Small Cap Value Report (11 Feb 2015) - TRI, DPP, PTCM, TNG, LTC

11th Feb '15 by Paul Scott

14 comments 18580 reads

Good morning! Do have a play with the new "Ranks" tab on the black menu above - it's great!I was experimenting last night, it's a new page to allow you to browse the stock ranking system here.

Trifast (LON:TRI)

Share price: 113.3p
No. shares: 116.2m
Market Cap: £131.7m

Trading update - this looks positive - note the "ahead of ... expectations" bit (although that refers to organic growth, not profitability - although they should mean the same thing);

The update also refers to improved efficiency driving higher margins, and the potential for more growth through acquisitions.

My opinion - I've previously been sceptical about the valuation here, but given the positive news this morning, and what now looks like a fair valuation, I'm considering buying a few of these shares at 113p. The company has a good track record (see the Stockopedia graphs below), and seems reasonably priced for a company that has been consistently meeting or beating expectations in the last few years;

I didn't take to management when they presented at a Mello event a couple of years ago, but it looks like I misjudged them, as the business has performed well since.

DP Poland (LON:DPP)

Share price: 12p (up 27% today)
No. shares: 95.4m
Market Cap: £11.4m

Trading update - this company has exclusive rights over Dominos Pizza in Poland, so the hope has always been that the company could replicate its huge success in the UK. So far the company hasn't even come close, with terrible financial performance to date.

The company operates 12 branches in Warsaw & Krakow, with a further 6 franchised branches. Like-for-like ("LFL") sales were up 19% in 2014, which is very good (but from a low base).

The top 3 stores moved from EBITDA losses of avg. £13k in 2013, to positive £24k in 2014. That's a good improvement, but throwing a bucket of cold water over bulls, I would point out that capex is not paid for by the tooth fairy! The fit-out for this type of store is about £400k in the UK, so whilst it might be cheaper in Poland, you would still be looking at a significant amount. Therefore the depreciation charge is almost certainly bigger than EBITDA, meaning that the top 3 branches are actually still loss-making!

Bear in mind…

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FREng

11th Feb '15

Paul

Red24 (LON:REDT) has issued a positive RNS this morning. I'm happy to be long.

gl196

Any views on ZZZ?

Jack Brumby

Looked at DPP a while back came to the same conclusion re. capex and cash burn -- assuming DPP does gain enough traction in the Polish market, it will probably still have to raise more money before that point.

Of Domino's Pizza Group (DOM, not DPP), its RoI business has faltered at points and its Germany business looks to have been a pain. Switzerland seems on track and the UK is thriving. Clearly the model does not work everywhere, or can be a bumpy ride as the brand establishes itself and the marketing and promotions do their work.

This may be the case in Poland. The management are experienced and any significant pick up in business will be well-flagged for those that choose to keep their eye on this one. Just no point being in it right now.

MrContrarian

Snoozebox (LON:ZZZ) still jam (possibly with a croissant) tomorrow. An EBITDA loss in 2015 is disappointing since it excludes the cost of the V2 unit.

EPS f/c was already for a 0.58p loss.

I've seen the demo V2 and it looks very good but long term earnings visibility is still poor.

Beginner

Hi Paul
For what they are worth, here are my views on Porta Communications (LON:PTCM) and Latchways (LON:LTC) . I have a small holding in the first, and have the second on my watchlist. Porta Communications (LON:PTCM) is really a gamble on the management. They are experienced and have done this growth by acquisition job before. In other fields it has worked well (eg Oxford Instruments (LON:OXIG) and Melrose Industries (LON:MRO) ). The credibilty gap they created will take some bridging, but I am happy to give them the benfit of the doubt for now. Results in April will allow me to decide if this is worth putting a little more into or not. As the price appears to be being suppressed by a seller, little dips below 7p could be a buying opportunity in the present.

As for Latchways (LON:LTC) their niche products are a positive, but the problems in the US that started the price decline here have not been sorted out yet. The US is a key market, especially at the moment as it is one of the few areas of economic expansion. We should also not foget their ultimate markets include aviation and oil engineering, so their could be further setbacks to come. I would be happier entering below 700.

Aislabie

I have held Trifast TRI or a while now and have been very happy with their performance, but as you noted in earlier comments this is in the end a nuts and bolts company that is riding on a (welcome, if modest) UK manufacturing revival.
It is a general concern for me that for this revival to continue some worldwide growth is needed to take things much further. This concern also affects holdings in Hayward and Tyler HAYT, Castings CGS, 600 group SIXH, Scapa Gp SCPA and others.
Is it time to look sceptically at this sector in general? Usually the market anticipates downturns and I wonder if anyone else is beginning to find their finger hovering over the "SELL" button

VegPatch

A few things catch my eye with DPP (£DPP)

It is the smallest in a very successful stable of quoted Dominos Pizza master franchises. Dominos Pizza has thrived in just about every territory that it has entered. It seems we all love a stuffed crust, double pepperoni with extra jalapeno. Look at the global store footprint: 5016 stores in the US, 6265 stores internationally with management estimating it can grow the international store footprint by a further 50% to 9300.

DPP has had its troubles, but has changed internal management, changed some of the operating metrics eg replanned the stores to make them smaller (less rent payable) to try and deal with them. Importantly they are getting the Pizzas to the customer hot and as ordered. I hope they can improve it enough to get the model to work because when it does, it is phenomenally successful. I agree with Paul cash burn will probably require the business to seek extra capital which will be problematic. If though, the stores can be brought to cash profitability I expect management to sell down its remaining 12 corporate stores to franchisees and accelerate the roll out. That is when investors will make serious money.

I had a good look at the Dominos franchise system about 3 years ago and made the worst decision based on upside rather than what was my downside. I bought DPP, not the parent company Dominos Inc ($DPZ). One has tripled the other has halved !

So why haven't I sold ?

As i mentioned this is a tried an tested model for consumers AND investors.
Some interesting stats

One thing to point out is that Dominos Inc ($DPZ) has an EV/Store of £930k / store but this is misleading as all of the 6265 international stores contribute c3.1% of revenues as a royalty payment pa for the right to use the Domino’s brand. This provides DPZ with an extra $240m of revenue pa at a 49% margin. I have not adjusted for this in the spreadsheet.

If I compare DPE (Dominos Pizza Enterprises: quoted in Australia and owns master franchise for Aus, NZ, France, Netherlands and Japan) and Domino's Pizza (LON:DOM) (Dominos Pizza plc which owns master franchise for UK, RoI, Germany & Switzerland) they both capitalised with an EV / store of c£1m. These are mature proven formats making cash profits and paying dividends to investors. So not a fair comparison with DPP, which is more of a very immature, ugly step sister at best. But DPP originally wanted to get to 200 stores (from memory, I may be wrong). Maybe this could be 100 long term? If the model can start to work then this could be worth £50m (100 stores capitalised at £500k, a 50% discount to the valuation of Domino's Pizza (LON:DOM) and DMP) vs current mkt cap of £9m.

This probably a case of hope over reality but explains why I still believe it COULD be possible and why I am holding on.

aiminvesting

The results misrepresentation in January 2014 was very convenient for Porta Communications (LON:PTCM) in my opinion, if you consider they managed to double the share price just before placing the shares they needed to fund some acquisitions. In fact, that is all very nice for existing shareholders, since it minimized the dilution caused by the placing. Of course, downside is that management have lost most of their credibility with shareholders, and I am sure the Insititutions which participated in the placing appreciated. Not very clever on the long term. And of course, quite annoting for private investors who, like myself, invested on the basis of the dishonest trading statement, and later discovered they had been used to inflate the share price.

Trying to dig in the numbers announced by Porta Communications (LON:PTCM) , an I am quite intriguied by tehe statement "Such was the success [in Newgate Australia] that the impact of the weak Australian dollar will affect Group profits before tax by approximately £200,000."

I am not an accountant, and know little about how overseas profits are translated, but here is how I undertsand it:
That means PBT in that business would have been £200,000 HIGHER if the exchange rate hadn't changed in 2014 right? Since the GBP/AUD rate moved from 1.85806 at 31 Dec 2013 to 1.90284 at 30 Dec 2014, are we to assume that a 2.4% decrease in the value of the Australian Dollar is worth £200,000 to £PTCM? Really?

Please note that the exchange rate mostly moved between these two values during the year, so I just don't understand how that could be worth so much money to PTCM, unless they did a 8m profit in Australia?

If anybody understands this better than I do, I would love to hear from you!

Thanks!

jonesj

Thanks for the analysis VegPatch, good work.
I looked over DOM.L about 6 or 7 years ago. I didn't manage to find anything at all about the master franchies agreement with the US parent, how long it lasts for and what stops the parent asking for an extra 2% or so, if the contract comes up for renewal. With hindsight, that's one that got away.

Paul Scott

Hi aiminvesting,

I agree, that comment in Porta Communications (LON:PTCM) results about Australia being so successful that it caused a forex loss, seemed bizarre, without a proper explanation.
As mgt have form for being less than clear about the truth, I took that as glossing over a negative.
Maybe it's relating to translation of overseas cash or debt, rather than earnings? Their vagueness doesn't help, and I can quite see why investors are sceptical about this company, and awaiting results. The share price has reflected that.

For a PR company, I am distinctly unimpressed with Porta's PR about itself! Let's hope they are doing a better job for their clients. That said, I do come across the company's name on plenty of RNSs, so they're pretty active in financial PR.

My industry contacts tell me that Porta are trying to grow too fast, and hence are making mistakes, but that they are fundamentally quite good. That's why I hold the shares. Am annoyed with management, but think there could be something interesting in the long run, as they've got a lot of experience in the sector. Also a chunky Director buy today helped.

It may seem strange that I am critical of a share that I own, but my views here are the unvarnished truth, as I see it, at the time of writing. Sometimes it's right, and sometimes wrong.

Regards, Paul.

janebolacha

12th Feb '15

Paul, I generally give very little credence to director share buys. Often, the numbers of shares bought equate to a month or two's salary, often they are dwarfed by free or cheap director share options. So, in many cases, they amount to nothing more than a bit of PR fluff. I'm not saying that's the case with PTCM. I have seen many cases, though, where directors' buys mean nothing or are even, imo, a sell signal as they seem to be attempts to fool investors.

Igotts

So Wincanton has a Stockrank of 97!

13th Feb '15

Hi jane,

I agree with you - in fact I usually disregard small Director buys, or even see them as negative.

The worst type of thing is when, immediately after a profit warning, all the Directors buy trivial amounts of shares, relative to their salaries & wealth. As you say, this is normally, if anything, a bearish signal! They get terrible advice on this issue from brokers & PR cos - I've challenged a number of companies on this issue, face to face, and they always say that their advisers told them to do it.

Bottom line is this. The numbers do the talking, and good companies will recover from setbacks, if mgt do what they are supposed to do, and run the company properly, instead of worrying about the share price!

That said, a £6-figure buy of shares is a lot more meaningful, and is worth noting, in conjunction with the fundies, in my view. Depends on the Directors though. Are they fundamentally honest, or are they manipulators? That's really the crux.

Regards, Paul.

Small Cap Value Report (11 Feb 2015) - TRI, DPP, PTCM, TNG, LTC

Trifast (LON:TRI)

DP Poland (LON:DPP)

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Paul Scott

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