Tag: Small Cap

  • August’s Stocks – Then and Now

    6 Months On

    Back in August, I jotted down 11 stocks which had appeared in some of screens as potentially interesting - for whatever reason. A few of them I went to look at in greater detail, but many of them I didn't - usually because I found one big thing that put me off entirely. In the spirit of learning, though, I thought it would be interesting to look back and see what all of them have done in the last 6 months against the wider market rally. While it's a relatively short time for a long-term investor, many of the shares were rather... shaky, to say the least, and as such I'm more interested in whether the outlook operationally is changing for the beleaguered firms. On to the first three, then!

    Molins, who I covered in December, rose ~27% in the period. Management is fairly tight lipped and not much seems to have materially changed since the post I've linked; a nice, niche business with a pension deficit that ratchets up the risk considerably. (more…)

  • International Retail

    The UK Conundrum

    Thinking through the savage market reaction to the Tesco results and tying together all the investment cases I've made and read over the last few months, I'm genuinely unsure about my overall position on retail. I like it in some senses - I think Lookers, the car dealership, is underpriced as the market seems to extrapolate current weakness endlessly, and it's extremely cheap. I dislike it in other cases - Game, for instance, I wouldn't touch with a bargepole, as I think they offer no useful service to consumers. It is an undifferentiable (I hope that's a word!) product which you can either order online for cheaper, or better still, have downloaded direct to your desktop. Supermarkets, finally, left me distinctly more ambivalent. The sheer number of moving parts made it difficult to really weigh up the factors - though I do think they'll be good long run performers. There's a lot of cheap shares in the sector, though, and it almost seems like blasphemy for me not to touch any more retail stocks simply because they're 'in retail'. That is exactly the kind of pricing error I'm trying to exploit - good companies overlooked for bad reasons.

    Which brings me nicely on to the thrust of the post and the title - the UK conundrum. Looking at a news report on Dixons, one line struck me - “The Christmas trading update from Dixons is likely to be frustratingly mixed again – good in the key Nordics business, not too bad in the UK and very bad in the rest of the group overseas.” Good in the key Nordics business, eh? So we have a failing UK business being propped up by strong international sales in some parts, and dragged down further in others? Now, where have I heard that story before? There's probably many more, but for this idea I'll focus on Dixons and the two I've had most exposure to - Tesco and Mothercare.In this post I'll run over the basics of the international businesses, and on Wednesday I'll discuss further the valuations.

    Tesco (more…)

  • RSM Tenon (TNO) & Morson (MRN)

    Stop the cuts!

    Don't worry, I'm not diving into political commentary; rather, reflecting on two very different companies with one thing in common - both of these portfolio members have seen rather steep share price declines, at least a part of which was down to a dividend being cut or removed completely. Dividends are important for a few reasons, but the key one for me is probably the signalling that the company is committed to returning money to its shareholders. I dicussed this in a post a couple of months ago in reference to Morson, so it's rather neat that they're one again popping up today! Market reactions, I should note, are also usually rather swift and brutal when companies cut dividends. If you can have faith in the reason for cutting the dividend and the management team, it strikes me that there's potential for some measure of staying ahead of the market. After all, if the management are good custodians of cash, they're just keeping a bit more for themselves now to give you more back later.

    RSM Tenon

    We'll start with the more difficult story from my point of view. RSM Tenon were always a problem from the perspective of the above; indeed, when I included them in my portfolio the first comment I got on the piece rather sharply pointed out that management didn't seem to care about the interests of shareholders:

    What this means is Tenon don’t make much for their shareholders over time by buying companies, they had just £19.2m of retained earning in their Balance Sheet at 31 December 2010 compared to £103m of share capital raised from investors. Empire building makes more money for Directors than for shareholders as your comparison of the value of Andy Raynor’s shares versus his remuneration package illustrates. Gullible shareholders are funding Andy Raynor’s inability to accumulate wealth for them over time. (more…)

  • Acal (ACL)

    Manufacturing with a difference

    After covering Molins last week, I've stuck with the manufacturing theme - and what a topical one it is. Manufacturing-related firms based in the UK (though 'based' can mean several different things!) always elicit an initial response of slight skepticism from me; I simply think that they probably have a tougher time than firms based in Asia, who have all the advantages that brings. Key, really, is how their costs are laid out, and how they're trying to compete in the markets. On that theme, Acal are rather keen to point out their niche focus and differentiate themselves from the mass-market production lines perhaps more commonly associated with their East Asian counterparts; I suspect the firm's statement from its latest annual report probably tells us all we need to know about where the business sees itself in the world:

    "Acal is a European specialist provider of technology products and services.With operations in eleven countries across Western Europe, and in South Africa, the business operates in clearly defined market niches where customers appreciate the added value that comes from high levels of technical support and customised solutions."

    They've hit probably the three biggest buzzwords there; 'specialist', 'niche', and 'customised'. The cherry on top is the 'added value' - the whole point of being specialist, niche and customised. So while I said I think UK based firms have an uphill struggle, they're also positioned to take advantage of exactly the three things they've mentioned here. They're closer to their customers, there's no language/cultural barrier, and geographically I suppose things are a little easier. These things are wrapped up in their business model, which focuses less on creating value at the production stage and more on providing addition services to their customers in the form of customisation and support. Anyway, that's just a preamble to get over my prejudices; the numbers, as ever, are the most important thing! (more…)

  • Molins (MLIN)

    Resilience & Weakness

    Molins are a small manufacturing company I first hinted at back in August and which have more or less flatlined since then. On an operational note, though, the company have released two reports - both of which positive - so as it was interestingly cheap then, it becomes even more so now after a confirmed upward trend in performance. An overview of the company, then, and probably the first key point regarding their potential resilience; Molins provide 'high performance machinery and instrumentation' and 'services and support' for consumer products. Importantly, by my calculations, at least 65% of their revenues are generated from the tobacco industry - somewhat of a safe haven in times of uncertain consumer demand. That certainly piqued my interest, as few of my shares could be regarded as particularly 'resilient' to the wider economy!

    In terms of the company's headline metrics, it looks cheap by the three key ones important to me; forward earnings, historic earnings, and assets. Historic earnings weren't just a blip, either, with net profits coming in at even stronger levels pre-crisis, barring a restructuring in 2006 which saw a large loss (even pre-exceptionals, as my statistics always are). Revenue hasn't slumped hugely in the recession for a firm involved in capex, no doubt because of their tobacco links, but operating profits have continued to be squeezed, which is slightly more worrying. Fortunately, Molins' half year report seems to report a reversal of that trend, with more higher margin work filling their books. Finally, the strong dividend is also a positive from my point of view, as I increasingly focus on dividend payments as a way of differentiating between companies who are willing or otherwise to put their money where their mouth is and signal a commitment to shareholders.

    Cash flows have also remained strong over the last few years, which is always good to see. Their own capex has been relatively restrained, with only the gyrations of working capital (payables/receivables) shooting the cash flow figures up and down. It's this background that has left an £18.4m market cap company with £12m of cash and relatively little 'debt'; £5.7m of term debt, to be precise. (more…)

  • Plastics Capital (PLA), Creston (CRE), Character (CCT)

    A round of news

    With 3 sets of results out this week, I thought I'd pull together a quick post showing how 3 of my picks are holding up. Plastics and Character have been in the portfolio since inception, with Creston a later addition in a sector (media) I found attractive. The headline result would be one of positivity, with all three companies showing year-on-year improvements in profits by some measure; though that is probably more a testatement to managements' fantastic statistical manipulation than great performance! Market reaction has been varied, as ever, and there are obviously many factors at play here; but given the minute P/Es all three companies are trading on, a continuation or  improvement in their profitability is exactly what I expect and hope to see. It follows that if their other issues are sorted, they'll probably be due for a re-rating; as well-financed growing companies rarely trade on low single digit P/Es.

    Plastics Capital


    - Revenue down 0.3% - Operating profit down 3% - Profit before tax up 10.5% - Reported pre-exceptional profit down 9.2%

    A rather mixed set of statistics, and I've put the most borderline of the three sets of results first. Their niche plastics business has been impacted by the recession and earthquake related supply-chain issues as the core issue of less demand fed through to their products, but the chairman was quick to point out that the business is growing in one sense; new business is compensating for less volume in existing business, which will hopefully provide a good basis for recovery whenever that golden day does come. The business's niche focus and market dominance in a number of very specific products means that they have a very low rate of attrition, as customers rarely have a great deal of choice, and long-standing relationships presumably are prohibitively expensive to change. (more…)