Small Caps Live Weekly Summary

Tariffs CAPD G4M SDI

A rather bonkers week in the markets this week. Trump announcing wide-ranging tariffs on almost all trading partners means that a recession in the US is looking increasingly likely. Going into such a scenario with one of the highest-rated and most concentrated US market ever, is never going to end well for US equity investors. Investors tend to be pro-cyclical when it comes to fund flows, chasing recent performance. For several years now, the outperformance of the S&P500, combined with the narrative that US large tech is the only place to be and the increasing move to passive investing, has meant investors were directing increasing flows into the S&P500, making a virtuous (or vicious, depending on your exposure) cycle. These flows have been to the detriment of any other markets, most of which have seen valuations compress.

We are yet to see if this cycle has reversed for the foreseeable future. However, it is good to see that Europe & UK indices have significantly outperformed the US over the last week or so. The problem is that they have still been down, just not by as much. As they say, “you can’t eat relative performance”. The type of smaller companies that many of us invest in have also had a tricky time. The reality is that Trump tariffs will impact even UK-focused small caps, just not as much as US firms or those with direct exposure. It is these second-order effects that are so hard to predict. For example, in the short term, some companies may benefit from the rush for orders before the tariffs come into place. This means that most UK small caps have continued to suffer purely due to the uncertainty.

Also announced on Friday is that China is retaliating with 34% tariffs on US goods and restrictions on the export of rare Earth Elements. This time, the FTSE100 is actually off more than the S&P, although we are guessing that oil and copper being down 7% isn't helping matters here.

A lot of wider UK sell-off appears to be more about liquidity than a rational assessment of tariff impact. The most liquid stocks have sold off, presumably by hedge funds and institutions. At the smaller end, the most popular PI stocks are taking the brunt of it for small caps. For example, W7L, SLP, SUP, MPAC, MSI, BKS, and GMS are amongst the biggest fallers.

In this environment, it is unsurprising that our discussions around specific stocks have been a bit limited. Here’s a selection of what we did discuss:

Capital (CAPD.L) - Signing of Reko Diq contract

This was expected, given that they were negotiating with an existing major client, but it's good to have something happen on time here for a change! These are the details:

This transformative agreement sets the stage for long-term success, with operations extending through to December 2028 and generating over $60 million in annual revenue once fully operational. The agreement also includes a provision for a five-year contract extension after 2028.

This is what they said when the mining services contract was first announced in January:

An early works civils and mining services contract award:

Reko Diq Mining Company ("RDMC") has received internal Board approvals for Capital to carry out these works, with both parties working to finalise contract T&Cs.

The initial contract is anticipated to have a 3-year term with works focused on the construction phase of the project prior to first production.

The first items of equipment are due to arrive on site in the first half of 2025 prior to commencing the agreed scope and ramping up in the second half of 2025.

So they may be ramping down again in FY2028. Previously, we would have said that the 5-year extension was a given as many of their drilling contracts run to twenty years now. However, recent experience with the mining side of the business should make investors very cautious here.

$60m revenue is close to the maximum of $65m that they generated in 2024 from mining, but Belinga never really got going. We don’t know what proportion of their fleet is being used on this. So, it is not clear how good a deal this is. At the very least, it still looks like diworsification versus a very profitable African drilling business.

Gear4Music (G4M.L) - Trading Update

Here’s the rub:

Financial performance in February and early March 2025 was subdued, primarily due to aggressive discounting from underperforming competitors in both the UK and Europe coupled with ongoing weak consumer confidence. However, both UK and European like-for-like (LFL) sales improved markedly in the latter half of March, with early indications suggesting that the competitive pressures may be easing as a result of a number of significant retailers experiencing trading difficulties and now exiting the market.

Reading the small print reveals a huge profits warning. Progressive not only cut FY25 EPS by 43% but FY26 by 44%, suggesting this isn’t just short-term industry dynamics. The only thing this company really had going for it was looking ok value of FY26 numbers. With these now slashed, it looks expensive again. It really is a mystery as to why this company didn’t fall more than 50% this week on this news. Similarly struggling retailers without debt have seen much bigger falls in the current markets.

SDI (SDI.L) - Acquisition

This is what they paid:

steam and hot water systems for industrial applications, for a net consideration of c.£1.85m.

This is what they got:

For the year ended 31 March 2024, Collins Walker delivered revenue of £0.94m and a reported EBIT of £0.31m (all unaudited).

So 2x revenue, 6xEBIT. It doesn’t sound like a particularly high-tech business, nor really a material business financially, which does raise some questions about how they make such large EBIT margins selling industrial equipment. There were only five staff members, so it is certainly possible that the seller only paid themselves a nominal wage and isn't going to do the job for the same amount in the future. It is also possible they have retired, and all of their functions will be done by existing SDI staff. This is still a hidden cost, though.

The brokers have updated FY26 forecasts by £0.8m revenue and £0.2m EBIT, which would imply that they aren’t going to even repeat those historical numbers, making it look like a worse deal. It seems that the days of companies such as SDI buying material private companies on 3xEBIT are long gone. They have had to pay up, even for this very minor purchase.

That’s it for this week. Have a great weekend!