Maynard Paton

[SharePad] Small-Cap Spotlight Report: NCC

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22 September 2023
By Maynard Paton

“Instead of buying back shares or raising dividends, profitable companies often prefer to blow the money on foolish acquisitions. The dedicated diworsifier seeks out merchandise that is (1) overpriced, and (2) completely beyond his or her realm of understanding. This ensures that losses will be maximised.”

Market legend Peter Lynch never liked great companies that ‘diworsified’ into less appealing sectors in the quest for growth.

His book One Up On Wall Street recounted how many famous US stocks blew big money on foolish acquisitions to ensure losses were maximised during the 1980s.

Diworsification sadly remains a popular management strategy, and UK small-caps have not been immune from ambitious boardrooms undertaking low-quality acquisitions and trying to prove Mr Lynch wrong.

NCC is a prime example. The IT group was once dominated by a terrific subsidiary, but lots of acquisitions created a series of mishaps and the shares are now back to where they were twelve years ago:

Let’s take a closer look.

Read my full NCC article for SharePad >>

Maynard Paton

SYSTEM1: Bumper Q4 Supports Stronger H2 2023 But New Marketing Course Raises Fresh Management Doubts And Leaves Disgruntled Shareholders Hoping For Trade-Sale Exit

15 September 2023
By Maynard Paton

FY 2023 results summary for System1 (SYS1):

A much stronger H2 versus the unsatisfactory H1, with disgruntled shareholders and proposed board changes prompting management to lift Q4 Data/Data-led revenue by a bumper 81%.

New partnerships and customer wins support the H1 strategic review, although partnership revenue and customer numbers remain frustratingly inconsistent and unclear.

Progress at Test Your Idea/Brand continues to be slow, with rival Zappi taking market share and an upcoming marketing course raising fresh doubts about management’s Data-platform focus.

Vague signs of favourable ‘operational gearing’ may now be emerging, although regular adjustments and capitalised IT still complicate reported earnings.

A deeply divided shareholder base and languishing share price may leave the door open for corporate activity, with global market-research groups hopefully able to recognise significant sales/cost benefits. I continue to hold.

TRISTEL: Record 81% Gross Margin Supports Positive H1 2023 As FDA Approval Creates 43M Disinfection Opportunity Alongside Management Ambition To ‘Double Revenue Over The Medium Term’

28 August 2023
By Maynard Paton

H1 2023 results and FDA approval summary for Tristel (TSTL):

A positive pandemic-recovery performance, with H1 revenue up 16% to a record £17.5m and H1 profit rebounding up to 33% albeit after a bevy of adjustments.

A record 81% gross margin helped offset greater H1 staff costs, with useful cash conversion keeping net cash above £8m — which oddly earns no interest.

The H1 effort was perhaps eclipsed by the subsequent FDA product approval, which creates the opportunity to capture 43 million US disinfection procedures and collect a revised 24% US royalty.

An informative open-day webinar revealed dividend cover was under review, option grants had been paused, H2 revenue per disinfection procedure had surged plus an ambition to “double revenue over the medium term“.

An estimated 23x P/E for FY 2026 is not an obvious bargain, but a premium rating could be justified by lucrative US income and management proposals to raise the group’s three-year targets. I continue to hold.

FW THORPE: Record H1 Shows Profit Up 34% After Supply Problems Ease Although Net Cash Declines To 16-Year Low And Shareholders Await Suitable Returns From Eventual £37m Zemper Acquisition

15 August 2023
By Maynard Paton

H1 2023 results summary for FW Thorpe (TFW):

A record H1 performance bolstered by acquisitions of Zemper and SchahlLED that showed total revenue up 29% and adjusted profit up 34%.

Thorlux and SchahlLED combined well, with adjusted Thorlux profit up 57% after supply problems eased and the launch of a new SmartScan system.

Mixed progress was delivered elsewhere, as Dutch profit fell 8% and Zemper not obviously living up to what could be an eventual £37m purchase price.

Net cash of £18m was the lowest for 16 years and no longer covers the anticipated earn-outs for Zemper (£12m) and SchahlLED (£7m).

A possible 20x P/E seemingly reflects TFW’s distinguished operating history and the persistent demand for energy-saving lighting rather than any doubts about the hefty acquisition expense and the uncertain wider economy. I continue to hold.

[SharePad] Screening For My Next Long-Term Winner: RECORD

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12 August 2023
By Maynard Paton

I have once again revisited a SharePad screen that applies two ratios favoured by ‘quality’ investors — operating margin and return on equity (ROE).

The exact criteria I re-used were:

An operating margin (latest and 10-year average) of 20% or more, and;
An ROE (latest and 10-year average) of 20% or more.

Any business with a persistent margin and ROE of at least 20% could be very special.

To narrow the field down further, I also sought companies that carried net cash (i.e. net borrowings excluding IFRS 16 finance leases of less than zero):

This time the filter yielded 20 matches, including Games Workshop, Hargreaves Lansdown, Plus 500 and Polar Capital.

I selected Record because it was among the better share-price performers of the last twelve months that I had not already studied for SharePad. Let’s take a closer look.

Read my full RECORD article for SharePad >>

Maynard Paton

M WINKWORTH: Acceptable FY 2022 Shows Ordinary Dividends Up 18% To Lift Yield To 7.6% But ‘Delayed’ Property Sales Prompt FY 2023 Warning And Reduces Possible Payout Cover Towards 1x

21 July 2023
By Maynard Paton

FY 2022 results summary for M Winkworth (WINK):

An acceptable FY performance that revealed ordinary dividends up 18% and remarkably took FY franchisee income close to the £64.8m exceptional level of FY 2021.

A subsequent trading update rather overshadowed the figures by admitting a “more challenging” housing market had “delayed” agreed sales and in turn caused current-year profit to run below expectations.

The “uncertain economic outlook“‘ had already reduced the proportion of franchisee commissions converted into revenue to 10% — WINK’s lowest percentage since at least 2009.

Healthy rental commissions, favourable competitor comparisons, resilient company-owned branches and cash-flush accounts suggest WINK should be well prepared for any house-price downturn.

Possible earnings around 12p per share may limit advances to the 11.4p per share trailing dividend, although net cash of £5m plus owner-directors who “prioritise” income should sustain the 7.6% yield. I continue to hold.

[SharePad] Small-Cap Spotlight Report: HOTEL CHOCOLAT

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15 July 2023
By Maynard Paton

I love ‘owner managers’ — company bosses with significant shareholdings who live and breathe their business and want to build wealth for the long haul.

Typically entrepreneurs, the owner-managers who lead quoted companies do seem to think and act differently to standard chief executives.

A hefty investment complemented perhaps by substantial dividends should certainly focus the mind on fundamental business matters…

…versus more common executive considerations such as bonuses, LTIPs, adjusted earnings and career progression.

But seeking owner-managers is not a foolproof way to identify your next great multi-bagger. Hotel Chocolat provides a useful example of what can go wrong even with devoted founders in charge.

The upmarket chocolate retailer floated at 148p during 2016 and its shares reached 530p the other year…

…but a series of mishaps has since dragged the price down to 120p and raised questions about the board’s decisions and composition.

Let’s take a closer look.

Read my full HOTEL CHOCOLAT article for SharePad >>

Maynard Paton

Q2 2023: Are You A Good Investor?

11 July 2023
By Maynard Paton

Happy Tuesday! I trust your shares are faring well during this underwhelming time for the market.

A summary of my portfolio’s progress:

Q2 return: -0.6%* (FTSE 100: -0.3%).
Q2 trades: None.
YTD return: +1.3% (FTSE 100: +3.2%).
YTD winners/losers: 6 winners vs 5 losers.

(*Performance calculated using quoted bid prices and includes all dealing costs, withholding taxes, broker-account fees, paid dividends and cash interest)

My year-to-date performance has not been fantastic as I look to recover from last year’s 23% drubbing. My portfolio currently requires a 29% advance to revisit its all-time high of December 2021.

Still, company RNSs from my portfolio were very acceptable during Q2. Dividends were held or raised and thankfully no surprise warnings emerged. As always, I am hopeful a mix of respectable competitive positions, capable managers and asset-rich balance sheets will steer my portfolio through whatever the economy has in store.

[Podcast] OCEAN WILSONS, TRISTEL And ARCONTECH With Roland Head, Mark Simpson, Bruce Packard And Maynard Paton

11 July 2023
By Maynard Paton

I have recorded another episode of The Investor’s Roundtable podcast with fellow investors and good friends Roland Head, Mark Simpson and Bruce Packard:

MAYNARD
PATON

ROLAND
HEAD

MARK
SIMPSON

BRUCE
PACKARD

We talked about Bruce’s investment in shipping and investment group Ocean Wilsons (OCN), my investment in disinfectant specialist Tristel (TSTL) and Mark’s investment in software developer Arcontech (ARC). We also discussed whether private investors should consider asset allocation within their portfolios:

[Podcast] INTEGRAFIN With Roland Head And Maynard Paton

04 July 2023
By Maynard Paton

I have recorded another podcast with fellow investor and good friend Roland Head. This time we talked about IntegraFin, the FTSE 250 investment platform that offers many attractive qualities for long-term shareholders.

We discussed the recurring nature of the group’s revenue, the focus on serving financial advisers, the appealing-but-complicated financials and how the business compares to retail-investor platforms Hargreaves Lansdown and AJ Bell:

CITY OF LONDON INVESTMENT: Possible 34p EPS Just About Supports 33p Per Share Dividend And 7.8% Yield After H1 2023 FuM Slides 18% And Q3 Update Admits Client Fees Cut To 71 Basis Points

01 July 2023
By Maynard Paton

H1 2023 results summary for City of London Investment (CLIG):

“Choppy” market conditions causing funds under management (FuM) to slide 18% to $9b led to revenue dropping 9% and profit diving 26%.

Significant new clients remain very elusive, with H1 outflows of $107m negating the inflows enjoyed during FY 2022 and aggregate withdrawals reaching $404m at merger partner KIM.

Rising staff costs represented 42% of revenue following a 24% profit share, and questions remain as to whether i) employees rank ahead of shareholders, and ii) the total-return KPI really stretches management.

The follow-up Q3 update admitted fee rates had declined from 73 to 71 basis points, as clients seemingly chip away at charges after perhaps watching the cheaper S&P 500 continue to outrun their CLIG portfolios.

Reduced FuM, lower fees and greater expenses now point to earnings of 34p per share that just about support the 33p dividend and 7.8% yield. Capital gains meanwhile look dependent entirely on a broad market recovery. I continue to hold.

MINCON: FY Profit Hits Record €20m As Stock Level Balloons To €77m, Free Cash Flow Squeezed To €2m And Greenhammer Lifespan Set To 15 Years

24 June 2023
By Maynard Paton

FY 2022 results summary for Mincon (MCON):

A positive performance buoyed by healthy post-pandemic orders, showing revenue up 18% (to €170m) and profit up 9% (to €20m) to set new FY records.

Bumper construction income, greater direct sales and increased US revenue counterbalanced weaker mining activity in Europe and Australia.

Rig problems have beset early revenue from the “transformational” Greenhammer system, which management now believes has a 15-year useful life.

A €14m working-capital investment pushed stock levels to a huge €77m, squeezed free cash flow to only €2m and raised questions about the debt-funded dividend.

MCON’s “superior technical and innovative technology” is still to translate into superior financials, with obvious evidence of smart capital-allocation decisions remaining elusive. I continue to hold.

[SharePad] Screening For My Next Long-Term Winner: BELVOIR

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15 June 2023
By Maynard Paton

Today I have revisited a SharePad screen that applies two ratios favoured by ‘quality’ investors — operating margin and return on equity (ROE).

The exact criteria I re-used were:

An operating margin (latest and 10-year average) of 20% or more, and;
An ROE (latest and 10-year average) of 20% or more.

Any business with a margin and ROE of at least 20% is probably quite special.

To narrow the field down further, I also sought companies that carried net cash (i.e. net borrowings excluding IFRS 16 finance leases of less than zero):

This time the filter returned 21 matches, including Impax Asset Management, Somero Enterprises, Jarvis Securities and Quartix.

I selected Belvoir because it was among the worst share-price performers of the last twelve months. Let’s take a closer look.

Read my full BELVOIR article for SharePad >>

Maynard Paton

[Podcast] BELLWAY, LUCECO And SUPERDRY With Roland Head, Mark Simpson, Bruce Packard And Maynard Paton

12 June 2023
By Maynard Paton

I have recorded a pilot episode of The Investor’s Roundtable podcast with fellow investors and good friends Roland Head, Mark Simpson and Bruce Packard: