Small Cap Value Report (Mon 18 Mar 2019) - FOOT, STAR, JLH, MAI, MGR, PIP

Good evening/morning.

Apologies for Friday’s report being late, I was in bed with a cold. Also, there was nothing of any interest in the small caps world for results or trading updates. However, I’ve reviewed a few things belatedly, including the insolvency of Interserve – something that Graham and I have warned about, repeatedly, for a long time – so I’d be very surprised if any of our readers lost money on that one.

Friday’s report is now finished, which is here.

Share price: 81p (up 74% today, at market close)
No. shares: 104.5m
Market cap: £84.6m

Recommended cash offer

Exciting news today for shareholders in this sports footwear chain, targeting yoof, which has been a dismal performer since floating in Nov 2017. Much bigger rival, JD Sports Fashion (LON:JD.) has launched a recommended cash takeover bid at 82.5p per share. This is a very generous offer, in my opinion, given the poor outlook for FootAsylum.

Based on the large shareholding which JD already has, plus indications of support mentioned in today’s announcement, then this looks a done deal – unless the competition authorities get involved in some way, in trying to block, or amend the deal. For that reason, I would sell now, banking the excellent profit, rather than risk something going wrong (scarred by my failure to bank profits at Revolution Bars (LON:RBG) after the 203p cash bid there fell through some time ago).

My opinion – this is great news for the bombed-out UK small caps market. I was having a drink in the city recently, with my main stockbroker, and another small caps specialist, and we all agreed that what this market needs right now are one or two takeover deals, at a big premium. Well here we are, that’s exactly what this FOOT deal is.

I think this nicely demonstrates that (selectively, as always) there is considerable value out there in small caps. Many shares have ground down, for up to a year now, often for no particular reason. Things have not risen on good results, and have often sold off, even on OK results. Disappointments, even mild ones, have been punished heavily, and repeatedly sometimes.

All of which combines to give us potentially quite a bit of low-hanging fruit – decent companies, whose shares have in some cases fallen far too low. When takeover bids start to happen, that could be seen as the starting gun being fired, for a market recovery.

I see this deal as very positive for the market as a whole.

Annoyingly, I did actually buy some FOOT when they were really bombed out earlier this year, but got the jitters and sold them, just before JD popped up with a notifiable stake. It’s rather galling that JD told the market that it wasn’t planning a takeover bid, and then launched one soon afterwards. Is that allowed? It seems a bit off to me, although plausibly deniable I suppose.

As you can see from the 2-year chart below, people who took the plunge earlier this year, have a 3-bagger on their hands. That’s an excellent return. Well done to anyone who spotted the opportunity (and got lucky!).

It will be interesting to see which other bombed out small caps attract takeover bids?

Starcom (LON:STAR) – results out today look uninspiring. The company is very small, and remains loss-making. Some time ago, there was a burst of excitement over some rampy announcement, which caused a brief spike up in share price. As usual, at this end of the market, it was all hot air.

With a market cap of just £3.7m, the risk of de-listing is ever-present.

I quite like the upbeat outlook comments, but the balance sheet clearly needs an equity fundraising to bolster things. Far too risky for me, but it does operate in an interesting space (asset tracking). So maybe one to keep an eye on, from a safe distance?

John Lewis of Hungerford (LON:JLH) - poor interim results today, are out from this tiny company that fits high end kitchens.

The balance sheet looks weak to me. Why is it stock market listed? Doesn’t make any sense to me.

Maintel Holdings (LON:MAI) – share price up 15% today, to 578p, on final results that have pleased the market.

If you understand the sector, this could be worth a look – dividend yield is excellent.

Adjusted EPS is up 20% to 65.5p, so the PER is well below 10.

Note that the CFO has given notice to leave, for “personal reasons”.

My opinion – the balance sheet looks weak to me, with significantly negative NTAV, so I wouldn’t be interested in investing here. It’s not a sector I understand. The danger seems to be that Amazon amp; Google, etc, steamroller the competition.

Miton (LON:MGR) – again, not a sector I cover, but it’s worth noting that results today triggered a 11.5% increase in share price, to 58%.

The headline bullet points look impressive. Adjusted PBT up 34%. The key number for fund managers must be funds under management, and how those funds performed. Both look pretty good.

Poor small caps markets are bound to lead to people withdrawing funds – that’s the big problem with open-ended funds – redemptions – which can be a nightmare for fund managers trying to exit illiquid small cap investments. They are forced to sell whatever they can sell. That often leaves remaining investors holding the worst stocks in the portfolio, whilst early leavers have walked off wish cash raised from selling the best investments.

A lot of us in the UK small caps community like amp; respect Miton’s front man, Gervais Williams, who seems to have his feet on the ground amp; talks a lot of sense.

I have enough liquidity problems with my own small caps portfolio, so the idea of aggregating that problem with other investors, into an insurmountable liquidity problem, just doesn’t make sense to me. On the other hand, a good fund manager, who buys amp; holds the best small caps shares, ignoring short term price volatility, has attractions.

Restore (LON:RST) – results are out today. The stand out number for me is £262m intangible assets at the top of the balance sheet. And £122m borrowings in long term creditors. I’m really not keen on groups that have grown fast, using cheap debt. Just look at Proactis Holdings (LON:PHD) as a recent example of how things can go wrong. Or almost the entire outsourcing sector!

Why take the risk? It might all turn out to be fine with Restore, but I just can’t see any reason to want to risk my money on what the outcome might be, unless risk:reward looks compelling. Which it doesn’t. There have been too many mis-steps, and near-misses, of late in this market, to make me want to give anything the benefit of the doubt. Waking up to a 50% instant loss, soon makes you question everything.

Restore shares bounced 11% today. I’m not convinced that gain will hold, but who can say? It’s too highly geared for me, so I wouldn’t touch it. This is a good time to have strong balance sheet discipline.

Pipehawk (LON:PIP) – today’s theme seems to be, “cripes, is that still going?!”

Amazingly, this jam next century company is indeed still going.

The balance sheet looks insolvent to me, so forget it unless/until it’s refinanced.

Although as we saw with Earthport – even the worst results amp; losses for 20 years, can end up with someone seeing value there, and buying it.  I can’t predict that, all we can do here is give a view on the reported figures. People thought Lastminute.com and Autonomy were worth billions, and there we go. What can you do?

Jolly good, I think that, somewhat belatedly, covers Monday’s trading updates amp; results statements.

Best wishes, Paul.

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