UK value nano cap with large upside and capital returns

Fat pitch value.

Hi all.

• Dirt cheap company with brands over 100 years old

• Normalised prices to earnings under 8

• P/S under 0.4

• Company resilient to crisis, low cyclicality

• Returns most capital as dividends

Intro

I will sometimes alternate between full write ups and quality investing (like my write up on Text SA or E-commerce plays where I try to really understand products using my sector experience), and shorter pure deep value investing, something more rare online, where there is more focus on the big picture and quantitative metrics. That will allow me to be faster and explain the reason for new deep value tracking positions. These ideas are called “Fat pitch value.”

The last UK nano cap I pitched last year Here has executed pretty well, with two acquisitions, some buybacks, growing EBITDA and net cash. I still hold despite a stock re-rating as I leave the management the benefit of the doubt in the good use of the amount of cash it has. Selling too early could be a mistake and I try to go towards a Coffee can strategy that captures upsides bigger than downsides.

For this new company, I don’t expect or need any strategy execution. I just need that the 15 years old trend regains its preeminence against an exceptional 2022-2023.

Start

It is a UK nano cap under 100 million Pounds, with a long established set of brands and worldwide sales. I could pretend that there is huge growth like “company at 10 times earnings growing 100%”, but if your earnings go down 50% and later double, that’s not really “growing”, while it is technically what I think will happen for this company.

Here we are about durability and stability, classic brands at low prices, and good cash flow generation to distribute to shareholders. And not cyclical shoes or clothing, which can give really unpredictable sales numbers.

Using simple data analysis and mean reversion I come to the conclusion that it is undervalued with a P/E of 8 even with earnings below the historical trend line. According to medium term management profitability targets, we are could to be soon at 4 times profits before tax, and I view this as possible.

This is mostly due to the inflation impact on costs and stocks that are normalizing for many UK businesses. I don’t know when the improvement will show in the results fully, in 2024 or 2025, so it’s not about timing. Value investing is about waiting.

I have been spending countless hours analyzing charts and percentages for my work in data analysis that this just comes up as another pattern in the profitability chart that I share below. I analyse this in Koyfin charts (affiliate link). To be fair, even the free version is well usable.

After this teaser, I will go with the details below:

PS: For free subs - I am preparing a free email next that will contain various ideas summary.