May 18, 2024 · 39 min
UK small caps face a valuation test
IC018 Investor's Champion Investment Ideas & Weekly Wrap Up Covering, Experian, AIM and UK small-cap focus IQGeo, Brickability, Michelmersh Brick Holdings, Lords, Angling Direct, Zotefoams, Creo Medical & Renew
The discussion weighs whether discounted UK equities offer genuine long-term value or reflect structural weaknesses, takeover risk and uneven growth prospects.
- 1UK-listed companies trade at discounts that attract foreign bidders, but repeated takeovers could weaken London’s market ecosystem.
- 2Experian combines strong margins, cash generation and data assets with growth opportunities that support its role as a quality holding.
- 3Brickability, Zotefoams, Creo Medical and Renew Holdings show how valuation, innovation, cash flow and management quality shape small-cap investing.
Don't miss
Renew Holdings becomes the clearest example of how a seemingly dull engineering-services business can compound through improving margins, reliable cash flow and disciplined management.
The brief
Chris and Lee open on the UK’s valuation discount, takeover wave and the ambition to build global technology giants, asking whether London can support smaller innovators.
Travel stocks send mixed signals: TUI’s strong winter bookings contrast with On the Beach’s share-price fall, raising questions about its agency model rather than holiday demand.
Experian stands out as a quality holding, with margins, cash generation, returns on capital, data assets and North American and Latin American growth opportunities.
The small-cap review tests different investment styles, from Brickability’s possible construction trough and Angling Direct’s expansion plans to Zotefoams and Creo Medical’s riskier innovation.
Renew Holdings makes the case for boring businesses: improving margins, dependable cash flow, diversified contracts and strong management can matter more than an initially unexciting profile.
The episode’s central lesson is practical rather than fashionable: judge companies by cash flow, capital discipline and management quality, while watching for warning signs.
What was said on this episode
36 statements · 27 positive · 8 negative · 1 mixed
IQGeo provides geospatial software for telecommunications and utility operators.
“IQGeo provides geospatial software to the telecommunications and utility operators.”
Listen at 3:01
The London stock market is somewhat depressed.
“I think it is somewhat depressed.”
Listen at 3:57
IQGeo could become substantially larger with patient supportive shareholders.
“This business could be substantially bigger than it is.”
Listen at 5:40
A UK homegrown trillion-dollar technology giant is unlikely under current conditions.
“To think that we can develop a trillion-dollar homegrown tech giant, and that's— he's focusing on tech, I think really is wishful thinking.”
Listen at 6:27
UK policy should encourage and support smaller AIM companies before pursuing trillion-dollar technology giants.
“I think we need to really start at the bottom and we need to start— he needs to think in the reverse. Start encouraging the smaller ones, nurturing the smaller businesses, the smaller companies on AIM, making it easier to list as well, and offering greater support, even offering greater support at the lower tax level.”
Listen at 6:34
IQGeo could grow from roughly £300 million to £1 billion within a few years.
“that £300-odd billion business could be easily a billion-pound business. Yeah. Not easily, but it could grow to that in a few years' time.”
Listen at 7:17
Lord Lee is unconvinced that Shein would benefit London’s stock market.
“I'm Well, I'm not convinced.”
Listen at 10:58
Low-cost investment products generally improve long-term investor outcomes by limiting fee drag.
“The best way of performing is investing in low-cost products, because if you look at things over the long term, the costs could really eat into your returns.”
Listen at 12:10
Investors should seek the lowest-cost investment products when complex advice is unnecessary.
“you should be basically seeking out the lowest cost products possible.”
Listen at 12:29
TUI’s strong winter bookings indicate promising momentum for the upcoming travel season.
“TUI reported its winter booking season ended strongly. Seems to be doing well, promising momentum for this upcoming season.”
Listen at 13:52
Experian has strong margins, cash flow, and high-single-digit growth.
“It makes great margins, great cash flow. It's growing quite nicely, not rocketing, but growing high single digits growth.”
Listen at 15:50
Experian has operating margins above 20%, strong cash flow, and high returns on capital.
“Nice margins, operating margins, 20% plus, sorry. Great cash flow, great return on capital.”
Listen at 17:05
Experian’s Latin American operations offer significant growth opportunity.
“In Latin America, which offered a big opportunity.”
Listen at 17:44
A construction-sector recovery would positively affect the broader UK economy.
“we firmly believe that all things positive start with construction. If the construction sector kicks back into life, that's going to feed down into everything.”
Listen at 18:13
Brickability director purchases may indicate construction is near a cyclical trough.
“Is this a good sign that we've reached the sort of trough of the cycle, that it's onwards and upwards here? Are things going to start looking up?”
Listen at 19:03
Michelmersh Brick Holdings shares are significantly undervalued.
“We think the shares are super cheap.”
Listen at 19:32
Michelmersh has net cash, share buybacks, and approximately a 4.5% dividend yield.
“it's got a great balance sheet, net cash, buying back shares, nice dividend income, about 4.5%.”
Listen at 19:53
Lords’ dividend is effectively being funded by debt, which is financially undesirable.
“this dividend's really being paid out of debt, which, yeah, it's never a good idea from our perspective.”
Listen at 20:59
Lords’ dividend is not covered by free cash flow despite adjusted earnings coverage.
“It's not covered 2.2 times by free cash flow. It's just, it's not actually covered.”
Listen at 21:53
Dividend sustainability should be assessed using free cash flow rather than adjusted earnings.
“make sure it's also covered by free cash flow because a dividend is paid out as cash and the cash being received, incoming cash, has to cover your outgoing cash.”
Listen at 22:04
Angling Direct trades below tangible net assets, with substantial cash backing.
“the shares look really very cheap at the current 37p share price. It was only valued at £28 million, and its tangible net assets, those are its tangible hard net assets, are worth £32 million, and nearly half of that's in cash.”
Listen at 24:09
Angling Direct generates free cash flow despite low reported profits.
“It is generating free cash flow.”
Listen at 24:33
Angling Direct should prioritize further UK expansion over overseas expansion.
“I would have thought there's plenty to go after in the UK rather than going overseas, which is harder to support”
Listen at 26:17
Angling Direct should avoid wasting its cash on expansion.
“We would implore them not to squander that cash.”
Listen at 26:32
Zotefoams has developed a fully recyclable packaging substrate for beverage cartons.
“they've developed something fully recyclable, mono-material barrier packaging substrate for beverage cartons.”
Listen at 27:30
Zotefoams’ valuation appears reasonable relative to its innovation upside.
“the valuation is not crazy, I don't think, given the upside potential for this innovation.”
Listen at 28:27
Creo Medical develops innovative surgical-endoscopy devices for a potentially large market.
“this is a medical device company in the emerging field of surgical endoscopy, and it's got highly innovative addressing a potentially huge market.”
Listen at 28:48
Creo Medical’s products could generate tens or hundreds of millions in revenue with high margins.
“the potential is to be tens, hundreds of millions in revenue. Uh, and huge margins from it because it's a lot of the values in the intellectual property.”
Listen at 30:01
Creo Medical may fail to achieve commercial traction.
“This thing could never get going. That's the risk.”
Listen at 30:47
Creo Medical must demonstrate significant benefits to persuade surgeons to adopt its products.
“it's got to be proven to be significantly more beneficial for them to use their product, which is, as I said, really tough.”
Listen at 31:10
Creo Medical has obtained FDA and European regulatory clearance.
“They do have FDA clearance now and they have European clearance as well”
Listen at 31:44
Medical-device scale and market entry create a substantial barrier to competitors.
“But once you do, but if you do get up to scale and once you get in, it's a massive barrier to entry.”
Listen at 33:19
Renew Holdings has increased net margins to roughly 5–5.5% and generates substantial cash.
“Now its margins have actually grown. So this thing initially was about 2-3% net margin. Now it's 5%, 5.5% margins. So they've been ticking up all the time and it manages its capital really well. It generates lots of cash.”
Listen at 36:30
UK net-zero investment could reach £600 billion over five years.
“There's talk of £600 billion over the next 5 years to meet the target of net zero carbon emissions.”
Listen at 37:03
Network Rail’s £32 billion renewals and maintenance commitments benefit Renew Holdings.
“Network rails commitments, £32 billion on renewals and maintenance. Again, right in their sweet spot.”
Listen at 37:24
A significant decline in Renew Holdings’ margins would signal a problem.
“If you see that ticking down significantly, that's going to be evidently an issue.”
Listen at 38:26
Statements are attributed to the speaker as said on the episode and reflect their view at the time, not PodLume's. They are not advice.
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