The Small Cap Veteran - 12 Jan 2021

He has been around the track a few times, now this former stockbroker and AIM company boss, gives us his views and pointers on his specialist subject – The UK Smaller Company Sector.

His comments are his own, he is not giving readers advice on whether you should Buy, Sell or Hold any of the companies that he might mention in his market ramblings.

He does not know what you might be looking for in your market dealings, so it is imperative that you must make up your own mind on his column’s content.

Check up on the Research Tree Company Profile pages in helping forge your own opinions.

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My Research-Tree ‘Pick of the Bunch’

Waste not, want not?

Nowadays, in such times of sustainability, I like to look at waste.

No, it is not some weird quirk, nor desperation from a penniless state.

However, it is a way of assessing value from what is discarded.

Sustainable societies are defined as towns and cities that have taken steps to remain healthy over the long term. It is such communities that value healthy eco-systems, use resources efficiently and actively seek to retain and enhance a locally based economy. 

And this is a growing trend.

Within the UK Small Caps arena there are two companies that I follow very closely and consider that have very good investment potential from being stuck deep in waste.

Augean (AUG) – 197.5p, mkt cap £210m.

Augean considers that it leads the way in providing sustainable, compliant-led waste management solutions where best practice is considered normal practice.

The company is a specialist waste and resource management group serving the hazardous waste management sector, the oil and gas industry and the nuclear and radioactives sector, operating at locations across the UK from Avonmouth to Shetland.

It also has a subsidiary company that specialises in the development of innovative solutions to manage all waste streams derived from North Sea exploration, production and decommissioning activities.

The group states that it is strategically positioned to provide strong commercial and compliance-led solutions in complex and legislation driven markets. It provides a wide range of services through its treatment, transfer, industrial services, landfill disposal, recovery and recycling capability.

The company states that its core strategic markets are ‘Energy from Waste’, construction soils, treatment, nuclear and North Sea decommissioning.

The interim results last September for the six months to end June 2020 witnessed the impact of Covid-19 upon the company and its activities.

Although it had actually managed to stay fully operational at all of its sites it saw revenues down from £44.2m to £41.4min the first half, while its adjusted pre-tax profits fell from £9.6m to £8.5m.

Brokers to the company N+1 Singer reckoned that the interim results showed resilience. For the full year to end December last they have estimated £96.2m of sales and £20.4m of pre-tax profits, worth 15.7p per share in earnings.

For the current year they see £103.6m revenue and £24.1m profits, with 18.5p of earnings.

Research house Edison Investment was encouraged that the group’s cash flow had remained strong, which should have shown a positive net cash position by the end of last month. Their analysis suggests £93.5m sales and £19.8m profits, with 15.4p earnings for 2020.

The group’s shares ahead of the end of year Trading Update are steady at 197.5p.

At that level I can envisage them rising back above their 241p High achieved just a year ago.

The group’s Trading Update for the finals to end December is due within days.

Renewi (RWI) – 43p, mkt cap £344m.

This group, which was the result of the 2017 merger of the Shanks Group with Van Gansewinkel BV to create a leading international waste-to-product business.

It exclusively focusses upon extracting value from waste rather than on its disposal through either mass burn incineration or landfill.

Collection is the group’s biggest division, it is centred around the collection and treatment of commercial waste in the Netherlands and Belgium.

Its Mineralz & Waste division handles decontamination, stabilisation and the re-use of highly contaminated materials to produce certified secondary products for the construction industry in both the Netherlands and Belgium.

On its Specialities side its processing plants focus on recycling and diverting specific waste streams, with its operations in the UK, the Netherlands, Belgium, France, Portugal and Hungary.

In mid-November Edison put out a note raising its expectations for the Covid-19 disrupted year to end March 2021. On revenues of €1.58bn it looks for the group to have suffered a profit fall from €54.3m to €22.2m.

However, for the coming year it estimates €1.69bn of sales to generate a €46.4m profit, worth 4.3 cents a share in earnings.

When that note was published the shares were around 25p, today they are 43p. Ahead of the year-end it looks as though the group is gaining investor attention.

In conclusion, having looked at both waste companies, I do rate highly their ongoing investment attractions – a real opportunity to show that ‘where there is muck there is brass’.

And in other news...

What would George Washington have thought of it all?

Some 330 years ago he was the first American President, having led his Patriot forces to win the War of Independence, he was also involved in helping to shape the Constitution.

Centuries later, Washington must be looking down now with consternation at his country and those that are in power to govern his previous domain.

But looking at the markets

There is no doubt that the US stock market has done well, pushing the performance of the Dow Jones Index just over 57% higher in the period since Trump came to power.

The question I now ask is - will the US market carry on under its own steam?

Mega-valuations are scary

I have a growing fear of the valuations being put on various mega-groups, some of them being almost stratospheric.

But are they just a part of a massive US pandemic bubble that could soon burst?

Or will they all just continue powering away ad infinitum?

To the Moon, then Mars

After all, just take a look at the market valuation of Tesla Motors – just over $800bn.

It is worth more than the market capitalisations of the nine largest car companies in the world added together – that includes General Motors, Peugeot, Ford, Toyota, Nissan, Volkswagen, Fiat Chrysler.

The total global car production last year is estimated to have fallen from 16m vehicles to around 14.3m. Tesla delivered fractionally less than 0.5m vehicles in 2020.

I can see the value of Amazon, but question the valuations of Facebook and Apple.

But that is all about the US market and mega-stocks

My questioning in this article is about whether our market could get too influenced by any massive correction, that could ensue after the inauguration and taking of the powerful US reins by Joe Biden.

In relative terms, the Dow Jones Index, at over 31,000 points, is way out in front of our own FTSE 100, standing at almost 6800.

We have not kept pace with the US indices – does that mean we are lagging too far behind as the DJI keeps on going to new Highs?

Seriously though

That brings me back to the incredibly high ratings put on so many US stocks in a period of, what I consider to be, the current US lawlessness.

Will sanity return to the US political arena and the US stock market with the advent of Joe Biden and Kamala Harris?

Where are we going

As for our UK market – it has risen well in January, so far, taking it back to levels some 400 points higher than at the start of 2020, pre-pandemic.

Will a fall-back in the States quickly pull us back down again?

Yes, it so easily could do just that, slicing us by 400/500 points very rapidly.

A climb, take a rest, then go into limbo for a while

On looking at our market, I take the view that, after we have enjoyed a little post-Christmas/New Year euphoria, our market will soft-pedal for a short while, then easing back gently in the process.

Don’t expect quick

We must not take for granted that just because we now have a variety of vaccines to hand that Covid-19 is over. It isn’t and it will take a very long time to defeat.

Similarly, in our hopes for smart corporate recovery this year – until those vaccines are out and have been delivered to everyone in the country, we cannot assume that we have really started to return to previous levels of growth.

Ability to resume

Do not get me wrong, I am still optimistic that UK companies are beginning to feel less pain and have realised their ability to resume business again.

Strange as it may seem, that then brings me back to looking at our UK markets, and particularly the Small Caps.

We have, as always, masses of overvalued companies in our arena, but there remain a multitude of ‘value situations’ still out there well worth researching.

What do I look for

In seeking out ’value’ we should look for companies that have:

·      good balance sheets (even if they have borrowings),

·      good market positions with products that are competitively priced both at home and abroad,

·      good sales prospects,

·      good operating margins,

·      and creating reasonable earnings for both their workforce and their shareholders.

Not too much to ask for really is it?

With such criteria

That is where Research-Tree really does come in so very handy.

A quick assimilation of what various brokers have to say about a particular company, can justify the requirement to delve even deeper into how it operates, its markets and its potential.