Small Cap Value Report (Mon 26 June 2023) - BMS, DWHT, LOOK, CINE, POLR, AML, CBOX, DEMG

Good morning from Paul amp; Roland, raring to go!

Gorgeous weather continued over the weekend here in Bournemouth, so it feels like I’m on holiday!

I’ve got into a good routine each weekend now – Saturday morning is to go through the week’s SCVRs, replace any missing tags, update my quick reference spreadsheet summary, then I record the weeks’ podcast. Sunday morning is for recording my macro/markets podcast, having done some digging around for relevant data and articles. Sorry part 2 was so lengthy this week, but there was masses of information, and I reviewed the Bank of England MPC summary/minutes, which was useful in better understanding the Bank’s rationale for increasing rates aggressively again to 5.0% (due to inflation amp; labour market running hotter than expected), despite admitting that it didn’t yet know what impact the previous 12 interest rate rises would have.

Brief macro thoughts

I’m actually a little less bearish than last week though, as I explain in the podcast. This is because consumer confidence data from GfK has been consistently improving since last autumn, and the interest rate hikes mainly shift money from borrowers to savers. Yet mortgages are something like 85% fixed, so that impact will only occur gradually, and impact a relatively small number of people. Whereas savers are benefiting already from higher interest rates, and there are many more people saving, than borrowing (only about half owner-occupiers have mortgages at all). Plus many people got a 10% pay rise from April, boosting spending, as Next (LON:NXT) pointed out in its upbeat statement last week.

I suspect some sectors might slow down (e.g. business-to-business, capital goods, construction, etc), but others might perform better than the current gloomy mood suggests. I don’t know, we’ll see. All up for debate, and I always remind myself that no matter how expert anyone is, and how emphatic their language, and certainty in their own opinions, we’re all just guessing! That’s why it’s better to keep an open mind, rather than to become rigidly wedded to some theory about what the future holds. 

I’ve noticed that in the past, lots of sceptical bears miss out on the best part of a recovery, because they’re still denying that it is a recovery (seeing it as a bear market bounce). Similarly, people who sit in cash, often miss the recovery, as they’re too timid to put the money to work in cheap shares. Although things are much more favourable for cash now that interest rates have risen. So I think cash, and bonds, are actually pretty good places to be right now. But as always, that’s for each investor to decide for ourselves. 

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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 £1bn. 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.

What does our colour-coding mean? Will it guarantee instant, easy riches? Sadly not! Share prices move up or down for many reasons, and can often detach from the company fundamentals. So we’re not making any predictions about what share prices will do.

Green (thumbs up) – means in our opinion, a company is well-financed (so low risk of dilution/insolvency), is trading well, and has a reasonably good outlook, with the shares reasonably priced.

Amber – means we don’t have a strong view either way, and can see some positives, and some negatives. Often companies like this are good, but expensive.

Red (thumbs down) – means we see significant, or serious problems, so anyone looking at the share needs to be aware of the high risk.

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Summaries of main sections below

Braemar (LON:BMS) – down 19% to 223p (£75m) – TU amp; Investigation – Paul – AMBER

Confirms previous guidance for FY 2/2023. However, it also confirms a Sky report yesterday that shares will be suspended because it won’t be able to meet 30 June deadline for publishing its accounts. This is due to an investigation over historic transactions of $3m. Looks like I was too sanguine with my relaxed view (written before 8am)!

Dewhurst (LON:DWHT) – down 3% to 1,015p (£85m) – HY 3/2023 results – Roland – GREEN

Today’s half-year results seem to have prompted a mild downgrade, but this industrial group needs to be looked at through a long-term lens. I think the current valuation looks reasonable, given solid profitability and a bulletproof balance sheet.

Polar Capital Holdings (LON:POLR) – unch. at 495p (£500m) – FY 3/2023 results – Roland – GREEN

Performance at this specialist fund manager appears to have stabilised during the second half of the year, after a difficult H1. The dividend has been held unchanged and while the timing of a recovery remains uncertain, I think the shares probably offer good value.

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Quick Comments Aston Martin Lagonda Global Holdings (LON:AML)

Up 10% to 360p (£2.6bn) – Deal with Lucid – Paul – AMBER

This luxury carmaker fell into our sub-£1bn briefly, both at the height of the pandemic, and again in the second half of 2022, when it looked very precariously financed amp; overwhelmed with debt. However, I remember commenting previously that whilst it looked very high risk, and almost a basket case financially (heavy losses every year), the brand value must be immense, and I also mentioned the massive valuation of Ferrari, which has achieved scale and hence become highly profitable.

Aston Martin has not only survived, but the shares have now 4-bagged from the lows, which is great to see. It has deep-pocketed financial backers, including Mercedes.

A deal announced today is with Lucid, a cash-rich, massively loss-making luxury US electric vehicle maker (a copycat Tesla it seems), valued at c. £8bn, despite its shares being down almost 90% from speculative spikes in 2021! The American market is just a different world, isn’t it! Tesla is currently valued at c.£640bn, or $813bn! Tesla has achieved substantial scale, and profitability though, so fair play to Elon.

Key points -

• Lucid will supply Aston Martin (AM) with EV (electric vehicle) powertrain components.
• AM seems to be offering to pay using a mixture of shares and cash.
• Minimum spend by AM £177m of Lucid products.
• Lucid could end up owning 3.7% of AM, with a 1-year lockin.

Paul’s view – clearly AM shares are outside the scope of a value/GARP report, but I’m always happy to look at anything interesting. Low volume, high end car makers like AM have always bought components from larger companies, and this is an innovative twist on that theme, paying partly in shares.

Aston Martin shares look terrible on conventional valuation methods, but that’s missing the point. It’s all about the brand, and scaling-up potential.

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Deltex Medical (LON:DEMG)

Shares suspended at 1.2p (£8.5m)

I dropped coverage here of this medical device jam tomorrow share in 2014, because it wasn’t really getting anywhere, and there’s been nothing since to re-engage our interest. Revenues never got off the ground really, and in recent years have been dwindling. Repeated equity raises saw the share price wither away almost to zero.

Today it’s reached the end of the road, shares suspended with the dreaded (and nearly always terminal) “pending clarification of its financial position”.

It’s set to run out cash in just over a fortnight, with loans fully drawn down, and negotiations for fresh funding have failed.

That’s it I’m afraid, the shares are now worth zero. Bad luck to any holders. At least the company tried to make a success of its products, but it’s so difficult (and expensive, and time-consuming) to commercialise innovative healthcare products.

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Deepverge (LON:DVRG)

Shares suspended at 0.15p (£1m)

Similar sort of thing, AIM announces that the shares have been suspended at the request of the company, again with the ominous words “pending clarification of the Company’s financial position”.

Deepverge itself put out an update at 07:00 today. It’s been trying to dispose of operations, to raise cash to keep going, but says today none of the offers look likely to conclude on a timely basis. Hence -

The Board’s current expectation is that this process will result in the sale, closure or administration of all Group subsidiaries.

The group topco plc has net liabilities of £0.2m, with more expected (eg for audit fees).

There’s nothing shareholders can do now, other than hope for a miracle. If a subsidiary can be sold quickly, then that might generate some value for topco, who knows? But I would say it’s safest to assume the shares are a zero.

So this is another share certificate/contract note to print off and stick on the wall in the downstairs loo, to remind yourself not to buy any junk like this again! (we’ve all done it, you can barely see the tiles in my loo!)

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Paul’s Main Sections: Braemar (LON:BMS)

279p (pre market) £92m – TU amp; Investigation – Paul – AMBER

(Update at 08:58 – shares down 16% to 233p)

Sky News (which seems to be the place to go for tip-offs of deals and scandals) reported yesterday that BMS “has been told by its auditor that its accounts will not be signed off before a deadline this week”, and is “plunged into crisis” by this, which would see its shares suspended. Although I would say that late accounts are quite commonplace these days, with the effects of the pandemic still being felt by understaffed auditors.

More worryingly, Sky says that auditors BDO are unhappy about unspecified elements of the accounts, and that FRP Advisory (a restructuring/insolvency/investigations) firm had been brought in. That sounds a lot more serious than just a slight delay to signing off the numbers.

Braemar issues a statement this morning -

Update on trading, FY23 results amp; investigation

Braemar (LSE: BMS), a provider of expert investment, chartering, and risk management advice to the shipping and energy markets, provides an update on its annual results for the 12 months ended 28 February 2023 (“FY23″) together with details of an on-going investigation into a historic transaction.

Trading update – this all sounds fine, no changes apparently, and 33% increased divi (yield is a useful 4.3%) -

As announced on 22 March 2023, Braemar is pleased to reconfirm its expectation of reporting record revenue and record profitability for FY23, with revenue for the year of not less than £150m (2022: £101.3m), underlying operating profit of not less than £20m (2022: £10.1m) and net cash of £6.9m at the year end.
It remains the board’s intention to recommend a final dividend of 8 pence per share (2022: 7 pence) to shareholders for approval at the forthcoming annual general meeting, representing a dividend for the year of 12 pence per share, a 33% increase over the previous year (2022: 9 pence).

Accounts investigation – this doesn’t look material, at c.$3m, and is historic from 2013-17.

It confirms Sky’s report that FRP Advisory to assist the investigation (that won’t come cheap).

As a result, FY 2/2023 audited accounts will indeed be delayed, and not published by the 30 June 2023 deadline. Note the deadline is 4 months for fully listed companies, whereas AIM is 6 months (rule 19). Braemar is fully listed, so 4 months applies.

Shares suspension – BMS doesn’t expect to meet the 30 June deadline for accounts publication, so its shares will be temporarily suspended.

Paul’s opinion – Braemar is a decent company, and trading well – I reviewed it positively (with a GREEN overall view) here on 22 Mar 2023, but wanted to see the full accounts before being completely happy. One issue I flagged was the apparently huge potential dilution (23%) from share options. Not unlike sector peer Clarkson, where the company seems to be mainly run for the benefit of its management amp; staff (who are ear-marked to get most of its cash pile, in bonuses!)

The accounting problems seem odd considering they’re historic, and only $3m. Why get in expensive advisers, and suspend the shares, over an issue that is small? I wonder if fraud might be involved? (EDIT: this point is also mentioned by M48 in the comments below. I should emphasise we’re only speculating here, not making any accusations).

Shareholders have this week to decide whether to bail out ahead of temporary suspension, or to sit tight (and maybe even buy more, if it plunges). Based on what we’ve been told so far, this issue doesn’t look significant or material, so personally I’d be inclined to ignore it. But as always in this type of situation, we never know what else might come out of the woodwork. Overall though, Braemar looks a good, sound business, so I’d be inclined to give it the benefit of the doubt over a small, historic accounting problem.

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Lookers (LON:LOOK)

118.6p (£453m) – Update re takeover – Paul – AMBER

As mentioned in my weekend podcast, I’m uneasy about this 120p cash takeover bid. 

The reason being that J O Hambro held 8.0% of the company, and gave a letter of intent to support the 120p takeover. But it’s since been selling in the market, having reduced its position by over a third, to 5.2% of Lookers. I don’t recall having seen that before. Normally instis give an undertaking to support a deal, and then hold until the deal completes. So why is Hambro selling in the market? The only reasons I can think of, is that they consider there’s risk of the deal falling through, or they need the money for redemptions, or to buy something else they think is better.

Furthermore, we’re told today that Artemis (holder of 40.5m Lookers shares, 10.6% of the company) has done the same thing! It’s now reduced down to 8.8%.

As a result Lookers now has only 37.4% of the company that has confirmed an intention to support the deal. Does this mean it could fall through? In that case, I would have expected the share price to have fallen to a say 10%+ discount to the bid price of 120p. But it hasn’t – the share price of 118.6p is so close to the takeover bid of 120p, that it seems the market expects this deal to happen, or even that there’s a chance of a higher bid – after all, someone seems to be hoovering up big blocks of shares in the market I wonder who the buyer was for Hambros and Artemis’s shares? (I’ve not ploughed through all the disclosures, due to time constraints, so do leave a comment if you have). 

So it’s looking quite interesting. Personally, I would follow the instis, and sell in the market, or maybe sell half, and keep the other half in case of a higher competing offer for the company? But wouldn’t the instis be holding too, if they thought a higher offer likely?

Paul’s opinion – the above is all guesswork really, but interesting to ponder. I’ve not seen instis giving support to a deal before, then selling in the market before it’s completed. So something unusual seems to be happening here. We’ve seen several other takeover deals fall through lately, hence I’m leaning towards playing it safe, and selling in the market to lock in the profit, if I held the shares personally.

I’d love to hear from any actual shareholders, and how you see things with this takeover deal?

The whole sector is ripe for consolidation, as we’ve been saying here for ages, so I’ve picked up some Vertu Motors (LON:VTU) and Pendragon (LON:PDG) shares recently.

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Cineworld (LON:CINE) Share suspension imminent amp; insolvency

I’ve given it my own title above.

This large, international cinemas chain once again confirms that its restructuring won’t provide for any value to existing shareholders. This is the latest in a long series of announcements confirming that its shares were worth nothing, yet for some bizarre reason unknown to me, the shares continued trading on the London stock market. Does anyone know why? (at the time of writing, they’re still trading at 0.5p, with a market cap of £8m! Why would anyone be buying? Probably shorts covering their positions, to avoid a lengthy delay in getting paid once it’s suspended).

The latest development today is that it has decided to place the UK plc into administration. It’s only the plc going bust, not the operating subsidiaries, which continue trading as usual. The US operations are already in Chapter 11 bankruptcy protection.

An intermediate holding company Crown UK Holdco Ltd will then own the operating subsidiaries, and will become wholly owned by a newco controlled by the lenders.

This is an important point to grasp for newer investors – that when a company becomes insolvent, the equity becomes worthless, and instead lenders end up seizing control. This is because debt ranks higher than equity in law.

Meanwhile the actual operating business itself has continued trading as usual. It’s just a transfer of ownership, from equity, to debt holders. That happens quite often. This is why it’s usually a mistake to buy shares in quite big companies where the shares look insanely cheap. They’re “cheap” because equity is being squeezed out by debt, and equity is probably already worth nothing, but speculators in the shares either don’t understand this, or are hoping for a miracle.

Anyway, I’m sure no SCVR readers got caught on CINE, because we’ve been telling you for a long time here that the equity was worth nothing.

Shares are going to be suspended shortly, and are worth nothing.

Thank goodness that’s over, we’ve wasted a lot of time covering this share, but I thought it was important to try to protect readers from stumbling into something that was a guaranteed 100% loss.

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Cake Box Holdings (LON:CBOX)

Up 8% to 137p (£55m) – Final Results – Paul – AMBER/GREEN

Cake Box Holdings plc, the specialist retailer of fresh cream cakes, today announces its audited full year results for the twelve months ended 31 March 2023.

Adj Pre-tax profit is down 23% to £5.4m

No adjustments this year, so numbers are clean.

Diluted EPS is 10.6p (PER 12.9x), down 33% on LY.

Gross profit was up 8% on LY, but the reason profits are down is because admin exps rose 32% to £11.6m, so I need to better understand why costs rose so much.

Franchise model, so revenues are smaller than if the 205 shops traded within the group.

Decent rate of expansion still, with +20 new sites in the year.

Supermarket kiosks also expanding, now with 18 – has anyone tried them? I found this image online -

Here’s a full store -

Cake Box’s niche is egg-free cakes. But they still have cream on some of them. So I’m not entirely sure exactly the dietary requirements this appeals to. Doing some googling, it says that some Hindus and Sikh vegetarians don’t eat eggs, which would rule out conventional cakes I suppose. It looks as if CBOX is targeting that particular niche, which is a nice positive for the investment angle – ie. targeting a specific, under-served niche, is the sort of thing I look for, in preference to competing head-on with everybody else, with generic products. If you know more about this question, then do please enlighten us with a comment below!

I am worried that franchisees might be struggling, as LFL franchise store sales were only up +1% in FY 3/2023 – which means franchisees are bound to be less profitable, since their costs will have risen a lot more than that. Although performance has improved more recently -

Dividends - total is 8.125p (LY: 7.6p), yielding a very impressive 5.9%

Balance sheet - is very solid. NTAV is £17.3m, which includes £8.7m freehold property (3 central sites), and £7.4m cash, less £1.3m mortgage debt, gives net cash of £6.1m.

Cashflow statement - looks fine to me, no concerns.

About a third of the £6m cash generation, £2m, was spent on capex – expanding central baking/warehouse facilities.

Most of the remaining cashflow was paid out in divis, costing £3.1m.

As it’s net cash, the finance income line should grow by a few hundred £k maybe in the new financial year, given interest rate rises, which is helpful.

Note 3 gives a useful breakdown of revenues – so the business model for CBOX is all about supplying the ingredients (at a mark-up). This is not what I imagined, as I thought they would generate revenue from charging franchise fees. It would be interesting to know how the contracts are set up, in terms of what ability CBOX has to force franchisees to buy from them, and what pricing power CBOX has, and how it detects whether franchisees cheat the system to buy cheaper ingredients elsewhere maybe? Do they reconcile what sales are versus ingredient purchases? These would be good questions for a future webinar.

Note 4 shows individual expenses. I’ve queried the high cost of “Travel and entertaining goods”, which has risen again, to £599k – seems a lot. Another good question to ask management. Let’s hope it doesn’t include any jollies!

“Professional costs” of £1.7m is double last year, again that seems a lot. What’s in it?

Paul’s opinion - I still can’t shake off my mistrust of this company after the accounting scandal in 2022, and heavy Director selling just before it. It’s a pity because, apart from that, there’s a lot I like about this share.

As some wholesale food ingredients may be coming down in price now, there could be margin improvements here possibly? Plus of course, it’s a successful franchise/roll-out model, which are usually priced at a premium, whereas CBOX looks quite cheap.

The founder owns 25% still – about the right amount to be motivated, but not overly dominant. The dodgy former FD has gone, and taken his ill-gotten loot with him, so good riddance there.

It’s quite tempting to take a small position here. Providing nothing goes wrong again, then I could see this share being a steady riser in the coming years, as more stores are rolled out. And you get nice divis along the way, since most of the cashflow is available to pay divis.

I’ll go AMBER/GREEN on this.

The chart since it listed on AIM in 2018 shows the rollercoaster ride investors have had, and the big impact of accounting troubles (see our archive for lots of details) in 2022. Although I’d say it’s looking like the chart may have formed a base now, and the StockRanks have also recovered. Interesting!

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Roland’s Section: Dewhurst (LON:DWHT)

Dewhurst (LON:DWHT) – 1,015p (-4%, 08.30)

Dewhurst (LON:DWHA) – 590p (-5%, 08.30)

Market cap: £85m

Interim results

Wonderfully simple and straightforward accounts from this family-controlled maker of lift controls, keypads and traffic control equipment.

Dewhurst is not the most liquid stock and suffers from a big spread. But the shares have delivered very steady progress over a long period.

Note that shareholders can choose to buy the non-voting but higher-yielding Dewhurst (LON:DWHA) shares. These are what I’d buy, given that the Dewhurst family controls more than 50% of voting rights. I can’t see any reason to pay more for an (effectively) worthless vote.

The A-class shares have eight-bagged over the last 20 years:

Results summary: today’s interim results cover the six months to 31 March. Refreshingly, there’s no PR puffery or talk of adjusted EBITDA here!

More generally, there’s not that much detail at all – management commentary is quite limited from this business. Investors wanting more detail have no choice but to plough through the annual reports, although there is an updated note available from Singers on Research Tree today, that provides an overview.

Here’s a summary of the main numbers:

• H1 revenue rose by 12% to £30.4m

• Pre-tax profit up 8% to £4.0m

• Earnings per share up 13% to 32.1p

• Interim dividend up 5.6% to 4.75p per share

• Net cash of £22.6m (H1 22: £19.9m) – that’s a quarter of the market cap!

Trading commentary: I think the main takeaway here is that Dewhurst is suffering the impact of inflation. The group’s operating margin fell by 1% to 13% compared to the same period last year.

Dewhurst has now been able to push through some price increases, but these have lagged higher costs and not all increases have been passed on.

Overall, price increases haven’t (yet) fully compensated for the impact of inflation, although there has been a welcome reduction in stock levels as material availability has improved. Recruitment difficulties are also said to have eased a little.

Management says that sales in the Lift Division saw sales growth “in most regions”, led by Canada and the UK. However, “a lull in major projects in Sydney” is still ongoing.

Keypad sales saw a modest recovery, but these remain “volatile and unpredictable from month to month”.

Overall, Transport sales were “fairly similar” to the previous year, with rail infrastructure spending down, but highways products up.

Outlook: Today’s outlook statement seems quite measured, perhaps even a little downbeat. Management appears to be expecting the second half of this year (April-September) to be more difficult across all of its markets:

In North America:

there are signs that the second half of this financial year may be impacted by a slowing of orders and customer approvals to proceed.

In Australia, order levels are said to be “reasonable”, but:

continuing customer labour constraints are leading to some project delays

In the UK, Dewhurst’s management think:

The UK has remained surprisingly steady given the economic backdrop, but may tail off later in the year as the impact of interest rate rises start to bite on the economy

My reading of today’s outlook is that it’s probably a mild downgrade to forecasts. The market seems to have taken that view, with the A-class shares c.5% down in early trade.

Roland’s view

Dewhurst’s profit margins look quite attractive to me for a company operating in this sector. The long-term average return on capital employed of 12.7% shown on the StockReport would be higher, if the company didn’t carry so much cash on its balance sheet.

My impression is that Dewhurst’s products probably have some degree of competitive advantage.

Cash generation improved during the half year as the group was able to unwind some inventories and reduce outstanding receivables.

Dewhurst’s final salary pension scheme remains a drag on cash, with deficit reduction contributions expected to total £1.4m this year. That’s significant, against a pre-tax profit of c.£8m.

However, the deficit is visibly reducing and the numbers in last year’s annual report suggest to me that this scheme might become self-sufficient over the next few years, given the benefit of rising interest rates. That could improve free cash flow and dividend payment capacity.

Although the outlook for this year suggests some risk of disappointment, Dewhurst’s balance sheet looks extremely strong, with c.25% of the share price covered by net cash of £22m.

On balance, I think the shares look quite reasonably priced for a business with such a strong balance sheet and attractive profitability. I reckon the A-class shares trade on about eight times forecast earnings with a 2.5% dividend yield, after today’s results.

The size of the spread here means that this is a buy-and-hold stock only. But the dividend hasn’t been cut for over 30 years, reflecting a very steady long-term performance:

In my view, the balance of risk and reward looks quite favourable at this level. I’m going to give Dewhurst a thumbs up.

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Polar Capital Holdings (LON:POLR)

Share price: 495p (unch)

Market cap: £500m

Final results

“Total dividend per share for the year has been maintained at 46.0p.”

Graham last covered fund manager Polar Capital in November, after its interim results.

It’s been a turbulent year for Polar, which is heavily exposed to tech stocks. But comparing Graham’s notes with today’s full-year numbers suggests to me that Polar’s performance may have stabilised or even improved slightly during the second half of the year.

With the dividend held unchanged, this unloved stock offers a 9%+ yield today. Is there value on offer here?

Financial summary: today’s full-year numbers do not seem to contain any nasty surprises and show profits broadly flat on H1 numbers:

• Assets under Management (AuM) down 13% to £19.2bn (H1 ‘23: £18.8bn)

• Average AuM for the year down 14% to £19.6bn

• Pre-tax profit down 27% to £45.2m (H1 ‘23: £23.0m)

• Adjusted earnings per share of 44.3p (FY22: 56p)

• Second interim dividend of 32p per share leaves the full-year payout unchanged at 46p per share

Dividend: is Polar’s 9% dividend yield sustainable? I estimate last year’s payout cost about £47m, compared to net profit for the year of £35.6m.

The payout clearly wasn’t covered by earnings and required some support from the balance sheet. But Polar still had surplus capital of £57.7m at the end of the year, after subtracting regulatory capital and the July dividend payment.

Fund managers’ profits can bounce back quickly with modest inflows and a more supportive market. The yield of 9% reflects some risk here, but also negative market sentiment.

If profits are broadly flat this year, as suggested by consensus forecasts, then I think the dividend still has some breathing room and may survive without a cut.

Trading commentary: Polar’s technology fund saw net outflows of nearly £1.2bn last year.

This chart from a new Equity Development note today highlights the outsized impact of technology on Polar’s fund flows last year. But we can also see inflows in some areas:

This chart from today’s results shows how AuM weightings have changed over the last year. Healthcare, insurance and emerging markets have all gained weight, helping to offset Technology outflows:

Understandably, chief executive Gavin Rochussen is keen to stress that Polar was by no means the worst performer in the fund management sector.

He says that 88% of Polar’s UCITs AuM (closed-ended funds) has been in the first quartile of performance against its Lipper peer group since inception. That seems quite positive to me. Lipper is a fund performance ranking scheme.

Perhaps more usefully, net outflows have eased during the final half of the year.

During the fourth quarter, Polar’s AuM actually rose by £0.8bn (+4%), thanks to £1.2bn of investment gains.

A net outflow of £0.4bn dampened this result slightly, but this was said to be due to profit-taking in the Global Insurance fund, rather than continued weakness in Technology.

Outlook: the company believes the outlook is positive, “with global inflation abating and the peak interest rate cycle within medium term sight”.

Rochussen says he believes Polar’s specialist focus and balance sheet leave the group well positioned for a return to growth.

Roland’s view – I think the company’s outlook statement leaves some wiggle room, but it seems like a reasonable viewpoint to me.

Although I think inflation will remain a feature of the economic landscape, most companies seem to be reporting a degree of moderation and have now factored in necessary price increases.

Polar’s share price is down by nearly 50% from its 2021 peak. If the company’s growth can resume its long-term trend, I think the chart suggests this could be a good cyclical buying point:

Of course, there are no guarantees. Risks remain and a dividend cut may still be needed if market sentiment does not continue to improve.

But on balance, I think Polar Capital looks in good health and affordably valued. In my view, the stock has the potential to offer attractive returns from current levels. For these reasons, I’m going to go green on this one.

Stockopedia

Source: https://www.stockopedia.com/content/small-cap-value-report-mon-26-june-2023-bms-dwht-look-cine-polr-aml-cbox-demg-970447/