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

[Aurel]

I have a small position in Burford Capital. They do litigation financing.

Disclaimer: Muddy Waters is/was short.

Edited September 26, 2022 by Aurel

[Spekulatius]

Looks to me like the GBP and the UK economy is melting down. I follow GHH (Gooch and Housego) simply because I dealt with them in the past with my job and a new some folks working there and the stock has lost half it's value this year and then there are the GBP losses on top. The stock looked quite overvalued and I can't make a valuation case even now, but that performance is really something to behold.

[Gregmal]

Oxford Metrics I’m not sure I’d call a UK company but it trades in London and is stupid cheap.

[Dinar]

2 hours ago, Spekulatius said:

Looks to me like the GBP and the UK economy is melting down. I follow GHH (Gooch and Housego) simply because I dealt with them in the past with my job and a new some folks working there and the stock has lost half it's value this year and then there are the GBP losses on top. The stock looked quite overvalued and I can't make a valuation case even now, but that performance is really something to behold.

The company diluted shareholders at the bottom in 2009, so a hard pass for me.  

[Dinar]

2 hours ago, Gregmal said:

Oxford Metrics I’m not sure I’d call a UK company but it trades in London and is stupid cheap.

Greg, what's the thesis?  Thank you

[Gregmal]

6 minutes ago, Dinar said:

Greg, what's the thesis?  Thank you

VICON. Basically their motion capture technology and equipment is in everything from movies, to videos games, to sports and life sciences. Balance sheet flawless. Conservatively managed. Total bitch to accumulate though but worth a look. 

[Spekulatius]

2 hours ago, Dinar said:

The company diluted shareholders at the bottom in 2009, so a hard pass for me.  

 I have no opinion on the stock which looks expensive to me. it's a rollup in the optical field.

UK management teams easily get scared in downturns and don't make much fuzz about diluting shareholders at the bottom. Something to keep in mind with the current carnage.

[UK]

Not about small caps, but seems interesting:

 

https://www.wsj.com/articles/u-k-markets-are-on-sale-nobody-wants-to-buy-11665996328

 

“It’s an untouchable market right now,” said Viraj Patel, a London-based global macro strategist at Vanda Research. “You could easily make a case where things get progressively worse from here.” 

 

“Those elements are completely incompatible,” Ms. Ielpo said, noting that while U.K. stocks trade at a large discount, he views few opportunities. “We don’t think valuations are a relevant indication” for U.K. equities.

[Dinar]

1 hour ago, UK said:

Not about small caps, but seems interesting:

 

https://www.wsj.com/articles/u-k-markets-are-on-sale-nobody-wants-to-buy-11665996328

 

“It’s an untouchable market right now,” said Viraj Patel, a London-based global macro strategist at Vanda Research. “You could easily make a case where things get progressively worse from here.” 

 

“Those elements are completely incompatible,” Ms. Ielpo said, noting that while U.K. stocks trade at a large discount, he views few opportunities. “We don’t think valuations are a relevant indication” for U.K. equities.

May be he is not looking hard enough?  I have found plenty of opportunities in UK, including world class businesses.

[changegonnacome]

UK listed small caps with little to actually do with the UK in terms of revenues are very attractive….the pound is both a valuation tail wind if/when the currency Re-rates and it’s a tailwind for the business fundamentals if majority of currency earned is in FX and the cash gets deployed into buybacks in Sterling.

 

The U-turn the Tory government did today Re:budget is quite something and in some ways to be commended…..the front benches of the Tory government might be filled with lunatics but the Tory men in ‘grey suits’ seem to be running the country now….these are pragmatic people.

[changegonnacome]

1 hour ago, Dinar said:

I have found plenty of opportunities in UK, including world class businesses.

Any tickers in particular?….want to do some more digging myself 

[longlake95]

Fever-tree (FEVR)

[Dinar]

43 minutes ago, changegonnacome said:

Any tickers in particular?….want to do some more digging myself 

I own Spirax Sarco Engineering, Ashtead Plc.  Porvair, Diageo, Relx, Experian and Cranswick are all in the on-deck circle.  If they either come in 5-15%, or I get cash I will buy them, ceteris paribus.  

[changegonnacome]

20 minutes ago, Dinar said:

I own Spirax Sarco Engineering, Ashtead Plc.  Porvair, Diageo, Relx, Experian and Cranswick are all in the on-deck circle.  If they either come in 5-15%, or I get cash I will buy them, ceteris paribus.  

 

Thanks will check em out

[UK]

5 hours ago, Dinar said:

May be he is not looking hard enough?  I have found plenty of opportunities in UK, including world class businesses.

 

When phrases like "untouchable" and "valuation does not matter" are used (and they are not about Russia or even China or simillar country) I am pretty sure they are speaking so under srong influence of the recent price action:)

 

[UK]

4 hours ago, changegonnacome said:

UK listed small caps with little to actually do with the UK in terms of revenues are very attractive….the pound is both a valuation tail wind if/when the currency Re-rates and it’s a tailwind for the business fundamentals if majority of currency earned is in FX and the cash gets deployed into buybacks in Sterling.

 

The U-turn the Tory government did today Re:budget is quite something and in some ways to be commended…..the front benches of the Tory government might be filled with lunatics but the Tory men in ‘grey suits’ seem to be running the country now….these are pragmatic people.

 

Despite all these missteps, I think UK is the closest thing to US, here in EU, and it will be fine in the long term or at least relatively will do better than rest of the Europe.

Edited October 18, 2022 by UK

[CorpRaider]

Yeah, if that ARE the new Italy, unlike Italy they can float their own currency and we can get all our clothes from Savile Row or maybe get a British made Land Rover in a few years and their balance sheet will improve.

[thowed]

11 hours ago, UK said:

 

Despite all these missteps, I think UK is the closest thing to US, here in EU, and it will be fine in the long term or at least relatively will do better than rest of the Europe.

 

I broadly agree, though if I had to choose one Euro country, I would tend to choose Switzerland - it may be a cycle again for Mittelstand Industrials, and many good managers.

[Spekulatius]

11 hours ago, UK said:

 

Despite all these missteps, I think UK is the closest thing to US, here in EU, and it will be fine in the long term or at least relatively will do better than rest of the Europe.

I am not sure about that. The Tory's in grey suits are just a boys club running the country in the ground, it seems to me. They are more of a problem than the solution. Look at where they come from - half these folks know each other from Cambridge and Eton Colleges.

 

The UK has very little manufacturing and not much high tech. A lower GBP does not help them, but hurts their outsized financial sector. 

 

FWIW, I think the UK market looks cheap, because of the composition of the index. Lot's of energy, financials, mining. the same stocks are cheap in US markets as well.

https://siblisresearch.com/data/ftse-100-sector-weights/

Edited October 18, 2022 by Spekulatius

[UK]

3 hours ago, Spekulatius said:

I am not sure about that. The Tory's in grey suits are just a boys club running the country in the ground, it seems to me. They are more of a problem than the solution. Look at where they come from - half these folks know each other from Cambridge and Eton Colleges.

 

The UK has very little manufacturing and not much high tech. A lower GBP does not help them, but hurts their outsized financial sector. 

 

FWIW, I think the UK market looks cheap, because of the composition of the index. Lot's of energy, financials, mining. the same stocks are cheap in US markets as well.

https://siblisresearch.com/data/ftse-100-sector-weights/

 

I agree re index composition, more or less similar situation everywhere vs SNP500. RE UK: they have their currency, borders, language, top universites, positive demography via controlled skilled imigration (if they want) etc. I would not loose my sleep owning assets in UK in the long term and if I was forced to invest only in assets in Europe, UK definately would be on the top of the list.

 

[thowed]

The UK is very two-tier.

FTSE100 is mostly cheap value - as Spek says, "Lots of energy, financials, mining."  Shell & BP are probably pretty easy buys - the rest I'm not so sure about.

 

Then there's the odd interesting co e.g. Ashtead, covered a fair bit on here, and pretty much a US company.  Diageo.  London Stock Exchange has outperformed Nasdaq over the longer-term.  Rightmove is Zillow for the UK but hasn't done stupid stuff.

 

The rest of the UK has some really impressive small caps.  Fevertree could become one of the next great global brands.  Abcam has divided opinion but so far has been an impressive biotech.

 

Many of these are beloved by Lindsell Train - I recommend their literature.  For small-caps, I'd recommend the thorough Annual Reports of Aberdeen UK Smaller Companies Investment Trust - the retiring manager is a legend.

 

 

[ACooke]

6 hours ago, thowed said:

 

The rest of the UK has some really impressive small caps.  Fevertree could become one of the next great global brands.  Abcam has divided opinion but so far has been an impressive biotech.

 

Out of curiosity, is there anything in particular that makes you believe Fevertree could be one of the next great global brands?

It seems like drinks co's (and similar) are a dime a dozen. They commonly seem to make an initial, big splash then sink - it seems very faddish. However, the ones that grab hold are typically big winners.

At initial glance, the valuation looks intriguing although their margin trend concerns me a little. Expansion maybe?

Heaps of cash, little/no debt. Doesn't look like they need to spend a real lot on capex. Minimal dilution, stock comp looks reasonable.

The build up of cash and dividends makes me think they may be struggling for re-investment opportunities, which is fine. I'd rather them fling the cash back to shareholders than blow it on garbage acquisitions or similar. 

Edited October 19, 2022 by ACooke

[longlake95]

I wouldn’t take the recent margin trend as any indication of Fever Tree’s future prospects. They have been hurt lately (last 24 months) with soaring shipping costs, high glass prices etc. those costs are likely to abate as inflation settles down and the new bottling plants are up and running. FEVR is a leader in the premium mixer category. Premiumisation, is a secular shift that is not stopping. People, particularly under 40 now drink/eat premium coffee, beer, spirits and food. Show me a Gen z that drinks Beefeater and cheap-ass grocery store tonic and I’ll show you a unicorn. They seem to have a long runway of growth outside the UK.

[formthirteen]

Sabre Insurance Group plc (SBRE.L), which is based in Dorking and owns a brand named ”Go Girl”, seems very interesting.

 

£355m in dividends and share buybacks (2001-2018) vs. £199m in EV right now.

 

There is one article on VIC:

https://www.valueinvestorsclub.com/idea/Sabre_Insurance/3638099628

 

Quote

Sabre Insurance Plc is a UK private motor insurance underwriter. It was founded in 1982 and over the last decade, it has built a strong track record in underwriting performance, with a Loss Ratio of 53% on average since 2008.

 

Quote

Over the last 18 years, the group has paid out £355 million in dividends and share buybacks, approximately 53% of the current market cap. Since 2013, dividend payments add up to £222 million, 34% of the market cap.

 

Quote

Sabre operates a fairly simple motor insurance business. They do not use Quota Share or Co-insurance to leverage capital requirements, and write business only when they think they can achieve an 80% combined ratio or better, which is a very high threshold. The implication of this combined ratio target is that they need to exert high levels of discipline when deciding which risks to cover and must by definition grow at lower rates when the risks available are not attractive.

 

Stock price plummeted in June due to inflation:

Quickfs profile:

 

 

Inflation sent shares in car insurers tumbling:

https://finance.yahoo.com/news/car-insurers-see-shares-tumble-115140995.html

 

Quote

 

Shares in car insurers were sent tumbling into the red on Thursday after motor insurer Sabre warned over a hit from soaring costs as rampant inflation begins to take its toll on the sector.

Sabre Insurance Group saw its stock plummet by as much as 39% at one stage after it said the cost of claims had jumped to around 12% – from 8% last year – due to rising costs across the board, including parts, labour, credit hire, paint and car values.

It said this is set to impact its profitability, sending shivers through the rest of the sector on the London Stock Exchange, with Admiral plunging 14% and Direct Line 10% lower.

 

 

Quote

Sabre said “extraordinary inflationary pressures” are set to see its combined operating ratio – a key measure of profitability for insurers showing costs and claims as a proportion of premiums – rise to 98.9% in the half-year to June 30 against the more profitable 74.4% seen a year ago.

 

Quote

The group has been hiking prices in response – up 19% in the year to date – but this has in turn knocked demand, with gross written premiums on the motor book around 10.6% below the same levels seen a year earlier.

 

Is this a falling knife? Risks include GBP, inflation, competition, robocars (LOL), etc.

[Spekulatius]

FERG (a UK company but virtually all their business is in the US) is another one I am following. It's a distributor, somewhat similar to WSO. Recent podcast discusses it:

https://podcasts.apple.com/us/podcast/value-hive-podcast/id1492171651

 

I think it's overearning right now, but it's an interesting stock to look at.

 

 

Edited October 19, 2022 by Spekulatius