leaves out the depreciation of mining equipment, i.e. one of its biggest costs. Mining profit minus depreciation remains firmly negative. These shares are a punt on the bitcoin price rising and on electricity prices falling, and on financing discussions having a favourable outcome for shareholders. I don’t have confidence in any of these things happening.

Zoo Digital (LON:ZOO) (£152m) – this company has turned the corner and produced a maiden H1 profit, along with great cash flow generation. For years, I worried about ZOO’s valuation but it finally makes sense: they appear to have reached a scale where they can at last generate real profits and cash for shareholders. Long may it continue! The current trend for Netflix to produce non-English language content is a great tailwind but I don’t think it’s a flash in the pan. After Squid Game, there appears to be a real appetite from viewers for content that is produced locally in languages other than English and is properly subtitled or dubbed. So I’m not going to complain about Zoo’s above-average PE ratio: it is an expensive stock but I suspect that it deserves its premium rating.

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).

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:

I was thinking about dipping my toe into this sector, which now looks amazingly cheap. Unlike previous recessions, this time housebuilders are well funded, with strong balance sheets, so there are not any solvency issues. Persimmon updates us today.

Persimmon (LON:PSN)

1226p (down 7% at 09:20)

Market cap £3.9bn (not a small cap)

Trading Statement

For FY 12/2022 so far. Key points -

Recent deterioration in market conditions.

Selling prices down 2% recently.

Increased cancellations rates (risen from 21% to 28%).

Forward sales (for 2023) has dropped to £0.77bn (last year: £1.15bn)

On target for 2022 sales (14.5-15.0k houses)

Inflationary pressures of 8-10% “being managed well”, so margins still industry-leading.

Forecast cash of £700m at year end.

£750m capital returned to shareholders this year.

Help to Buy scheme has ended, was used for 20% of transactions.

Has plenty of land, expecting to buy less in 2023.

Cladding remediation provision is being increased to £350m. This seems a very large increase. Looking at interim results to 6/2022, the provision (note 9) was £69.3m, so a whopping £281m increase, if I’ve got those numbers right.

Capital allocation – is being revised, sounds like they’ll probably be paying out less generous divis.

Guidance for 2023 – too early to judge, but expecting fewer completions, and lower prices - impacting margins.

My opinion – this is not a share I follow closely, however, I want to see what’s happening in the property market, for wider read-across. Sorry if that triggers some readers, who are unnerved finding a mid-cap in a small-cap report!

The large increase in cladding provision is worrying. I’m not sure how it could jump from £75m originally, to £350m now? What’s the betting it increases further? High, I would have thought. So this issue needs careful scrutiny for other builders.

Given all the news recently, it surely shouldn’t be a surprise to anyone that the housing market is cooling. That’s already been anticipated by plunging share prices across the sector. Taylor Wimpey (LON:TW.) Is only down 2.5% in sympathy today, versus Persimmon’s fall of about 7.0% at the time of writing.

As I’ve mentioned before, brokers have been slashing 2023 earnings forecasts from July this year. Current estimates are that Persimmon’s earnings of c.246p this year (FY 12/2022) are set to fall 28% to 178p in 2023. At 1237p/share, that’s a 2023 PER of only 6.9 times. Hence arguably the share price looks cheap, as it already prices in a nasty downturn in earnings. The risk is obviously that a housing downturn could be worse, and longer, than currently imagined. So who knows?


I prefer to look at Price to Tang.Book, rather than earnings, in times of a housing market downturn. Stockopedia’s sector tables (below) are really handy for this – see below – we’re spoiled for choice in terms of housebuilders trading at below their net tangible assets, and with safe, cash-rich balance sheets too. That’s very attractive, in my view. They could get cheaper still of course, but I think this sector could provide rich pickings for value investors prepared to hold long-term (clickable link on table below) - 


Note from the long-term chart that recovery from the 2008 crash was very slow for housebuilders, but then really took off, providing a fabulous return for patient investors, two thirds of which has gone up in smoke in the last year (there have been big divis from PSN too).



Marks Electrical (LON:MRK)

72.5p (up 2% at 10:45)

Market cap £76m

Interim Results

Marks Electrical Group plc (“Marks Electrical” or “The Group”), a fast growing online electrical retailer, today announces its unaudited results for the six months ended 30 September 2022 (“the Period” or “H1-23″ or “first half”).

The story here is that MRK is small, but gaining market share quickly, through having a simple amp; efficient operating model, selling electrical items online.

I recently reviewed its H1 trading update, coming away with a positive impression of the business, but cautious on valuation. Also, forecast earnings of 4.3p this year FY 3/2023, is lower than the 5.0p achieved in the previous 2 years. I suppose we have to be realistic about the macro picture, and inflation, so a dip in earnings this year isn’t a calamity, it’s to be expected really. I think investors need to focus more on the longer term, which should be good for MRK in my opinion.

H1 numbers look like this -

H1 revenue £43.1m (as expected), up 15% vs H1 LY

Profit before tax of £2.1m, slightly up on H1 LY

Adj EPS of 1.66p. That leaves 2.6p to do in H2.

Outlook – sounds perky, despite macro conditions – and the same terminology as used in the last update -

The resilient performance delivered in the first half provides us with solid foundations to deliver our strategic objectives in H2-23.  

The business has continued to prosper during the start of the second half, with an acceleration in sales momentum in October and a strong continuation into November. As we benefit from improved gross margin and operating leverage during the peak trading period, we expect to improve our Adjusted EBITDA margin in H2-22 and remain on track to achieve our full year targets.

Balance sheet - is clean, and simple (e.g. it has none of the stuff relating to warranties, that complicates the balance sheet of larger competitor AO World (LON:AO.) )

Working capital looks healthy, and includes a £7.7m cash pile. Although note that the increase in cash has mainly come from increasing trade creditors. This is shown more starkly on the cashflow statement.

My opinion - I think this is a good business. The share price has risen about 25% from recent lows, and doesn’t strike me as a bargain. So it’s difficult to see much upside in the short term. Longer term, I imagine that the business could grow, although electricals retailing is one of the last sectors I would want to invest in, due to the low margins, and plentiful competition.



Hilton Food (LON:HFG)

546p (down 14% at 10:56)

Market cap £488m

I last reviewed this company here on 15 Sept 2022, when it fell sharply on a profit warning.

It’s fallen another 22% in price since then, so is it entering value territory? I wasn’t impressed last time.

Trading Update

Hilton Food Group plc (“Hilton Foods” or the “Group”), the leading international multi-protein food business, today announces its Autumn trading update.

This year is FY 12/2022.

Revenue (and volumes) in line with expectations.

“Challenges” in UK seafood division.

Oh dear, it’s another profit warning -

…the Board anticipates that operating profit will now be below its expectations for the full year.

Outlook – “well placed for 2023”

… financial position continuing to be strong, with leverage remaining at comfortable levels.

I’ve just been reviewing previous RNSs, and wondered why Hilton Foods had bought a tyre business? But then realised I’d accidentally put in the wrong ticker, for Halfords. Looking at the correct interim results, Management may be comfortable with the debt, but personally I’m not – net bank debt of £221m looks too high, going into a recession, for a business that only ekes out a tiny profit margin (£2,039m revenues in H1, and only £34m adj PBT, that’s only 1.7% profit).

My opinion – I can’t see anything of interest here. It would need a strategy to meaningfully increase profit margins, to interest me.

Shareholders have had a rude awakening in the last year, after years of decent progress -



Warehouse Reit (LON:WHR)

122p (down 1% at 11:15)

Market cap £519m

I rarely look at property REITs, but a friend introduced me to this share a few years ago, with a very simple investment theme – that warehouses were undervalued (selling at below replacement cost at the time), there aren’t enough of them (in demand due to the growth in online shopping), and WHR shares provided a nice low risk way of getting a decent income (of about 5-6%). The investment case was also that the tenants would generally be stable, and not likely to go bust (unlike retail lettings businesses).

That was then, when interest rates amp; inflation were low. In a higher interest rate world, going into recession, do these shares still make sense?

Like many property shares, there was a recent plunge in share prices – some have blamed this on the LDI pension debacle, where pension schemes facing big margin calls dumped anything they could, to raise liquidity.

Could there now be a buying opportunity, especially if you believe (as I do) that interest rates could be coming down again if, as seems likely, we go into a recession in 2023, and inflation falls?

Interim Results (to 30 Sept 2022)

Some figures for H1 -

Gross property income £24.1m (up 3%)

Operating profit £17.0m (up 1.8%)

Adj EPS 2.8p (down 10%)

Dividends per share 3.2p (up 3%)

Total divis for the year are expected to be 6.4p, yielding 5.2% - not madly exciting these days, better yields are available elsewhere.

EPRA NTAV per share 153.3p (down 12%)

The drop in NTAV has been caused by a fall in property valuations. Could values fall further?

Hence the share price of 122p is at a 20% discount to NTAV.

Balance sheet - NAV is £679m, or 160p per share. I don’t know what the EPRA adjustments are, to reduce that to 153.3p. Investment properties are £1,020m, and interest-bearing debt is only £334m, so a nice comfortable LTV (loan to value) of about 33%.

The property companies which got into serious trouble, and even went bust (eg INTU in 2020) saw calamitous drops in asset values, e.g. for shopping centres. It strikes me as very unlikely that WHR would see such a collapse in its property values, given that they’re not directly dependent on shopping footfall.

Debt - the other key thing to consider for all property investments, is the term, and terms of the bank borrowings. Note 15 explains that a consortium of 4 banks have extended facilities of £345m, which expire in Jan 2025 – just over 2 years time, but can be extended by a further 2 years.

Covenants are interest cover, and market value.

Interest rate risk looks well covered, with 75% of borrowings capped.

My opinion - the 5.2% dividend yield isn’t enough to get me excited.

With the benefit of hindsight, zero interest rates for a long time, led to many assets becoming over-valued, including property.

Another thing to worry about, is that there have been reports of some property investment companies suspending redemptions, to stop forced selling of assets. Although as we’ve seen in previous property market downturns, valuations tend to decline, due to sellers wanting to sell things in order to reduce gearing. Simply supply amp; demand then means prices go down. So maybe it’s better to watch from the sidelines for now?



Graham’s Section: Argentex (LON:AGFX)

Share price: 120p (pre-open)

Market cap: £136m

This share came to my attention over the summer as offering high growth at a cheap valuation.

In October, it issued an H1 trading update that was ahead of expectations. The valuation still looked very modest at the time.

I’m not the only one who noticed: the share price has had a nice bounce and is up over 50% from its summer lows.


Not that it’s too relevant at this stage, but the IPO price for these shares was 106p, back in 2019.

The company was much smaller back then:


Let’s dig into today’s interim results:

  • Revenue +75% to £27.4m
  • Adjusted operating profit +55% to £7.3m
  • Actual operating profit +45% to £6.4m

Operationally, the number of corporate clients is only up by 12%. So clearly that is not the growth driver, but rather there are other factors involved in driving growth (e.g. increased share of wallet as clients abandon banks in favour of specialist brokers, and increased overall trading activity compared to other years).

On that latter point: with all the headlines around Sterling and the political changes that have occurred over the past few months, this was an unusual year for forex, with widespread concerns around rapidly changing exchange rates. So I think we need to understand the reported 75% revenue growth at Argentex in that context.

Other operational news:

Structured solutions grew from 1.9% of revenues last year to 9.5% of revenues this year. It’s reasonable to assume that the margins here are much fatter than the margins in spot and forward transactions.

There are some interesting comments on cash conversion: the revenue mix has resulted in lower cash conversion, because of a lower percentage contribution from spot trades (where the trade happens instantly and revenue is therefore generated straight away). But it’s almost certainly worth sacrificing some cash conversion in exchange for the higher margins from the other trade types

More clients are trading on the Argentex online platform. This is good news for shareholders because it reduces the overall labour intensity of the business. But online platform revenues were still less than £1m during the six-month period, so still a low percentage of overall revenues.

The new Netherlands business has “exceeded expectations and is generating meaningful revenue” after getting an e-money licence.

Headcount has crossed over the 100 mark to reach 107.


Momentum has continued across all facets of the strategy into the last quarter of our new reporting period. Although market dynamics continue to be supportive, we maintain a balanced approach to risk, particularly in light of the uncertainty through this period of high inflation.

I don’t see anything to cause concern here.

They also say “as highlighted in the 3 October trading update, the Board expects that the financial performance for the full year will exceed current market expectations”.

I would not interpret this as a fresh upgrade, because of the phrase “as highlighted in the 3 October trading update”.

Updated consensus forecasts are difficult to source, but Paul Hill (analyst for Equity Development) reckons that revenue will come in this year at £47 million, versus prior forecasts of only £42.8m.

Note that with the company’s financial year-end changing from March to December, the next financial statements we get will be audited statements for the 9 months ending December 2022.

Net cash rises to £25.8m and a final dividend is expected at the end of the financial year.

My view

The market seems to have caught up with the upgraded expectations, as there is no further share price increase this morning.

With a c. 50% increase in the share price versus where it was priced during the summer, I also think it’s fair to say that the easiest gains have been made here. But note that the valuation is still not at particularly demanding levels, using Stockopedia estimates (and bear in mind that the estimates have been moving quickly):


StockRanks don’t see too much value, but do see plenty of quality and momentum, calling it a High Flyer:


I will maintain my view that this is my favourite listed FX broker, and has a valuation that still gives it room to provide new shareholders with a decent return.

Zoo Digital (LON:ZOO)

Share price: 171p (+1.5%)

Market cap: £152m (about $175m)

This is another share that provided a nice buying opportunity in mid-summer, and is now up by around 60% since then.


My views on ZOO have evolved over time: I thought it was overvalued for many years, but more recently I thought it had grown and developed to a point where shareholders could be more optimistic (e.g. see here for my thoughts in July).

Note that the current share price is not much higher than the levels it reached way back in 2018, when it was much, much smaller:


Here are today’s interim results:

  • Revenues +91% to $51.4m
  • Adjusted EBITDA more than doubles to $7.3m (important: adj. EBITDA has not historically translated into profits and cash)
  • Maiden H1 PBT of $3.5m
  • Cash inflow from operations $7.6m, cash outflow from investments $2.0m

At last! We get some real profits and cash flow here finally (I’ve taken the cash numbers directly from the cash flow statement, instead of using the company’s numbers).

Operational highlights:

Localisation revenues up 150% to $32.3 million. This includes subtitling and dubbing.

Zoo’s fortunes are closely tied to Netflix, and is a key beneficiary of Netflix’s drive to fund high-quality foreign (non-US, non-English language) productions that can be enjoyed by a global audience. I think it’s fair to say that the revenue opportunity from translating these productions into English and other languages is bigger than the revenue opportunity that ZOO would normally have translating productions from English into other languages.

For example, I recently watched the gruesome All Quiet on the Western Front on Netflix. This is a new German-language World War 1 epic, and I watched it with English subtitles.

Media services revenue up 39% to $18.2 million.

Zoo’s freelancer network increased 27% to 12,343.

And now for the outlook. The full-year is expected to be in line with expectations:

Strong order book across all service lines with good visibility for H2 and a pipeline of work from established, satisfied customers

Further expansion of international operations to deliver revenue growth and improved visibility across multiple service lines

Clear opportunity as streaming service providers continue to focus on content as a key differentiator, with increased sourcing from international markets

Industry notes

Some comments from management are worth repeating. They note that “production of film and TV content has exceeded pre-pandemic levels”, referencing both the United States and UK spending.

Within the industry, the highest growth is seen from “Over-the-Top” (OTT) providers, i.e. from services you can access on the internet without a dedicated media subscription. Netflix is considered an OTT provider since you can access it from any internet-linked device, including a smart television.

ZOO says that it has a 4% market share of its current addressable market. Could the industry ever be sewn up by players such as ZOO taking a huge market share? I’m not sure. But the trends are positive. This paragraph seems worth emphasising:

…OTT streaming companies are ZOO’s primary commercial focus, and all indications suggest a shift in their purchasing strategies towards engaging with a smaller number of more capable vendors of media and localisation services. In this regard, ZOO is well positioned within the market as a one-stop shop, providing all services needed to prepare entertainment media for distribution on streaming platforms across all required languages.

The Group is one of perhaps five organisations in the industry with this capability, in ZOO’s case differentiated by its proprietary cloud software platforms that enable high efficiency and scalability in its operations, leading to the high rates of organic growth that have been delivered in its recent reporting periods.

My view

I still maintain that it’s the streaming companies – the likes of Netflix, Disney+, and so on – who have most of the negotiating power when it comes to getting their content translated. They have the intellectual property and they own the relationship with their vast audiences.

But I have come round to the idea that Zoo has built a reliable and comprehensive set of services that is not easy to replicate and can therefore command a decent level of profitability. They seem to have finally turned the corner and become a company that doesn’t need to hide behind “adjusted EBITDA” to demonstrate profitability. In addition, it’s hard to deny that they have exposure to an excellent growth trend (the globalisation of media) that looks set to continue for years to come.

Therefore, I’m no longer going to grumble about ZOO being overvalued. It’s expensive again, yes, but for good reasons:




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