Small Cap Value Report (11 Apr 2016) - BAR/PIER, XPP, CRPR, SSTY

Good morning!

I wrote a catch-up report yesterday, being the one that I missed on the day, last Monday. It's here - and includes my thoughts on the Sepura (LON:SEPU) profit warning, plus a couple of other interesting companies. So why not have a read of that whilst waiting for today's report to emerge?

Eclectic Bar (LON:BAR)

Share price: 75.6p (up 29% today)
No. shares: 16.2m existing shares + 15.455m new shares = 31.66m after Placing
Market cap: £23.9m

As you can see, I have manually adjusted the market cap above, to take into account the 55p Placing done last Friday, which together with a hefty loan from Barclays, is funding the purchase of Brighton Pier. The shares were suspended on Friday, and have come storming back into the market today, up 29%. Clearly a big vote of confidence in the expansion of the company, and the key figure behind this new strategy, Luke Johnson, one of the UK's top entrepreneurs.

An announcement today says that a new admission document for the enlarged company will be available on its website later today. I've had a quick look, and can't find it yet, but that should make interesting reading later.

It's a bold move to expand from bars into experience-led attractions. I can see the opportunity to improve Brighton Pier, but that will come at a heavy cost - a large, and ongoing capex requirement. For that reason, personally I'm not tempted to chase up this share on the initial excitement of this deal. It's certainly an interesting one to watch though.

XP Power (LON:XPP)

Share price: 1618p (up 2.6% today)
No. shares: 19.2m
Market cap: £310.7m

Trading update - this Singapore-based company has a full UK listing (so much more palatable than overseas + AIM, which very often spells trouble). It also has an excellent track record of profits, high margins, cashflows & divis. So it's a company that I would certainly consider investing in.

Trading is going well:

Trading in the first quarter has been strong. Group revenues in the three months to 31 March 2016 were £28.2 million (2015: £25.6 million) up 10% from those achieved in the same period a year ago. In constant currency, revenues were up 6%.

Order intake in the quarter was also encouraging at £30.3 million (2015: £27.9 million) up 9% on the same period in the prior year. In constant currency order intake was up 4%.

What's interesting, is that the constant currency comparisons have reversed - remember last year, many companies were reporting lower sterling growth than in local currency (often US dollars)? Note from the above that this has swung round, so that the sterling figure for growth is now above the local currency. So there might be opportunities for companies affected in this way to beat broker estimates, if the broker has taken a cautious stance on currencies.

Net debt is negligible, at £3.7m

Dividends - unusually for a company of this size, it pays dividends once a quarter. The Q1 divi has been increased 8% to 14p. The forecast yield for 2016 as a whole is about 4.3%.

I can certainly see the attraction of receiving a quarterly divi of c.1%, for income seekers.

Valuation - the PER of just under 15 for the current year looks perfectly reasonable, considering that it is conservatively financed, and a quality company.

Outlook - sounds fine. Maybe there's scope for the company to exceed forecasts as the year develops?

The Group has made a good start to its financial year, with the strong order intake experienced in the last quarter of 2015 continuing in the first quarter of 2016. It therefore remains on track to grow in line with our expectations in 2016.

My opinion - overall, a thumbs up from me, on a quick review of the figures.

James Cropper (LON:CRPR)

Share price: 730p (up 10.6% today)
No. shares: 9.2m
Market cap: £67.2m

Trading update - this looks good. The heading is "Trading materially ahead of expectations".

This covers the 53 weeks to 2 Apr 2016:

During the calendar year 2015, James Cropper and notably the Technical Fibre Products division experienced healthy sales growth. This trend has continued in the first calendar quarter of 2016.

The financial impact of the events of late last year as announced on 15 December has yet to be fully quantified but the board is confident that insurance and other mitigating factors will compensate for any adverse financial impact including business interruption. A fuller update will be available by the time that the Company reports its full year results in June 2016.  The board is confident that, even before recent favourable FX movements, the Company's full year results will materially exceed market expectations. The outlook for the financial year just starting is encouraging.

That's all great, but going back to one of my articles last week, the question is - why are they leaving us in the dark by not quantifying the out-performance? Materiality is generally considered to be a 10% or more change in profits. So the trouble is, in this case, as no guidance has been given in terms of numbers, the out-performance could be 10%, or it could be 50%! We're really just left to guess, and then try to get hold of the house broker's updated note asap, since he will have been told what the figures are. Altogether a very unsatisfactory way of doing things, but this is normal unfortunately.

I would have much preferred if the company had said, we now expect profits to be in the range of £x - y, subject to audit adjustments. That way we could make an informed decision on whether to buy, sell or hold the shares.

As yet no updated broker notes have made it into my Inbox, so I can't really go much further with this one. Although looking at the old forecasts, EPS of 32.1p was the 2015/16 consensus, so if they're materially above that, then we're looking at 35p+.

Consensus EPS forecast for 2016/17 is 43.3p, quite a big jump, so there must be some kind of growth story underlying this. I haven't looked at this company for about 10 years, so am rather rusty on it.

Pension deficit - of £14.4m was shown on the last Annual Report's balance sheet. So I'm just flagging this as an issue.

My opinion - the historic figures don't look particularly exciting, nor enough to justify a £67.2m market cap, so clearly the market likes some growth aspect of this company.

There hasn't been much growth historically, and the dividends are poor, at just over 1.3%, so at the moment I'm not seeing anything much to motivate me to dig any deeper. If any readers have looked into this company in more detail, then please feel welcome to add your thoughts in the comments section below.

EDIT: I understand from my broker, that supplying recyclable coffee cups to McDonalds is the potential exciting upside on this stock. Sorry I didn't know this earlier.

Safestay (LON:SSTY)

Share price: 54.5p (down 1.4% today)
No. shares: 35.4m
Market cap: £19.3m

Results y/e 31 Dec 2015 - these results look poor at first sight, key points being:

Turnover more than doubled to £4.0m

Operating profit fell from £580k in 2014 to £210k in 2015

Finance costs now highly material, at £821k in 2015

Moved from profit of £137k to a loss before tax of £610k in 2015.

Although as the narrative explains, the rapid growth necessitates taking on overheads in advance of new sites opening. 2 new sites were opened in H2 of 2015, so those should make a bigger contribution in 2016.

Balance sheet - is now looking very top heavy, with £42.3m in fixed assets (mainly properties), financed by c. £28m in debt.

My opinion - this looks a very inefficient business - it requires an enormous asset base to generate currently no return at all, it's actually loss-making. I accept that some of that might be due to growth pains, but it does call into question the whole business model.

Further growth will, in all likelihood, require further discounted placings, so it's difficult to see the share price making any headway. With no divis likely for a long time, this really looks a very unattractive investment proposition in my view.

I like the concept, but the numbers just aren't working as yet.

If you look on the website of Hostelworld (LON:HSW) - there are large numbers of hostels these days. It seems to me that there may be limited scope to build a group with any competitive strengths, when budget travellers just want a clean & cheap place to rest overnight. Looking at the user rating for Safestay's hostel at Elephant & Castle, it scores 8.4 out of 10 overall, which is good, but there are plenty of other hostels in London with higher scores.

All done for today. See you tomorrow!

Regards, Paul.

(usual disclaimers apply)