UK Small Companies' valuations seem highly attractive for long term investors

[UK]

Does anyone has any opinion on SFOR (S4 Capital)? 

 

https://www.thedrum.com/opinion/2021/08/19/why-sorrell-s-s4-capital-just-so-damn-attractive-right-now

 

https://www.theguardian.com/business/nils-pratley-on-finance/2022/jul/21/s4-capitals-share-slump-means-sir-martin-sorrell-has-a-crisis-on-his-hands

 

Edited January 22, 2023 by UK

[Spekulatius]

The Uk looks more and more like an emerging market to me:

https://finance.yahoo.com/news/prepare-pain-britain-hurtling-towards-050000881.html
 

Feels like Greece 2010. Inflation 8.7%….

Edited May 29, 2023 by Spekulatius

[changegonnacome]

I follow the UK fairly closely - it's sad to see how far its drifted since 2016......I think its fair to say that Britain has been at war with itself since the Brexit referendum......and the political class in response to that civil war has suffered a significant brain drain/exodus of the most competent & trustworthy leaders...both Labour & Tory......the last two PMs might go down in history as the worst one/two combo the UK has ever produced in terms of competency, credibility, character & ability......Boris Johnson > Lizz Truss......the UK is lucky that Sunak was still a serving politician and had not returned to investment banking such that he could pick up the pieces after the Johnson/Truss debacle & restore some faith in the UK as a fiscal authority with the markets and as partner with the EU which allowed for a resolution of the EU/UK trade deal. This is not to suggest that Sunak is some kind of genuis political operator (he isn't)....he is however honest, hard working & a pragmatist not wholly focused on his own re-election but doing what makes the most sense for the UK longer term.

 

The Bank of England, I would suggest, likely needs to assert its independence as fully as it can now to get inflation under control while Sunak is in No.10 & Hunt in No.11......the residents of those addresses, if they were to change, might not be so respectful of central bank independence moving forward.

 

Having said all that I agree with this recent podcast - https://www.bloomberg.com/news/articles/2023-05-26/podcast-rob-arnott-says-why-uk-value-stocks-are-still-the-trade-of-the-decade?srnd=premium&sref=7zqHEcxJ

 

You can find stocks on the LSE with pretty much nothing to do with the UK's economy......and better still you can find stocks who's main trading currency is Euros but the listing is quoted in GBP's....its a nice FX tailwind for buybacks as lots of the smaller stocks really don't seem to move much on the underlying FX/trading movements. I think the level of M&A in this company cohort is going to go through the roof in the next year or two.

[SharperDingaan]

Keep in mind that where you live has a lot to do with this view.

We have a great many UK acquaintances who are depressed ... almost entirely because they live in the UK. Lots of reasons .... high inflation, high interest rates, too much debt, widespread mismanagement, debasing pound, loss of EU status, yada, yada. Yet ..... despite such a terrible environment ....  almost nobody is willing to get on a plane? ... and leave for greener pastures ??

 

There are a lot of very good invitation-only private UK companies for sale, going for a song; simply because the founders want to partner up, cut back on their involvement, and train up a successor. They are tremendous opportunities, and we have a nephew in such a partnership. 

 

During our London property re-development, we used seismic detection to assess ground stability net of land disturbances (heavily bombed area during WWII) and burial sites. Small diameter directional drilling, placement of a seismic vibrator in different sections of the bore, and an electronic detector. As seismic waves travel differently through voids/disturbances vs solids, the time differences can be used to both locate the disturbance in 3D, and estimate its shape; very useful when council planning requirements are an issue.

 

Some discussion later, and we're using the technology for burial detection in flooded areas (Canada's residential schools), and geo-locating dinosaur bones in bogs/sedimentary basins.

 

The nephew being on two digs this season. 

 

SD

 

 

 

  

 

  

 

 

   

Edited May 29, 2023 by SharperDingaan

[Spekulatius]

19 minutes ago, SharperDingaan said:

As seismic waves travel faster through voids/disturbances vs solids, the time differences can be used to both locate the disturbance in 3D, and estimate its shape; very useful when council planning requirements are an issue.

 

Some discussion later, and we're using the technology for burial detection in flooded areas (Canada's residential schools), and geo-locating dinosaur bones in bogs/sedimentary basins.

 

The nephew being on two digs this season. 

 

SD   

I am not saying your tech doesn’t work, but seismic waves travel faster through solids then through voids. My guess is they detect reflections from density disturbances not the speed. To measure propagation speed(for indirect density measurements)  you need an emitter and a sensor distant from each other.

Edited May 29, 2023 by Spekulatius

[Spekulatius]

4 hours ago, changegonnacome said:

I follow the UK fairly closely - it's sad to see how far its drifted since 2016......I think its fair to say that Britain has been at war with itself since the Brexit referendum......and the political class in response to that civil war has suffered a significant brain drain/exodus of the most competent & trustworthy leaders...both Labour & Tory......the last two PMs might go down in history as the worst one/two combo the UK has ever produced in terms of competency, credibility, character & ability......Boris Johnson > Lizz Truss......the UK is lucky that Sunak was still a serving politician and had not returned to investment banking such that he could pick up the pieces after the Johnson/Truss debacle & restore some faith in the UK as a fiscal authority with the markets and as partner with the EU which allowed for a resolution of the EU/UK trade deal. This is not to suggest that Sunak is some kind of genuis political operator (he isn't)....he is however honest, hard working & a pragmatist not wholly focused on his own re-election but doing what makes the most sense for the UK longer term.

 

The Bank of England, I would suggest, likely needs to assert its independence as fully as it can now to get inflation under control while Sunak is in No.10 & Hunt in No.11......the residents of those addresses, if they were to change, might not be so respectful of central bank independence moving forward.

 

Having said all that I agree with this recent podcast - https://www.bloomberg.com/news/articles/2023-05-26/podcast-rob-arnott-says-why-uk-value-stocks-are-still-the-trade-of-the-decade?srnd=premium&sref=7zqHEcxJ

 

You can find stocks on the LSE with pretty much nothing to do with the UK's economy......and better still you can find stocks who's main trading currency is Euros but the listing is quoted in GBP's....its a nice FX tailwind for buybacks as lots of the smaller stocks really don't seem to move much on the underlying FX/trading movements. I think the level of M&A in this company cohort is going to go through the roof in the next year or two.

I actually struggle with the FX aspect of Uk small cap stocks. The GBP is up almost 20% against the USD from the lows, so depending on when an Uk company reported and how much of their revenue are outside the UK, you need to make huge adjustments. These currency fluctuation are also quite damaging to the Uk economy, again similar to what happens in EM’s. They basically  increase the cost of capital. Then you have the 8.7% inflation issue.

 

I just run a Greenblatt /magic formula like screen for some counties in Europe and get many hits in the UK but also Italy. I have in the past done better in Italy in the the Uk, but there are quite a few small cap pot. gems in both countries.

Edited May 29, 2023 by Spekulatius

[SharperDingaan]

Typically the more dense the medium the faster the transmission speed, and the less energy absorption there is; in close-up application, the collector is working primarily off energy absorption, and echo reflection from disturbances. The detectors signal feed is calibrated to what is expected, the exceptions amplified, and then run through an algorithm to determine potential attribution.

 

Drill 2-3 holes, put the detectors in both the holes and on the surface, and you can get a localized computer generated 3D interpretation with minimal disturbance. While the tech is not overly precise, versions of it have been in European use for decades as a means of detecting unexploded bombs.

 

In archaeology, bones show up as a hard echo return. As there is more space to work with in remote locations, emitters can be on the surface and using a much more powerful signal, whilst detectors can be either on the surface (some distance away) or in the substrate itself. Were this o/g you would use the geophysics to find oil/gas traps in the sediment layers, and estimate what is there; thereafter if it is promising, it would be drilled to prove if you're correct or not.     

 

The value-add is in the interpreting algorithm; the emitters/detectors used to generate/collect signal are old technology. And as with all AI, the more data that you can train it on the better it gets. The tech that we were using could detect iron vs concrete vs plastic pipes, eliminate aluminum cans and shrapnel, and draw 'interpretive' 3D maps of piping, foundations and underground anomalies, adjusted for land slip over the years. Bomb craters and graves showing up as undefined black blobs. 

 

SD

[changegonnacome]

1 hour ago, Spekulatius said:

I actually struggle with the FX aspect of Uk small cap stocks. The GBP is up almost 20% against the USD from the lows, so depending on when an Uk company reported and how much of their revenue are outside the UK, you need to make huge adjustments.

It can be a short term headwind for sure…..the GBP mkt cap quote doesn’t reflect underlying trading currency strength or company performance…lots of companies are simply re-listing to the US or Euronext..Hostelworld which is the name I’m mostly involved in there…..has both a nano cap discount and this underlying Euro trading currency/GBP discount…..a discount is only as good as the catalyst which solves it however……my nano cap problem will be solved by HSW scaling to revenue and mkt cap relevance and/or M&A…M&A is going to large catalyst for many UK value names IMO..…and I do believe that the UK to an extent is exiting its 2016-2022 Brexit fever dream….and stepping back into a world of pragmatism not idealism mixed with tribalism…..the UK is an amazingly civilized place with great in-place human capital/universities and given its attractiveness as a place to live it has an ability to attract the best and brightest globally. In short I think they emerge from this mess in a good position and in a reasonable timeframe which should see further GBP strength and flows back to LSE listed entities in time. The Tory Brexiteers and Corbyn-istas….kind of had their time in the sun and between them they wrecked the UK…..I hope….what we are seeing with Sunak and Starmer is a rush back to the Centre.

[ACooke]

Does anyone want to share any particular names they're interested in here?

 

I think there's a bunch that are interesting but tied to construction and/or renovation.

 

I think Somero, Andrew Sykes, Headlam, Howden Joinery are all interesting but influenced in varying degrees by the above.

 

Edited May 31, 2023 by ACooke

[KJP]

6 hours ago, ACooke said:

Does anyone want to share any particular names they're interested in here?

 

I think there's a bunch that are interesting but tied to construction and/or renovation.

 

I think Somero, Andrew Sykes, Headlam, Howden Joinery are all interesting but influenced in varying degrees by the above.

 

 

These may interest you:

 

Macfarlane Group

Sabre Insurance

 

You may also find some interesting UK small caps at these two blogs:

https://perlican.substack.com/

https://lewissrobinson.com/  (@expecting value on Twitter)

 

[ACooke]

18 hours ago, KJP said:

 

These may interest you:

 

Macfarlane Group

Sabre Insurance

 

You may also find some interesting UK small caps at these two blogs:

https://perlican.substack.com/

https://lewissrobinson.com/  (@expecting value on Twitter)

 

 

Fantastic. Thanks KJP.

I am familiar with Macfarlane and Lewis Robinson but not so with Sabre or Perlican so I'll jump straight in to them.

[Spekulatius]

On 5/31/2023 at 1:13 AM, ACooke said:

Does anyone want to share any particular names they're interested in here?

 

I think there's a bunch that are interesting but tied to construction and/or renovation.

 

I think Somero, Andrew Sykes, Headlam, Howden Joinery are all interesting but influenced in varying degrees by the above.

 

Somero is one I am aware of. Special machinery for concrete application. Maybe a hidden champion. The business is quite cyclical though. They do operate world wide.

[ACooke]

19 hours ago, Spekulatius said:

Somero is one I am aware of. Special machinery for concrete application. Maybe a hidden champion. The business is quite cyclical though. They do operate world wide.

I like the business a lot.

 

They do operate worldwide however something like 75% of revenue is from NA off of the top of my head.

They are focusing on growth particularly in Australia and Europe and are semi-winding down their China segment - essentially just servicing existing customers for the most part - from what I understand.

 

I think probably my largest concern outside of the cyclicality (mainly tied to non-resi US construction), is whether their volumes are contracting and if so - why.

The reason I question whether they are is because they've added additional groups of machinery over the years and I think it's likely that certain of them are things that would have previously landed under the boomed and ride-on screed categories. So if the historical screed categories are trending down (I'm not sure they are, it's difficult to tell with the noise of the last few years) then that may purely be due to the historical screed categories being mixed in to 2 or 3 additional/new equipment categories rather than 1.

 

They do name the machinery so that should be very easy to nut-out. Where volumes will normalize is a little more difficult for me to grasp. They do have some newish (I believe?) competition within the NA market too.

 

Anyway, intriguing business for sure.

 

 

[formthirteen]

@Spekulatius Somero seems like almost a too good deal, but I bought a starter position anyways. Thanks for the tip.

 

20 hours ago, Spekulatius said:

Somero is one I am aware of. Special machinery for concrete application. Maybe a hidden champion. The business is quite cyclical though. They do operate world wide.

 

[mjm]

2 hours ago, formthirteen said:

@Spekulatius Somero seems like almost a too good deal, but I bought a starter position anyways. Thanks for the tip.

 

 

Seem to be based US.  Why do they trade in London?

[Spekulatius]

I am not sure where this belongs since it’s Macro , but when I was playing with the trueflation site, I noticed they have the UK inflation too:

If this is real, the UK is effed. Worse than the 70’s actually…

 

[ACooke]

20 hours ago, Spekulatius said:

I am not sure where this belongs since it’s Macro , but when I was playing with the trueflation site, I noticed they have the UK inflation too:

If this is real, the UK is effed. Worse than the 70’s actually…

 

It'd be interested to see where they'd put Australia because things seem, and have seemed pretty spicy here too.

[Spekulatius]

There is a VIC writeup on Wickes, which appears to be losely a similar business than HD:

 

https://www.valueinvestorsclub.com/idea/Wickes_Group_plc/2454960235

 

I can make head or tails out of the metrics that the author is posting. He ignores leas liabilities (Ok) but even accounting for that, what he posts makes no sense. Wickes is a highly levered business and seems to be far less profitable than HD in any case.

 

Has anyone looked into this? is is just me, but with some VIC writeups the metrics seem to be almost completely made up.

 

https://www.wickesplc.co.uk/investors/investors-overview/results-reports-and-presentations/

[kab60]

17 minutes ago, Spekulatius said:

There is a VIC writeup on Wickes, which appears to be losely a similar business than HD:

 

https://www.valueinvestorsclub.com/idea/Wickes_Group_plc/2454960235

 

I can make head or tails out of the metrics that the author is posting. He ignores leas liabilities (Ok) but even accounting for that, what he posts makes no sense. Wickes is a highly levered business and seems to be far less profitable than HD in any case.

 

Has anyone looked into this? is is just me, but with some VIC writeups the metrics seem to be almost completely made up.

 

https://www.wickesplc.co.uk/investors/investors-overview/results-reports-and-presentations/

Highly levered? Do you count their leases as debt? Ignoring leases, they have 100m net cash per last Q.

 

The accounting for UK companies with leases is confusing and makes the cash flow statement a mess. But I agree Wickes is definitely no HD.

Edited June 21, 2023 by kab60

[Spekulatius]

@kab60 The balance sheet is interesting. Their payables are larger than the inventory. Also, it seems that not only have leased the building but also the equipment.

There is only 160M GBP of equity for a 1,100M GBP balance sheet of which ~690M is lease liability. I guess you could say it’s a pretty efficiently run business. I do think this amounts to considerable operational leverage. Some of the cash is probably not fungible or they would run a net negative working capital.

 

Edited June 21, 2023 by Spekulatius

[kab60]

7 hours ago, Spekulatius said:

@kab60 The balance sheet is interesting. Their payables are larger than the inventory. Also, it seems that not only have leased the building but also the equipment.

There is only 160M GBP of equity for a 1,100M GBP balance sheet of which ~690M is lease liability. I guess you could say it’s a pretty efficiently run business. I do think this amounts to considerable operational leverage. Some of the cash is probably not fungible or they would run a net negative working capital.

 

Not saying this is an Autozone either, but those guys run with negative equity and negative working capital - basically having suppliers finance their operation. And I wouldn't call them levered either at 2xnet debt/ebitda. I'm not saying the cash at Wickes is 'free' per se, of course they want some at hand, but if they were aggressive they'd probably finance that through a revolver or term loan instead of equity.

 

Like most retailers Wickes has a ton of operating leverage, and long term leases are obviously dangerous if things turn south. But I think that's just the life of being a retailer. Sure some own their real estate, which they can selloff piece-meal if things turn to shit, but in reality that rarely works out either, as we all know (cutting off limps to try and stop the bleeding...).

 

I've been looking at Wickes on-off over the last couple of years and think it looks pretty cheap, I just don't think it's better than a lot of alternatives.

[hasilp89]

@kab60 have you ever looked at howdens? 

[kab60]

3 minutes ago, hasilp89 said:

@kab60 have you ever looked at howdens? 

Yes. It seems like a great little business, I just don't think it looks particularly interesting from a valuation perspective considering the cyclicality.

 

I like Kitwave, Macfarlane, S&U and Sabre Insurance around these levels. Also think Pendragon is interesting as a special situation of sorts. But the UK is where capital returns go to die, so I'd probably not go balls long any of those names.

 

Mortgage Advice Bureau and Belvoir Lettings are also interesting plays on housing (and inflation).

[Spekulatius]

OT -

Digging into this book about Spirax- Sarco, which you can order for free (!) from the company. Ordered it a week or so ago and it just arrived today. My wife thinks I am crazy.

https://spiraxhistory.subscription.expert/

 

[brobro777]

24 minutes ago, Spekulatius said:

OT -

Digging into this book about Spirax- Sarco, which you can order for free (!) from the company. Ordered it a week or so ago and it just arrived today. My wife thinks I am crazy.

https://spiraxhistory.subscription.expert/

 

 

Holy moly that looks like a lot of complicated, annoying reading

 

I'll just stick to the few things I know, like BTI cigarettes!