2525: 2 P's on a Pod: Small Cap Investing with Paul Hill & Paul Scott

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Speaker D: Welcome back, everyone, to Fox Markets Live. My name is Paul Hillel. I'm delighted again to be able to speak to equity analysts, top markets commentators, Paul Scott to discuss all things small cap. So big. Welcome, Paul.

Speaker E: Thanks, Paul. Hello, everyone.

Speaker D: Yeah, we've got another packed week, obviously with the budget. Uh, so let's, uh, let's kick off there because we've got a few sectors. It's a bit of a nothing burger on their budget. I think it's probably the fair reflection. However, there were a few stocks which did surprise them. Robert asking, I think was one you own. You quite like Whitbread, basically the owner of Premier Inn. They got a. Seemed to get a boost, didn't they? Do you want to take us through that one? Because obviously you, you know, you know it because you own it.

Speaker E: Well, I was absolutely staggered by the RNs that Whitburn put out the, the day after the budget, the morning after it, saying they're going to have a huge boost to their profits, which, um, you know, went completely over my head. I didn't realize there was. They got clobbered, I think it was last year with a massive hike in business rates. And it. They're now saying that it's Unwinding and they're going to get a huge, I mean I think they mentioned between 45 and 60 million pound a year boost to profits, which is material, that's more than 10% of profitability. So I, as I say I was pretty stunned by that. But looking at the chart, the market seems to have actually anticipated that. I did wonder why it kept going up. So, um, no, very good news if it follows through. I mean my worry would be that nearly always the support that government schemes give is only to the smaller retailers or pubs, isn't it? So I'm just hoping that they haven't um, screwed this up and um, that, I mean presumably they wouldn't have RNS'd it without having checked with their advisors and whatnot. So on the face of it, looks very good news for Whitbread. Yeah,

Speaker D: yeah. What sort of upside? I've done a quick sort of back of the pack packets out of, you know, some of the parts on Whitburn and I put an eight times ebitda, uh, on the um, UK business that's post rent. So that's basically, you know, the rent they pay off. So it strips out the ifrs, you know, accounting rubbish.

Speaker E: And

Speaker D: then I put a sort of like. Exactly. Then I've put a 10 times on Germany because obviously it's growing a lot faster. Take off the bank debt, not the lease liabilities and you get sort of like, you know, just over £30 50. But that's quite a modest. There's no, there's no. If a private equity buyer came along and knocked on the door, that's not, that's, that's obviously ungeared. These are uh, this is an ungeared valuation. What sort of a valuation do you put them in that? My mind, sort of like ungeared represents what, about 10% upside?

Speaker E: Yeah, I'm looking at a much bigger figure actually. I haven't done a specific calculation on it, but if you compare it with uh, one of the differently structured um, hotels groups like uh, uh, I think it's ihg, isn't it? Intercontinental Hotels, you know that you've got on a, on the simple metrics, you've got a geared balance sheet, you've got pe, uh, in the 20s, know. So the opportunity with Whitbread I think is where you've got a huge freehold property portfolio which dwarfs the uh, net bank debt, is uh, many, many times the, the debt. I think there's an obvious opportunity here for it to be acquired by a financial player. Obviously private Equity or a big US buyer restructured so that the properties are hived off, um, and um, then put on a higher multiple. So. So I think it's just uh, yeah, I'm mainly in it for the, the value on the balance sheet and the unlocking potential of that. So I mean I'm thinking kind of 50% upside on the current price. 40 quid a share roughly. That's my kind of. With a takeover premium. Um, I think it's a sitting duck for a takeover actually. And it's obviously the dominant UK branded hotel chain, um, and growing quite fast in Germany. Um, I'm actually going to mystery shop at one of the German hotels. Uh, imminently. I'm taking a long weekend to Lubeck, so I'll report back.

Speaker D: Yeah, okay, good. Let's go to another sector that got hit. Well, basically we had the gambling sector. We've got um, George asking about Rank Group, the owner of Mecca Bingos and Grosvenor Hotels also has an online, I think, and then it's got an Iberia business as well. The shares have been very weak coming into the last, well basically the last six months because everybody knew that it was well signaled they were going absolutely annihilated. And then it seems as though it wasn't quite as bad as everybody expected. But, uh, shares are still in the dog. It's very cheap. What's your sort of take on this one? Whether it's now, uh, a buying opportunity?

Speaker E: Well, uh, funnily enough, we were talking about this on my site, um, a few days before the budget because we spotted that it had been absolutely plummeting, as you can see there, because of fears that the gambling tax hikes would be worse than expected. So I think you've pretty much summed that up already. The uh, or was it the. Is it the fixed odds machines has gone up from 20% tax to 25% and I think the market seems to have been bracing for something even worse than that. So I do think it's good value now. I think the forward. But they've taken about 10% off the forecasts. I think that was shore capital. So, um, the value, it's on a P.E. of about 10. Um, given that this is such an out of favor sector and the trouble is the government keep coming back for more, don't they? They can't raise any of the standard kind of main taxes so they're having to go for whatever, you know, if it's not bolted down, they go for it, don't they? So. Well, no go for it, it was bolted down. But anyway, forget the bolts. Um, basically I think they'll be back for more with the gambling companies. And that risk is why I personally wouldn't pay more than a p of about 10 for it anyway, so. What, what?

Speaker D: Yeah, I mean I think you need to do this on some of the parts because it's got so many distinct elements to it. I mean Grosvenor hotels, I mean if you just put a seven times ebitda. Which

Speaker E: casinos?

Speaker D: The casinos. Yeah, these are basically the physical casinos, you know, basically. And so, you know, the gambling licenses associated. You can't just rock up there and get a gambling license nowadays. Likewise Mecca Bingo. I mean that's obviously a declining industry. Sort of five times ebitda because people don't really go to the bingo that often unless you can just like jam a load of fruit machines in there, slots, slot machines. And then this Iberia business is totally outside the uk so that's quite interesting. I don't know why they own that. They could get rid of it and six times EBITDA is pretty, pretty cheap for it. And then you've got this digital, digital business. They're like that frankly, you know, you could, you could argue should be a lot, lot higher if you can make sure it's, you know, most of it's sort of off offshore etc so you take off central costs, you put a bit of net cash on and you get a, you get a very modest fair value of a quid. So you can absolutely see if somebody, a private equity wanted to take this off, they would unbundle this and, and they would sell off the relevant parts. And I mean, who knows the opportunity. You know, you get into prediction markets, you get into basically, you know, um, all the, all the different sort of like, you know, the flavors of the month. You know, I mean I know William Hill in terms of the, you know, the brand is massive in the States. Well, why can't, why can't basically, you know, Mecca or Grosvenor make a, make a similar sort of play out in the States? I don't know. But uh, somebody with an imaginative. I think this one, when you, when I know you use the expression quite a lot, I think this is a sitting duck because I don't think being a listed company helps it one bit in lights. The government, because it just get, puts it into the crosshairs.

Speaker E: Yeah, good point. And I think being a listed company generally, um speaking, and certainly for UK smaller mid caps, that's little to no benefit because the public markets are uh, Public markets are very uh, significantly undervaluing everything really compared with private markets. So yeah,

Speaker D: yeah, we get all the um. Okay, the last one was obviously the house builders. They flagged uh, last month that um, they were going to put some flesh on the blown for this uh, first time buyer scheme, the, the, the 2.0 for help to buy basically. So they did that and everybody went in there thinking that it was going to be pretty good and then the shares jumped up but came down and we've got one particularly. First time I've got Alison asking about Gleason's that I think we both own actually, the affordable, uh, affordable house builder out in the Northeast and Midlands. Any views on this one now?

Speaker E: Yeah, I mean Gleason's has been doing quite well actually. Um, so it seems to me that the market is maybe tentatively starting to factor in some sort of recovery, uh, which of course it will generally do well before the green shoots actually appear. So there's a bit of a mismatch. Some investors are saying look, the whole sector's more or less finished, it's on its knees and will be forever. Other people are uh, looking forward to the, you know, the help to buy thing coming in, the stimulus to the affordable housing where those budgets are starting to unlock and actually saying well we need to get ahead of the curve and start anticipating at least some sort of recovery uh, in this sector and the building products companies. So that's definitely where I am. But I'm usually too early with my sort of turnaround situations. And from what I read, um, the market mood seems to be that they're hoping for more. This, it's only a loan guarantee scheme, remember it's not grants. So for that reason I suspect some of my readers were suggesting it might defer. People might hold back from buying a new house until this scheme comes in. That's one possible thing that might affect some people. But help to buy type schemes tend to push up asking prices and it's not a subsidy, it's just uh, um, you know, a loan guarantee. So whereas if it was something like you know, reducing stamp duty in the future, I could see that that would defer current sales. But I don't, I suspect this won't have any negative impact in the short term. As I say because, you know, if you can afford to buy, the key thing is mortgage rates need to come down. And that is we've heard from several, from Gleasons and several other people in the sector. That is the number one consideration. That is the thing that's holding back demand is. Mortgage rates are just a bit too high and, and with government yields well off the top a bit in the last few days, maybe there's a little bit of hope there. Yeah, but, but maybe this scheme is a little. Most commentators seem to be saying this, this scheme was uh, disappointingly small and they were hoping for something with a bit more, a bit more firepowers. 4.7 billion over five years. It's not much really, is it?

Speaker D: No, I, I'm with you. And I think most of it's been funded by the house builders as well. I, I think the 20% loan guarantee, I think it's zero interest. That's what I read before I think. So the 20 is at zero. But they sort of like the, the kicker or the sort of like the prid quo quo is that the house builders to be able to offer to get these mortgages for their buyers have to basically give up to 4% of the sales price to the government. And you can. And the logic being such that, you know, if you basically, if you've got 100, let's just do this math, you pay a hundred thousand etc, you have to, you know, 100,000 pound house, you pay four grand over to as a tax basically the house builder does to the, to the government but the, the client effectively saves the interest over five years of 4% on it, you know, basically because that'll be the mortgage or 5% whatever it is on 20% of M. The amount. So that works out at about four grand. So it's four grand of interest saving paid as an upfront by the house builder is, you know, to the.

Speaker E: Oh, I see. And

Speaker D: so, and I'm with. I think they'll just, I think the house builders will just push this forward because it's uh, a, it's a way to encourage people to buy houses and I think, I think they'll just, I think that cost will be just pushed onto the house buyer in their mortgage and they won't see it simply because they're basically getting 20% of it for. Not for free, but they're getting interest free for five years. So I uh, I think it's positive but it's not a slam dunk. It's. It's a sort of like, it's almost like a, you know, zero cost type help to buy scheme. It's not as you rightly point out. Coming back to Gleason though, I mean just for just. I mean I did. If you assume that the house building sector, uh, you know, the Actual house building part of it. The division gets back to 10 return on tangible book and you put one times on that you get sort of £4 50. If you, if you take a 50 haircut on their land division for net tangible assets you get 40p. You take off legacy cladding and safety remediation and all this kind of stuff and a bit of debt, debt, you get a fair value still 460. So I, and the. Oh and I think the net tangible book is over five quid. So I think you're right. As long as we're patient, both of us should be all right, I think.

Speaker E: Yeah. And the other key thing with Gleason obviously it start homes. It's right at the bottom of the market. So it's very. And they pay peanuts for the land so it's very unlikely they would need to actually have a write off of the plots and let unless the plot become completely unviable. Uh, and build cost inflation is a big factor as well, isn't it? And I think the total build cost has gone up 40% or something in the last few years. So uh, and obviously higher oil prices. A lot of building products are uh, plastic or oil based. So you know, we know all the headwinds. But at some point you have to say look, the discount the market is putting on this is, is so severe that there's, there's probably more upside than downside. I think so yeah. Uh, I remain bullish on Gleason. I'm not tempted to top slice.

Speaker D: Good, bad. Yeah, so am I. Okay, let's stay in the. Yeah, let's go to building product sets. We got plenty of questions. We've got Zoe and Lorenzo asking about one you own, um, brickability that I think came out with a half year trading update saying I think it was such that they said that their design and installation of cladding solutions was doing okay and other solutions. But they're clearly their brick distribution, their core business is struggling a bit in this market because it's so little. How do you, how do you see it?

Speaker E: I'm just completely looking through this. I'm staggered that the market has uh, did such uh, a big knee jerk reaction to something that was blindingly obvious. You can see from the housing start data and whatnot that the whole sector's absolutely in a deep downturn. So why the market acted surprised on this I have no idea. I think it's down to investor timescales. People like me, uh, are in this medium long term and fully aware that the current situation is Tough. So bit of a profit. There's only 10% reduction on the EBITDA figure from 50 to 45 million. H1 was in line but they said, you know, the hope for recovery isn't happening and uh, therefore we're trimming the estimates. Doesn't alter my view on the fundamentals of the share one bit. But as I say I'm medium long term. Maybe there were some people in IT who just fixated on the short term. Uh, there was one valid point though I think that people made about the net debt seeming a bit too high. I actually met management at a Cavendish conference two, three weeks ago and they were pretty depressed. But I think the CEO is just quite a dull character anyway so uh, he um, yeah, he was just saying the market's terrible and do you know what I mean? He said the housing starts numbers are appalling but the investment case is all about a bounce back that there's so much brick making capacity has disappeared in the uk about half has disappeared. He said you only need a sniff of slightly improvement. We ah, only need it to go from 130k starts a year to 160k which is well below normal level. He said and that will turbocharge our numbers because there's no capacity left. So we'll immediately be able to put through price hikes, we'll be able to import from Belgium and Holland and whatnot. So he was quietly excited about the medium term and it doesn't need much, is very geared to an upturn. So that's the investment case and I think personally I'm just totally ignoring the short term profit warning. It doesn't matter in the slightest to me.

Speaker D: Yeah, I mean the profit warning to me is only a problem if their net debt starts to increase. Okay. Because as I think from the half year if you take their forecasted EBITDA and then you look at their current net debt, it works out 2.1 times for a brick distributor. I mean they only need something to go. They only need that EBITDA to go down. That then you start having to talk about to banks and say we need a waiver for short term. I mean how do you view that risk? I mean and the probability of

Speaker E: is it is a slight risk I would say. Um, because you've got to remember only half the business is very cyclical to the house building stuff. They've built up this other division, design and install I think they call it, which is actually um, doing very well. They do things like as you put on your slide, like Cladding, remediation there is a booming area. So it's not the. And, and, and so far the growth in the design and install division mainly by acquisition has completely offset um, the cyclical downside on the core business. So I think it is important to bear that in mind. So going back to your question, the debt, I challenged management on this when I saw them two, three weeks ago and said look, this is a little bit out of my comfort zone particularly when you know the market conditions tough. They said yeah, it's a little bit outside our comfort zone too. Yeah, they're refreshingly straightforward, direct team. But they said the, the uh, the high end fencing business that they've acquired was such an absolute, you know, they had to do it. They said it was a cracking deal, they had to do it. And yes, they pushed the debt a bit too high in the short term and now with a profit warning as well, I would work on the basis that dividends will get cut. I think looking at the numbers, to me the dividend is the standout thing. But actually I'd rather you pause the divvies and pay down some debt. So uh, yeah, I wouldn't buy this for income now. Um, uh, but again I'm looking several years ahead and I, I see 50, 100 upside if not more on this. It's just all dependent on your, on your investing time frames.

Speaker D: M. I actually think there's a strong chance. When I say strong, that's probably, it's probably overplaying. There is a chance that the institutions force management change on this because I know I've spoken to a number of fund managers and they're all saying the same thing. They were very annoyed about the board not playing the right cards on that potential bid from Atlas Holdings. And I think, I think the issue is, is that they didn give them, they didn't give them a chance to improve their offer from 65. They didn't give them any access and I don't know why because they weren't a direct competitor either. But uh, they put it this way, I think the board need to not have another slip up and if the business is going south a bit then you're going to get increasing basically. If you had Harwood on board, which you don't, but if you had someone like that who could basically control a whole bunch of cats, you know, a whole bunch of fund manager cats, then I think you'd see change quite quickly. Um, but I don't think the institutions are very happy at all to perfectly honest.

Speaker E: Well that's Interesting. I hadn't heard that. But yeah,

Speaker D: I

Speaker E: mean what we have, when it got down to this level around 40p last time, that was when the opportunity opportunistic bid came in, wasn't it? Which I think as you say was 65p. So it wouldn't surprise me at all if that or another bid because the valuation is utterly compelling here if you look through the economic cycle. I think so. Yeah. And it's a. It's a good business I think. Um.

Speaker D: Right. You've just given me a good idea for my takeover. Top takeover ideas. It's going to be brickability or brick for next year because uh, you're. You're exactly right. You know, basically institutions now uh, are not happy and on the basis that's perfect environment to get their approval for a takeover bid for somebody coming in and there's no chance. So it was like atlas that the board would just like say go away. There's no chance. They'd have to give them a shot. So yeah, that's okay, right? Fine. That's pretty good. I like that. Okay, we've got another one of the brick. We've got Steve Waters asking about Michael uh, Mersh Brick, the premium brick manufactories. I mean the shares have obviously like everywhere else have been a bit of a nightmare like Ipstock and um, for tier of down to 70p. Any, any quick. I mean I own them. M. I can fill them in as well. But any thoughts on this one?

Speaker E: No, I'll let you go first on this one, Paul, while I load up my notes.

Speaker D: Yeah, I mean all. I would say it's a high quality business with high quality assets but clearly demand for RMI which is roughly I think about 30, 40 of the business at least that is struggling as well as the new build. And um, it's just really stick, you know, sticking your head down and getting through it. And the other, the other thing they do have as a brick manufacturer etc, which you don't get with brickability is the exposure to energy costs and we all know the cost of gas has increased significantly, you know, over the winter etc. So you know, hedging that. I know they've got a lot of hedging agreements and they should be pretty much okay, but that's what the market is worrying about. And uh, I, I would not be surprised. Everybody in this area is putting out sort of profit warnings. I would not be surprised if they had another minor profit warning. But the balance sheet is pretty good. They've got a. I think they had the half year, if I remember rightly. They had a bit of net debt which they were hoping to you know, turn back into sort of like, you know, a neutral level because that was mainly working capital, I think. Let me just put the um.

Speaker E: Yeah, it's only 5 million. So insignificant.

Speaker D: And the asset basing is, is very, is about, is about a quid I think just on the net assets. But if you put a seven times multiple on a, on a low mo on a low EBITDA for the brick making, which is very reasonable price, you get over a quid. Take that. I mean you get over. All I would say is that ah, there's no reason I'm selling this. I think they're going to get through it. It's, it's uh, I, to me this is very much like a Gleason play, I. E. Such that it's going to be fine. It's got a good brand, it's got a niche. It does premium bricks and print that premium, that, that trend for premiumization. So it should be absolutely fine and it's well managed. You know, I've spoken to the CEO, uh, who was Ryan Mahoney, who was the CFO for a long time. Um, and I think it's in good solid hands but clearly the market's against it. If rmi, you know, the demand is not good and your costs are going up, then when, then that's, you're going to get squeezed. But, but point is because you're taking out a shed load of cost and getting really lean when the good times come, then you're going to have significant operating leverage. So um, we're waiting.

Speaker E: That's a really good point because I mean in, in most sectors when you get a really deep recession, uh, management teams will strip out all the uh, you know, they'll be brutal in stripping out costs. They kind of mainly people and, and buildings that they would have tolerated in the good times. But that to when you have to get into survival mode, you know, you set it up for, for a fabulous operationally geared recovery. Yeah, I like Michael Melch as well. And that is also near the uh, right near the lows that we saw back in March and in May. Uh, unsurprising because as you say the sector is terrible. So I don't think you can expect to buy these things right at the bottom price. I think you, they get into a range where in my view the upside medium term is so good that you, you just, you just buy them and you accept that. Yeah, they might well Warn on profit doesn't matter because I'm not going to sell them.

Speaker D: Yep, okay, good. We've got another one um, in that building sector we've got uh, J.C. hoates. He's asking about Alamask which I'm not sure you own at all but

Speaker E: basically.

Speaker D: Okay, yeah, I mean you can take us. This is basically it's got three divisions sort of water management business that does storm drains for big sort of airports and um, that sort of stuff. It also does uh, I think it does roofing solutions which is like a bit of, a bit of drainage and a bit of solar maybe. And then they do the really brilliant part is this house built house building products business with Tim Lock which does really

Speaker E: Nichy

Speaker D: really Nichy sort of Velux window or vents in, in roofs and also does a few other things and stuff. But uh, they came out with quite a day, surprisingly positive trading update. What was, what was your take?

Speaker E: Yeah, I, I really like it. I'm a happy holder of this one. Again it was, I mean it kept outperforming for about the first three years after Covid and it looked almost too good to be true then because the whole sector was on its knees of course and then of course inevitably their luck ran out and they because it is subject to quite large lumpy contract risk, uh alibas is I think it's cracking business. I mean if you look at the margins it makes ah particularly as you say on Tim look it makes astonishing profit margins. Uh I caught up with management recently uh in an in person meeting two, three weeks ago. Um they're between CEOs. Uh so I think it is vulnerable to a potential bid approach. Um, a little bit rudderless at the moment. Um but the uh, the update three days ago is actually quite good, wasn't it? Q1 revenue is up 10% improved year on year margins and order book up 67%. So I think it's a uh, lovely business this PE of 9. Um, not much debt to worry about. Yeah, um, real innovated high margin products. So yeah, I love it. Happy to hold.

Speaker D: Yeah, no I'm with you. I mean I've done a very, I mean this is, we talk basically this is using EBIT expectations for the division for 2027 for next year and frankly it's still pretty trough earnings there's no doubt about it. And I've used pretty, you know, I mean basically 10 times EBIT, you know you tax it is 13 times PE for a growing business with good pricing power means that's a reasonable price to pay. So if you do, if you do eight times for the water management because it's more lumpy contracts, you do the building envelope which is a regular type of recurring which is that and then you've got the real jewel in the crown, the Timlock business. I mean you put all that together, take central costs and net debt off, you get three pound 93 and that's a, that's a very, very reasonable valuation. That's not any high for looting. So I think there's.

Speaker E: Yeah,

Speaker D: I mean that suggests even on a, a non stretched valuation you've got what, almost 50 upside? We've got 50 upside, haven't you?

Speaker E: Yeah. One of my contacts uh, mentioned that he'd noticed some large trades going through recently. So um, he was starting a rumor that it might be a bit target. But I think the numbers that you've just shown show that it clearly, you know, somebody could come along and offer three pound to three pound fifty for it and still be getting a bargain. So. And while it doesn't have a CEO, it's all a bit rudderless. That's the ideal time to pounce for a bidder isn't it? And bolted on to some other business. And I think probably the institutions would be happy to take uh, that sort of 30 to 40, 50% premium wouldn't they? So yeah, I think uh, that could well be a target for a bidder.

Speaker D: Yeah. Okay, Good. We got Andy 22055 asking about uh, Beaks Financial which is the one. We actually had a chat to um, the management uh, team didn't we Gordon? And I can't apologize, I can't remember what the CFO was called but uh, in terms of the, you know this week do you want to take us through your thoughts on, on the business because you own it don't you? Just Hype basically does software and hardware for high school speed trading which goes into exchanges and allows people like um, you know Citibank and people, Morgan Stanley to be able to access really fast trades to uh, maximize the returns for their traders and other traders.

Speaker E: Yeah, they put the algorithms on, on big servers which are plumbed into the uh, exchanges. It's an infrastructure company mainly. Um, you know, so it won't be as highly rated as a software company companies. But there's so many interesting things going on there. I mean I'm super bullish on this one but I have been for years so ignore me. But I, I think, I think it's a very, very good business. Um, and uh, woefully undervalued compared with private market valuations for this type of thing. It's becoming the de facto standard in providing the cloud connectivity for global uh, exchanges not right at the very biggest tier but the next next tier down. And um, I, I'm m, I'm very bullish on this. I think it was a terrific call we had with management. They are so frustrated about really I would say all aspects of being a public company and the, the criticism you read extensively on the Internet, on commentators, it's all, it's all very basic stuff, you know that is not in any way being concealed. It's all in the numbers there. You could just choose whether you want the adjusted numbers or the statutory numbers. You know, there's nothing hidden. Uh, and just like the AI build out, you know they have to do the capex up front. It's not a huge amount, they've had some asset funding for it doesn't need to do another placing. They're emphatic about that. And even if it did, you know, it would only be 5% dilution or something. Um, I think it's one of the best growth stories in the, the London market. So, and I've, I've carefully looked at all the negative points that people post and um, you know, I understand all those points. It's not for everyone if you, if you don't like the business model, don't invest in it. But for me I think it's a, ah, ah, absolutely rock solid hold. In fact I'd like to buy more but I haven't got any cash as always.

Speaker D: Yeah, the one thing which came through from Gordon actually he was pretty frustrated with, with the market in terms of particularly the valuation and people not really getting their head around the business model. What I liked, I mean on the bull side for this ultimately to be an attractive takeout target. What I liked about it is that it's built the infrastructure that is very difficult to replace because it's expensive. You need regulation to get in there. And so consequently if you're a large financial software provider to a lot of the customers that that beak sells to, okay then you've got a perfect vehicle like launch pad to basically if you bought this then you've got basically at least five years contact because these five years contract, you know, contracts with the customers, at least five years to upsell a shed load of software and you've got all the intro.

Speaker E: And

Speaker D: so basically it's just, it's that classic land and expand but the company, you know, the company's already doing that themselves. But if you, if you were a, you know say a big financial software company, wow, that would be a brilliant way of getting into a shed load of fund managers and hedge funds and exchanges. So I love the infrastructure play and what I also liked about is Gordon was emphatic that now when it comes to signing those exchange deals is that when they go on the revenue share he's asking for some skin in the game. So they are having to make a

Speaker E: contribution,

Speaker D: a contribution to pay for the capex which can be for a big exchange a million quid. Okay and that gives them, that gives them skin in the game and then it's a five year deal and then obviously share the revenue and typically what happens I think for every pound that um, uh was it basically beaks has to pay up front in capex and stuff they get like 3 and 4 back of recurring revenue at the end of five years. So it's a lovely, it's a lovely infrastructure model um, you know in that. And then they're adding all these software stuff on top which is things like the info effectively software that allows clients to monitor um, the performance of their high speed trading and anticipate a problem before it occurs and therefore it won't lose the money. And then they're also putting on other software that helps them improve their trading with algos and this sort of stuff. So it's a, it's a lovely strategy. Um, the area, the area of you know you just got to be careful with your terms of valuation because they did about 40 million of sales last year, big second half of which 6 million of that they put on their balance sheet I. E 6 million of those. So they had a net 34 million of ARR but the other 6 million they didn't invoice, they basically chucked it onto you know, their assets, long term assets. So when you come to do a multiple of sales if you do that way for evaluation then you need to strip out those one offs. So I've done a very sort of like conservative valuation and I looked at it three times recurring revenue streams and then you know um, they call it, was it annual um contract value or monthly contract value and then the tangible infrastructure about a 40 million you put a bit of net cash and you get over two quid. So I can absolutely see as a standalone rock solid type valuation this is over 2 quid but the strategic value to a potential buyer and I talk about strategic value a lot when I look, when I look at potential acquisitions and I, and that's a difficult one. If you, if you, if you went, if you, if you basically identified a lot of large software companies who, what. And then what would they use this for? And I think there's masses of sales synergies there. Then I think you're right. I think they could get m. I think they could get multiples of their current value if somebody had a really big, you know, financial software. So I'm m, I'm with you. I think there's a lot of upside and the, the only the. It's one of those weird things that Gordon is, is frustrated with the market. So if he does. I think so if he does get a blockbuster deal, I think he'll pull the trigger. And, and um, you know, say I've had enough. I've been battered by the market for five years. I'm gonna go, I'm gonna, I'm gonna take a lot of money out, my employees are going to do well and then I'm going to go and work for KKR or for you know, one of the big Blackstone or something like that.

Speaker E: I, I agree. Um, it's, you know, it's an owner managed business. I think Gordon still holds uh, I think 30 or something. Certainly enough to. That he's calling the shots on this and he's already always made it clear it'll be up for sale like some point when the price is right. So uh, yeah, I think you'll just wake up one morning and find there's ah, a knockout takeover bid for it. I suspect that's just my hunch. Um, I don't know for sure. Um, but um, in the meantime I think he's likely to remain frustrated unfortunately. Um, but the fundamentals of business are outstanding in my opinion and all the account. Oh and the revenue share thing. Um, it was also pointed out that as you say uh, if they want 50, 50 revenue share, uh, um, the which way around is it that they don't put in any capex. But no, no. Is it the other way around? Well anyway, basically that is the minimum. That's the minimum figure. So Beaks is now negotiating higher numbers than 50% for revenue share deals. Deals. Uh, so yes.

Speaker D: Okay. Okay. I'll tell you you're going to be busy today because we've got Brian asking about another one. We talked about Carrera Networks Service. We spoke to the uh, Carl the CEO and Chris the CFO there. These guys are specialists in DDoS protection for cyber security. So they, their software typically does the biggest and the hardest sort of data centers and hyperscalers and protects them against large scale sort of bot attacks. And uh, what was your take from it? The shares obviously have done well because they've had a, they've had a flood of new orders over the last, what, six to 12 months given the demand from, from the Neo clouds, the likes of Core Weave, who are building new data centers and from the hyperscalers who are just building like left, right and center. So uh, what was your take?

Speaker E: Very positive. Yeah, I should disclose I am um, building a position in this. I've uh, I have bought some more this week after I call with management. And the interesting thing here as well is that unprompted, we've had a couple of other companies which I probably shouldn't mention the names who've actually unprompted said when you ask them what, what DDoS do you use? Yeah,

Speaker D: it wasn't unprompted, it was a direct question and it was great. I think you can name them anyway. I think you can name.

Speaker E: Well, we better not. We better not. But um, you, you hadn't said until that point anything about Carrera to these other companies. You just asked them. Unless I nodded off during the call, which I'm sure I didn't. Uh, they actually said we use DDoS from Carrera and it's bloody good or something along those lines. So when you get that third party confirmation that this software is good and an absolute avalanche of new contract wins, this, this looks, I think very, very exciting. Um, so, yeah, I want to, as I say, I want to buy some more. So um, ah, let's hope the price doesn't shoot up.

Speaker D: Yeah, no, I mean that was a brilliant, I mean, you know, uh, we went into that interview and I was going to ask him, you know, because I KNEW they had DDoS protection. You're right. I mean when the, when the top boy said we love Carrera, fantastic. Really good software. What a flipping, you know, customer, you know, sort of like endorsement that is. Now

Speaker E: when

Speaker D: we spoke, when we spoke to the management team, um, you know, they reckon they're going to be. Carl was pretty confident over the next five years he's going to be basically a rule of 40 company. Ah, which will

Speaker E: be,

Speaker D: you know, he does about 18 EBITDA margins but I reckon that's going to go to 20, 25 and that means there's going to be sales, organic sales is going to be at least 15% for the next five years. And uh, I mean his strategy is, is he does direct sales to the large hyperscalers and the big telco boys because basically that's where they're um, you know that, that's where they are absolutely a leader uh in the, in those sort of like the big, the big things. And then for the cloud DDoS where they don't really operate that much they use partners things like Akamai. In fact Akamai is actually a competitor and they haven't got as good cloud DDoS so they, so they use them. So you know, I mean you know they've got, that's right because and then the other one they've got these jupe is Jupiter. Uh, yeah, Juniper and then uh gtt. So they're using partners to attack the cloud side. That is really is really sort of like you know it's got other, other providers. Now the downside is that they are actually against some really big dogs in the industry because you know Net Carrera Networks sort of like sales are ah, I can't remember is probably around about 12, sorry about 20 to 30. 30 million bucks. 30 million bucks or something like that. Um, and Netscout and Radware on hundreds of dollars, you know hundreds of millions of dollars each year. So they are, they're a small dog in terms of developing. But the, but the sort of. When I asked him about what the trigger was for these you know, extra orders it was basically greater demand from the industry but more importantly it was because they'd spent the last three years refreshing the, and improving the product significantly. Um, and it's, but they've been, they've been selling it and winning a lot of RFPs on the back of it. This, this product is going really well. So I'm with you. I think this has been a turning point and then you look at it on valuation. Well the shares have almost doubled on the back of this because they're quite thinly traded. But still if you just put a sort of like a four time sales multiple given this is going up by you know 15, 15% per annum plus has over 90% gross margins and 75% recurring then that's not a stretch and then you bit of cash I get a fair value of at least 20. So all I would say is that that's a, a prudent and this will be a trophy asset as well because with its, with its software um, so I, I, it's been one of those things that you and I have tracked for years, isn't it? And it, and this could, this could well be the moment given the importance now of protecting against AI you know, DDoS type style bot attacks because the, you know, the, the modus operanda for most nasty people who do these attack, you know, basically do cyber attacks is that you absolutely flood your victim with DDoS. You take their, get their, their gaze away, get them really sort of like fretting that they cut their websites going down and then you hit them somewhere else where they, where they've got their defenses are weakest. So it's, it's combined with a lot of other stuff. So I think there's, it's, it's a very. Anyway, it was very. The CEO Carl was, was pretty bullish, wasn't he, about where it's going to go to this business?

Speaker E: Yeah, they're very confident as you say. The key thing is that they've said, you know, it's always had, Carrera has always had great technology, but it just wasn't focused on actually getting it out to market efficiently or effectively. And as you say, they said they've improved the product features, um, such that it was only really suitable for tier one customers last year. So put all these points together and I think it seems very, very clear together with the, the big acceleration in order intake that this appears to have reached a genuine inflection point where they potentially got years of growth ahead of them. A huge, um, total addressable market. Um, I mean obviously we're taking a lot of this on trust but uh, uh, you know it looks, it looks the real deal to me. That's why I'm happy to pay double what the shares were a few months ago because the fundamentals have improved a lot.

Speaker D: Yeah, it's been pretty productive this discussion so far because I've now got my top three takeover targets for this year. Got Brick ability, we got Beaks and now Carrero because I think they're all absolutely, you know, they've either, they've got other, you know, they're either situationally, you know, weak in terms of brickability and they're all return to their just trophy assets in terms of what somebody else who owned them could do with those businesses

Speaker E: and

Speaker D: realize significant sales synergies. So um, it's, this

Speaker E: is the thing, you don't look at the current valuation with these things, do you? You say what would they be worth to someone else? Which can often be a long way ahead.

Speaker D: Oh yeah,

Speaker E: you don't, you don't do your pes and whatnot with, with companies that are at inflection points like Beaks and Carrera. That's more for value shares. You know, I would Say,

Speaker D: I mean you, you know, you look at something like Netscout and um, and Radware and you say well okay, these are big dogs. They start losing a few deals, RFPs and stuff like that. Well they really want to continue losing them and they just take the damn business out. One competitor disappeared. There you go.

Speaker E: Yes, I would, I would be amazed if Carrero doesn't get a bid approach from America. Yeah,

Speaker D: yeah, yeah. Uh, I think that's absolutely spot on. Yeah. Okay good. Let's go to different sectors. We had a profit Warner the week we've got L PW UK Investing asking about Vanquish bank the subprime lender to consumers. I think it used to be named. Is it Provident Financial? Basically it used to be a doorstep lender I believe but so they don't do anymore. Um, and, but they do do they give credit cards out and consumer loans to people who struggle to get normal banking access. So they take a very, got a high risk clientele. Uh, net interest margins accordingly are very high, about 1415. And then they ultimately they assume that effectively they're, they're going to get a loss ratio of about 8% anyway. They came out with a pretty nasty profit warning uh, this week based on the credit quality of consumer credit card businesses saying a significant tick up in the loss ratio because of the cycle in terms of um, interest rates and cost of living pressures is, I mean I guess this is one. First of all is Vanquish bank cheap? And then the second one is, is this a red flag for other sort of subprime lenders or lenders who operate, operate or basically platforms who operate in this area? What's your take?

Speaker E: Well my team and I dropped coverage of Vanquis in July this year because we just decided we didn't really like it. We didn't really. It takes too long to analyze and we couldn't add much value to it. So that was actually quite, quite well timed. So it's not one I, I look at in, in detail. Um, I, I have followed some discussion of it online though and some people as you suggest seem to be saying is this the canary in the, in the uh, uh, coal mine? Yes, that's it. Um, which over consumer credit. Um, I don't know and I noticed, I don't know if this was related But I noticed NatWest shares are one of the biggest large cap fallers today, down 8%. Um, they've had an update out as well so I don't know if those are linked but

Speaker D: yes they are. They Are, I'm sure they are because they, I mean I had a look at it and I haven't got the update the exact reason but I, the thing I was actually looking for because in Lloyd's retraining update yesterday they said they'd seen a 60 uptick in their loss ratio and NatWest said exactly the same but higher percentage. I mean we're talking from small levels so I, I think at the margin the people who are struggling most are now starting to walk away from their credit card bills and you're getting a lot of delinquencies.

Speaker E: That is very interesting. I mean I wonder if it will affect some of the other niche lenders like um, um, OSB and Distribution, uh, Finance Capital. Um yeah, it's a bit um, it's a bit worrying isn't it?

Speaker D: Yeah

Speaker E: yeah.

Speaker D: The other one I would, I would watch as well. I mean I know time has been taken out as a subprime that's a business to loans but, but it's going to, it's going all anything subprime or anything at the you know the high level. I mean I would, I would, I would uh just have a, just be careful how you do with, with funding circle because the reason why I say that

Speaker E: is that

Speaker D: some of that business is a credit card business to you know, small companies.

Speaker E: Yes true

Speaker D: M but and that takes all on their balance sheet you know it's all the credit card risk and stuff so short term loans, people walking away I mean all I would say because you know most, I don't know but I bet you a lot of their companies, you know they're one man bands basically. Um, you know and they uh get a loan and get a credit card on the back of it. That's it and if they're starting in their personal lives to you know effectively go go delinquent on their, on their bills, not pay their bills then they're probably going to be doing the same only so I, I would just be make sure you, I, I, I think this is actually a bit of a, a bit of a problem. You know this is, this is some if all if your mainstream banks, your Lloyds and your NatWest are saying it and then you're getting a ah, really big you know knock to the lower income or no income type part of the um, you know basically the social demographics then I think that's a real red flag to perfectly honest that is saying to me people on benefits are now struggling actually that says to me

Speaker E: I agree with all of that. You know you Often get a delay, don't you? Where people are getting themselves into financial problems but they keep the ball rolling by refinancing and doing balance transfer type things. And yeah, I agree with you. If they've got a lot of often people as well to prop up their, their small businesses, often borrow uh, on personal credit cards. So it is all linked, isn't it? And I think it just feels like the tide uh, may be turning on this sector. So. And history shows that when that does happen, you get the hell out of all of them.

Speaker D: Yeah, I agree. We were there, weren't we for the great financial crisis. Wow. When it turned, it was bad. It really was. That leverage, that balance sheet leverage was a nightmare. I really hope we don't get anywhere near that. Where we were all fingers. I'm sure we

Speaker E: won't. But the ones, the ones that say oh, it's not affecting us and whatnot, it tends to, there's a delay but then it will hit them as well. I think so just be very careful I think on this sector.

Speaker D: I remember when, I mean I remember exactly in the great financial crisis because the first canary in the coal mine for subprime lending was HSBC with its Mexico division. And everybody was saying back in March 2000, oh, uh, you know, is this an HSBC issue or is this the sign of things to come? And the market just, and the market just carried on going up and just said look, okay, this is, this is just specific, you know, it's not a problem. It doesn't symptomatic of the whole sector. Well we, the market got that wrong, didn't it? The market got it wrong because that, because HSBC then battened down the hatches everywhere else and they managed to get a. Get through the financial crisis with having a bailout whereas everybody did, you know, your Lloyds, you're Nat West. Barclays effectively got a bailout from um, from Abu Dhabi, didn't it? But anyways, that's, we all remember that. Okay.

Speaker E: We're still battle scarred from 2008 I think. Are we?

Speaker D: Oh yeah. Wow. It was plenty of other ones as well. Okay, we've got a couple of people asking about the Vesuvius takeover from um, rhi. Um, Magnus Sita. Um, I think they. The deal basically. Is it about. I think it is, it's. It's £4 70 cash plus about 75p

Speaker E: in

Speaker D: um, RHI M M shares. Um, any quick thoughts on this? Because I think the, the putable. Shut up was last week and it. Or this week and it's got, it's got put forward, isn't it? Is this deal. Basically both are asking is this deal going through and is there an arbitrage opportunity?

Speaker E: Um, I haven't actually been following this since the update on the 29th of September. I know there were question marks over the weather, how the bidder was going to finance this because they were already highly, um, geared. But other than that, I haven't done an update on it. So I'm sorry, I'm not up to speed on this. Do you know any more about it, Paul?

Speaker D: Yeah, I mean, I read the announcement and I mean, basically what it said was that, uh, RHI and the Vesuvius board had been discussing about just finalizing a bit of due diligence. But the main thing is that they know they're going to have to shed things when it comes to competition, which is, you know, the competition authorities, if they announce it. Okay. And therefore they put in things like, um, they've agreed a break free, but they didn't say how much it was if it, if they decide to put an offer. And they've also agreed, um, a limit on the amount of assets that need to be shed before it then breaks. Those are two conditions. So what that says to me is funding is fine. It says to me, rhi Magna Ceta absolutely want to do this deal and the board are very happy for Vesuvius to go ahead to it. So when it comes to an arbitrage opportunity. Opportunity, as if you're owning Vesuvius, I would say yes, there is an opportunity because, you know, we're looking at potential upside of, you know, to five pound 45. So I think the deal go ahead. The problem you're going to get is that you're always going to be. It's going to be a lengthy competition authority review. If they do put a number on it and if they come back quite hard, it's going to break the deal. Okay, so you've got it. You've got to have a good insight of what you think they've agreed and then think about what the, what the, um, what the CMA and other competition authorities around the world are likely to say to it. So I don't know, I, I'm not close enough to be able to play it. But it does put this way, it's a marriage. You've got a bride and you've got a groom and they want to do, they want to do the deal. But they're the, the, the fly in the ultimate in the, in the in the ointment is the cma. It's the competition authorities.

Speaker E: Yeah, no that, that's right and just reading the announcement here. The put up a shut up has been extended to 24th of November. So everybody's on side and wants the deal to happen, don't they by the looks of it. And they've got the support of their largest shareholder that's extended their irrevocable undertaking to support the offer. So yeah, it sounds like they want it to happen doesn't it? But uh, I don't have any insights on how likely that is unfortunately. Me I'm afraid.

Speaker D: Yeah. Okay, good. Let's go sectors. We got um, William asking about um, oil and gas services hunting which came out with unfortunate because I own it. These, these guys uh, really actually in all of the right areas sort of medium and long term. They do uh, basically deep sea. They do shallow sort of like you know on offshore stuff. They do shale drilling. They're basically you know help with the products are sort of like perforating systems for the shale side. They do these tubes that help obviously the drills, the drill bits in um, in the well heads etc. And they've got some very interesting technology in terms of oil recovery. Plus they've got this business called Dearborn out in the States that uh, services the aerospace and defense and it's all. It's precision manufacturing which is uh. But anyway they came out with an announcement on Monday and said the oil and gas services in, in the Middle east is not great. We're a bit cautious about um, shale in the states. At the end of the quarter four the seasonality and um. The Dearborn business uh has got. Had supply chain outside of its control issues. So that's taken it down. What was your take on it? The shares dropped by about 10:15 I think.

Speaker E: Yeah, we almost immediately, well before 8:00am on the day of the profit warning we just said look we don't think this is a disaster. It's a setback. And you know you have to just accept that with the Middle Eastern war situation ongoing that's bound to affect anything uh providing services or capex or whatever to the oil and gas industry. You know. And you've always had um, a large lumpy orders issue with hunting as well. Uh so that's just part um and parcel of the inherent risk of owning the share. So yeah, I mean um, we haven't changed our, our uh, fundamental view on it. Where Amber Green which is four stars out of five. We think it's a good business Very, very unusually strong bulletproof balance sheet as well. So that gives them loads of firepower for further bolt on acquisitions. And of course you've got upside as the company said, when the um, Middle Eastern hostilities uh, cease or maybe it curtailed in some way. One hopes so. And they're doing cost reduction. So yeah, it's not broken. We think, we think this is a uh, relatively minor setback if you take a long term view on your investing, which I know you do Paul. So over to you.

Speaker D: Yeah, ah, I mean if you basically look at this year 2026 is a bit of a write off and assume that hopefully by the start of next year we'd have reached a conclusion in the Middle East. I mean that's a big if. Okay. But let's just assume we have and we can get sort of starting getting back to normal. Then there's going to be a massive demand catch up, particularly in the Middle east because they will, they've got a shed load of money they need to m make by getting that all out. So it should be ideal for it. And the exploration of course you know, offshore is going gangbuster in places like Guyana and the deep sea and off Brazil where they play well, um, you know they're perforating stuff is doing well. So if you do some of the parts, I mean even on modest numbers for next year, you get over five quid. So I'm with you. I think this is really just a, you know, it's a bump in the road, it's a temporary hiccup and whatever you want to call it. And if you've got a long term view you should be absolutely fine. And we know from Ashtead this takeover activity in this. So

Speaker E: yeah,

Speaker D: let's not, let's not ignore that somebody could put a bid on these.

Speaker E: Yeah, good point. And also um, somebody made a good point another commentator the other day, uh, that uh, globally the reserves or reserves have been so heavily depleted that you'll have to have a long period of potentially long period of overproduction to replenish these um, these reserves. So you know, if you look beyond the Middle east conflict that this could be a nice hunting ground. Oh, sorry. No, no, I didn't mean that. So good sector.

Speaker D: No, absolutely. Okay, let's go sectors. Let's go to carpet distribution. You've got RIMS 50, 52. Asking about your favorite likewise and his question specifically is he got any thoughts at all on how the integration of Headlamp uh, is going? Because they bought some assets and people apparently saying they took on 110 employees and I think they paid was about 15 million quid for all the properties as well. How do you see this one? Because uh, obviously the shares have done brilliantly for you so far.

Speaker E: Yeah, I've doubled my money on this so far and uh, I'm not selling any. I think there's a lot, not much, much more upside. But medium term, you know, I think probably 40p level is maybe about right, uh, for balancing up short term risk reward. Um, but longer term you just, I think as you mentioned before, you know, there's no reason now with the way headlamps have more or less gone effectively, uh, likewise have cherry pick the best bits. Um, they're also disposing of this surplus uh, stock block that is not subject to retention of title claims for the administrator. So they can control the supply of any excess inventories. Um, I mean it's just worked out beautifully for Likewise I think. And I'm um, looking, I'm looking through all this to uh, you know, a share price of a quid or more, um, a few years out. But I'm not, I'm not saying that'll happen overnight but uh, ah, and the balance sheet's lovely. They've got, got you know, cash left over I think from the deal they've done and of course lots of freeholds as well. The Tony Brewer, the previous um, Headland boss is now sort of managing likewise. He says we just don't want to expose ourselves to the risk of having leased properties not knowing what the rents are going to get jacked up to. And he also said there's so much demand for warehouse space in the UK because the Chinese are coming in there and now setting uh, up their own warehouses in the uk. So uh, uh, all of which is just music to my ears. You've got. So I'm very, very, I remain very bullish on this but uh, priced about right for the time being maybe.

Speaker D: Yeah, yeah. I mean I did a quick some of the parts and I remember when we spoke to Tony he sort of like indicated EBIT, Marge, EBITDA margins of about 7%. Now if you do that then you just look at the existing business because they did a fundraise before Headlam as we, as you mentioned. Um, and if you do a sort of like if you assume 7, 7% EBIT margins on, on a, on a, on revenue of 300 million because that's what they've sized the business to be before they did the Headlam deal. So if you did that and you put an 8 times EBITDA, which isn't racy for this type of business. Um, then you get 45p and that, that underpins the current valuation. It's 10% more than the underlying value. So you get this Headland possibly, possibly, you know, possible upside from Headland. All this for free in my view. And if you look at it, if you say well headlamp, they could get, they could get 100 million of revenue off headlamp and at 7% EBITDA margins that easily be another 15p. And let's be clear about it, if you're the dominant number one provider, 7% EBIT margins is pretty modest. You probably can go to 8 or 9, all this sort of stuff. So I'm with you. You know just, just as a basic type valuation, I'm getting 58. But, but if you, if you get higher margins and faster growth and that, and that, you know, you get m. Because Headland was a big business, wasn't it? It was about, you know, about 4,500 million. So you could see this getting up to that in totality and if you did that then you'd get economies of scale so you could, you could easily see it's going to be well over 60p would be uh, would be the valuation. So I'm with you. Interesting.

Speaker E: Yeah. And you've just got to be patient sometimes with some shares I know we're all probably guilty of trying to you know, time the lows and buy and, and sell and profit taking things like this is for me just locked in now. Uh, I'm not going to touch it uh, because, and of course you can always have it on a buy the dips list, can't you? If, because so many investors are so short termist and impatient um, that they throw, but they throw buying opportunities at you as we've seen with breakability I think, I suspect. So, uh, longer uh term people can take advantage of that. Short term sentiment and lack of liquidity I think.

Speaker D: Yeah, no, I'd agree. Okay, let's go to um, the marketing and um, advertising sector. We've got David asking about MNC Saatchi. The shares have really sold off. I mean I know this has been a weak error and I think you've had S4 capital which came out with a bit of a profit warning and everybody's been talking that it's pretty tough out there. Uh, but I must admit the shares now are three year lows. What's your view on this one? Because this could well be an unbundling takeover opportunity, particularly with, you know, we've got, we've got Vin Murray on the board who will be holding the board to fire to feet and we've got Richard Staveley as a major shareholder. What's your thoughts anyway?

Speaker E: Well, I should disclose a stake. I've recently bought some MNC sart sheets. Um, uh, so obviously talking my own book on this one, but I'm. Yes, I'm persuaded by the sum of the parts argument on this. The you've got uh, the issues business in particular, which I think we've mentioned before, is the jewel and the crown. And um, it would seem largely impervious for AI other bits of the business and are not necessarily such high quality and. Oh, there you are, you've done the sum of the parts there. Yes, so, but I think 50 plus upside on the current price is good, is good enough for me. So I bought uh, some. I don't think it's a full position size. Um, but yeah, I think it's cheap enough for me to dip my toe in.

Speaker D: Yeah, no, I'm with you. I mean when. I mean the two real sort of lovely part divisions in this is the issues business, as you rightly point out, which more than pays for the rest of the business actually. So I uh, value that, you know, £1 20. And then you've got that media planning business. If you use a six only just a six times basically. But dar on that you get another 60p. And remember, um, Brave Bison put a number of that 50 million on that, which would have been a pretty low valuation. It was about four times Ebit or something like that was pretty modest. So that underpins what you're saying. Looking for 50% upside. And that basically means the rest of the business is in for free, isn't it? It's just

Speaker E: like

Speaker D: if they ever decided to shake the tree and to do an unbundling, you know, basically the advertising, the passions and PR and the strategic consultancy, I mean they could almost give it away for free and then they'd have a really high quality business left over. The problem they get, I think is that there is some shared overhead, uh, some shared corporate central costs. So

Speaker E: they

Speaker D: sell it. If they sell a division then they'll have temporarily some stranded central costs. So they've got to be careful about how to do that. But with somebody, you know, basically the brain power of Vin Murray and Richard Staveley on board, then, uh, they should be able to do that, shouldn't they?

Speaker E: Yes, uh, that's right. And the other Vin Maria share. I like is Advanced Advt. Um, I think I've got some of those tucked away in one of my accounts but I can't remember where. But uh, yes, uh, I think that obviously they'll be able to get. People are going to be very worried about AI. AI aren't they? Because there's everyone we speak to, we've spoken to most of these companies, management in fact all of them actually over the last year or so. They're all saying it's changing the sector radically.

Speaker D: Yeah,

Speaker E: um, but everybody's saying you can't ultimately replace that human creativity with AI. But it can strip out large numbers of processes and we can actually, you know, they're all obviously saying we can use this to our advantage but there's definitely going to be winners and losers, aren't there? And it's not entirely sure. Um, so as a general thing I would probably be avoiding advertising and marketing companies. I'm not tempted by WPP or S4 capital for example, but I think brave bison. I hold advt, I hold. Well that's a software company isn't it? And MNC Saatchi I hold all for company specific reasons in um, a generally rather horrible sector.

Speaker D: Any quick thought and we've got Kevin asking about S4 Capital. You mentioned it. Basically this is the um, Samartin Sorrel advertising business mainly does digital um, advertising for the large hyperscalers for the likes of Google and Microsoft and Facebook and people like that um, around the world. I think what they came, they basically said, I think in a trading update this week that uh, the tough challenging conditions in H1 had continued into Q3 and they reckon that was carrying on into Q4 even though there's the Christmas. They weren't seeing that top line growth but their EBITDA forecast was still the same at about, I think it was 80 million or something. They were expecting. Um, what was your. Any quick thoughts on this one? As a, as a sort of turnaround, the shares again have felt fell quite heavily actually on the day.

Speaker E: Yeah, I was very surprised they fell as sharply as they did but of course they've had a very good run from the lows of about 16p up to 40 something p I think or even 50 something. So I think it just triggered. It was actually an inline update in line with expectations. So I was surprised there was such a vicious sell off. But I, I suspect quite a lot of people are trading in and out of this share maybe and as you say the top line's shrinking and they did include a line. It's worth reading actually for Martin Sorrel's um, commentary which is uh, fascinating and has read across to lots of other areas. And he said basically the hyperscalers as we know are just focused purely on these gigantic capex budgets and they're just not interested in spending on marketing or other operating expenditure. So that is possibly uh, what uh, uh, upset investors. Um, it's been an impressive turnaround. I mean he built a bit of a can of worms really, really didn't he? Overpaid, took on too much debt. But actually the numbers have been straightening out. Uh, but, but mainly through cost cutting which is never, you know how far can you keep cutting the cost. So I think at the current level it's not for me. Um, but um. Yeah. What do you think Paul?

Speaker D: Yeah, I mean I think the, the real, the change is going to be if they can get that top line growing. And when we chatted to Martin Sorrel that's his aim, getting some like for like growth. And if you do that then this, some of the parts is very, very achievable which is basically over ATP because you just you know, six times marketing services division, eight times the technology. I mean those are very reasonable valuations for those quality business but it is predicated on them getting positive like for like top line growth which is a

Speaker E: big,

Speaker D: it's, that's, that's, that's the. And he read when, when we chatted to him he said look we should be able to do that because we're in the right areas but who knows you know. And also when it comes to advertising, you know you look at um, it's influencing humans historically isn't it? And if you ever get this bot commerce you know where about, you know you get your chat bots like, like um, you know, you ask a chat GPT to go and you know, basically buy you something then it strips out all that advertising to humans and stuff. And so the industry is going to be reshaped. If that does happen, if you start getting AI commerce commerce really taking hold then it really, that will really change the advertising because, because as advertising how are you going to influence the human to make the decision when you're not in, when they're not even using that the bot is just ignoring the advertising. I don't know. I mean anyway that's, that's a work in progress I think.

Speaker E: Yeah. And the other thing with a small capital we forgot to mention is it's also a margin improvement story.

Speaker D: Yeah,

Speaker E: they've already they've got their EBITDA margins up a lot already and they think they can do it further and I would imagine as well sort of employees are not going to be banging on the door demanding big pay rises right now are they? They're probably just grateful to still have a job so um, you know, not be in the latest round of redundancies. So the pressure could be coming off some of the costs there as well. Maybe. But I don't, it's too uncertain what, what the sector future holds for me to want to get involved personally in this show.

Speaker D: Yeah. Okay, well let's go to um, data centers. We've got Atman Salamat. He's basically saying what about Computer Center? Does it deserve a higher re rate now rather than the structurally low margins given the fact that it's a, it's like a pure play hardware IT supplier into the big, you know, things into Azure and AWS and Google Cloud and this sort of shares have obviously done really, really well over the last uh, two years. What you, what's your thoughts on, on. They're basically a reseller of hardware, like a bit of software and hardware, but largely hardware which is why their businesses absolutely boomed over the last two years.

Speaker E: Yeah, we like it. We had a good update from Computer center on the 26th so that was I think Monday, Tuesday this week, wasn't it? Q3, Q3 performance was ahead of expectations and they've substantially raised the outlook for the uh, for the full year. So we thought that uh, pre market we wrote these comments, we thought it actually could be uh, an interesting buying point but it, it did, it rebounded very strongly in the last few days, didn't it? So

Speaker D: yeah,

Speaker E: um, I don't really, I've never looked into this business in detail Computer center but um, uh, I mean the performance has been fantastic hasn't it? And it's got a decent balance sheet with net cash. M uh, but how long can this elevate, you know given that the whole AI uh, um, trade in the UK in the US is going quite wobbly at the moment. You have NASDAQ selling off intel shares apparently down 25% uh over overnight. You had Google sell off I think 12% the other day. Amazon sold off a bit overnight. So it does look like the market is really fretting now about the Ala capex and what sort of return return these companies are going to earn from it. It's looking a bit wobbly isn't it?

Speaker D: Yeah, I think there's going to be headwinds well uh, there are at the moment, I mean clearly anybody who's not um, one of the hyperscalers but you're a Neo cloud is struggling to get funding for it um because the you know the debt levels, the yields have gone up hugely. Um, and, and, and then you, you, you know you actually look at who's good, you know who's going to start paying for those services as like you know and there's only so the budget, you hear it in corporates, you know they've only got a certain set amount of budgets and they're already burning through it for AI. So I'm with you. I think there's going to be a bit of a moment of truth and it's already started actually so I think you've got to be, I think the, the decades long increases in capex. I mean it was some crazy isn't it? I've seen those stats. It was something like over the next five years they're going to spend apparently you know, $5 trillion the hyperscalers and you look

Speaker E: at

Speaker D: that's the size of the British economy on data centers.

Speaker E: That

Speaker D: just looks unsustainable. That looks unsustainable to me.

Speaker E: Yeah, I agree. I mean it's, it's whether it's a bubble, I don't know but it's certainly a boom. And when you get numbers that, on that scale. I don't think I've ever seen numbers on that scale.

Speaker D: Um

Speaker E: and uh, you know you, you can't keep growing at that percentage rate that the numbers are now. So big week. Yeah. So yeah, I mean I'm, I'm, my short on the NASDAQ is actually in the money now which is very good for me.

Speaker D: Okay. Yeah. Ah cool. Okay let's go to one another let's go to retailer that did have a bit of a profit warning this we've got Jack asking about uh Shoe Zone. The uh cheap affordable shoes retail. I think they do mainly in store but they do a bit of online. I uh don't want the, I don't want the valuation is but I've got a look at the share price but I think about three years ago it topped out about was it 270 and now it's down to 67p. What's your view on this? Uh sort of like affordable shoe business.

Speaker E: Uh, I'm not really taken with it. I mean its performance has deteriorated a lot. We had a full year trading update uh middle of this week um and it's actually generated a small loss of 1 million pound adjusted PBT. Um, and, and the outlook. There seem to be a lot of negative words used in the outlook, um, statement, um, the business model. I mean I don't think it's going to go bust. Um, and you have got a net cash position there. Um, but it's just very difficult to assess, isn't it? And I think the trouble is as well for retailers, um, several have mentioned in the last few days, uh, higher business rates. Rates, uh, which is the concessions are being made for the hospitality sector but not the retailing sector. And um, higher wages. You had, what was it, 3.9%, I think minimum, um, wage which is pricing a lot of younger people out of jobs altogether really. And the retailer, you can only cut the staff level so much. Remember once I tried to get all the wages cost down, as I said, of revenue in my CFO days.

Speaker D: I bet they

Speaker E: loved you.

Speaker D: I bet they loved you.

Speaker E: Well, the trouble is the store managers tried to do it and it turned out that we had a two, A two store, two floor store in Brighton with entrances and exits, you know, on both floors and there was only one member of staff downstairs, nobody upstairs. So the local, uh, the local trash, if I can call them that, uh, discovered this and went in with laundry bags and just scooping the clothes. So my wages cost went down and my stock loss went through the roof. So it's, it's difficult, isn't it?

Speaker D: Yeah. Okay, cool. Um, all right, we've got a quick one. Actually we don't talk about it very often. Uh, sell high one he's asking about, um, Basically it's River Global, the small sort of like um, used to be, not a fund manager. Basically they own a 30 stake in a business called Parmenion. I know a bit about this because, uh, I did actually previously own the shares. Any, any, any thoughts on this one? They've, he's saying that basically they're looking to sell that 30 stake though. It's been put up for sale but they're delisting the shares. Any quick thoughts on this one?

Speaker E: No, I'm sorry, I haven't looked at this one. It sounds a bit of a special situation. So. Yeah, you'd need, you'd need to do a proper analysis on it, which I, I can't do unfortunately.

Speaker D: Let me just put the chart on it. I'll, I'll um, run through it a bit. Um, I don't. I mean I did own the re. I used to own these. Used to be part of uh. God, who was it? River Mercantile. It basically came out of, I think. And anyway, they rebranded themselves into River Global and they split themselves into a bunch of different shares. The fund manager was sold off to, uh. God, I can't remember who it is. Basically one of the big ones, um, gives you the P, I think. But anyway, one of the big bit of big fund managers, anyway, it leaves on with these, the B shares. They've only really got one asset, which is this 30% stake in a financial services business, um, which has been the. The private Equity guy owns 70% of it, who's now running through an auction process for it. And that's been publicly disclosed. And the valuation of that 30 stake is somewhere between 55 and 65p. And I've spoken to Christopher Mills of Harwood on it and he says, look, that's. That's a modest valuation. It could well be higher. So this is an unbundling. Christopher has gone all. He was on the board of River Global, so he obviously knows what he's talking about. Um, and he sees particular, you know, upside. The shares are obviously very cheap if you're prepared to, you know, wait. And the only other side is that if you're gonna. If you're interested in buying these, and they're 34p with a potential upside to go to 60, you could almost double your money in the next year. It is. The only downside is they're delisting the shares before that that money is. Comes through. Okay. So if you hold it, if you hold in an ISA account, you're going to be. It's going to be automatically pushed into your dealing account. Uh, but you can keep it in your daily account and you can probably keep. He says you probably keep it in your SIP account. So just be careful where. If you want to go into this as a special situation, that's where you own it. But, uh, yeah, I mean, Christopher is the. Is the person to speak to and he. At Mellow last year, I remember somebody asked him about it and he said, look, you know, we know a lot about this. We own 30% of it. Uh, the business is doing very well indeed. And clearly Preservation Capital, the equity, the private equity guys who own 70%, you know, love the business and are putting it up for sale because they believe it's going to get that type of number. Um, so I think, I think you just. I mean, it's just one of those things. If you're prepared to have a delisted share, then you could well double your money in the next 612 months.

Speaker E: Sounds interesting. Yeah,

Speaker D: yeah. Okay, cool. Um, got a couple of emergency fundraises to go for. We got Helen, first of all asking for Pulsar Group, the, um, SAS software business that sells its services to corporates who want to know how their brand or their activities are viewed elsewhere across social media. They were doing okay until they had, they slipped up, I think, in terms of, um, cash management had to pay a few more extra costs. Anyway, the shares have been suspended, I think, and they're pending a 5 million pound, um, emergency fundraiser. Any quick thoughts on this one?

Speaker E: Yeah, we warned our, we've been warning our readers about this stretch balance sheet on this one for nearly two years actually. Um, and on 18th of August we went bright red on it from amber red when there was the press speculation about a winding up petition being issued by hmrc, which I think you and I discussed at the time as being a serious red flag. You know, when that came along, you know, it was very obvious it would need to raise emergency funding. So anyone, um, who got caught on this, obviously, I feel sorry for it because they're quite a hefty discount, I think, actually, let me just double check. Have they announced the price on the Pulsar deal?

Speaker D: I don't think so, no, I don't think they've come out. I think they're on that capital access, sort of like suspension.

Speaker E: Yeah, there were two of them but, uh, I think this is the one where I would imagine that there will be quite a deep discount, um, because whoever's prepared to put new funding in, there's very few of them around. A broker told me there's only about 15 phone calls. We, uh,

Speaker D: yeah,

Speaker E: we could, we can make for this type of thing of people who are actually institutions or family in it, uh, high net worth, who are actually prepared to take the punt on this sort of thing. So, uh, yeah, I maybe. Didn't they say it was 14p or something? I might be. There'd been a few of these things I might be getting muddled up.

Speaker D: Yeah, I haven't seen it but, um, I did. The shares are currently 14. Fifteen piece, maybe, but I haven't, I hadn't seen

Speaker E: it.

Speaker D: I thought they were. Yeah, um,

Speaker E: yeah, I mean it'll be. I mean, look at the chart. Oh my God. I mean, you know, but the writing was on the wall. It was, it was obvious. You could have sold those at about, about 36p after the bad news had come out, you know, so. But it's so easy to read a balance sheet and a cash flow statement. I Don't understand why more people almost ignore um, the, the financial position companies are in. It's crazy.

Speaker D: Yeah, well, the main thing is that read the balance sheet and then you have a view about whether it's, it's priced accordingly. Because I know uh, people like Richard, Richard Crowe and some serious situational investors look at distressed financial and distress operations and don't run away from distressed balance sheets as long as the price is very, very attractive and you believe it's mispriced because of it. And that's why, you know, when he, when he wins, he wins big time because he gets that, all that operating leverage, you know. So, you know, it's one of those things is such that you have to be, you have to do deep, really detailed, you know, sort of financial banking covenant type, you know, analysis, which I know he does, you know.

Speaker E: Yeah, I mean I think you can get away with a stretched balance sheet. Don't get me wrong, I'm not saying avoid. I agree with you. If risk reward is, is attractive, you can get away with the stretch balance sheet. But where you have actual financial distress press, which you did with Pulsar, uh, when they said

Speaker D: yes,

Speaker E: we've had a winding up petition from hmrc. I mean HMRC don't do that unless you're, you've reneged on a whole set of payment plans and you know, I've been there, I've been on the receiving end. Well, not, but not personally but uh, for a business and you know, when they run out of patience with you, you're at the end of the road basically, unless you can raise more cash. So that was. Pulsar was an avoidable one because people should have seen that coming.

Speaker D: Yeah, no, I think you're right. Okay, we've got one final final in the same area. We've got Mark asking about Zinc Media, which is the TV production, they similar sort of thing. I mean you've called this perfectly right because uh, they had a string of contract wins recently largely I think in the Middle east and you know, to basically do TV productions out there. Um, unfortunately I think they're not getting paid from their Middle east customers and therefore they need to do an Emergency fundraise of 2 million. Anyway shares didn't like that at all. What was your take on it?

Speaker E: Yeah, I've always been negative on this one and I'll tell you why. Because the webinars they've done, um, are just, it's like the, the, it's like the management are on LSD or something. I mean there's no correlation between the way they talk about the business and the actual numbers, which are terrible. So. No, I just think it's an absolutely rubbish business. I'm sorry.

Speaker D: Yeah, well, they managed, I think they managed to get 2 million away, didn't they? At 30p. But, um, you've just seen that was the

Speaker E: one. Yeah. 30 odd percent discount. That was the one. But it just makes losses every year.

Speaker D: Yeah,

Speaker E: it's ridiculous. Yeah,

Speaker D: yeah. All right, cool. We've been going for, um, what, basically, uh, 80 minutes. So, um, thanks everyone for your questions. Covered a lot of ground. Obviously a big week on the actual budget and, uh, gives us plenty of time to, uh, hit down the pub and, uh, enjoy ourselves. So, uh, thanks again, Paul.

Speaker E: Yeah, thanks, Paul. Thanks everyone. Bye for now.

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