Small Cap Value Report (2 May 2017 - Part 1) - JE., PPH, ACC

2nd May '17 by Graham Neary

15 comments 10271 reads

Welcome back after the long weekend!

Paul is also writing a Part 2 article, wherein he is covering:

Plastics Capital (LON:PLA)
Premier Veterinary (LON:PVG)
Digital Barriers (LON:DGB)

Here is the link.

Regards,

Graham

Just Eat (LON:JE.)

Share price: 560.25p (-3%)
No. shares: 678.9m
Market cap: £3,804m

Q1 2017 Trading Update

A reader took issue with me last week describing this as having a "nosebleed valuation"!

I accept that description may have been a little harsh, as today's 40% like-for-like growth numbers reinforce the case for a premium rating.

It's also quite pleasing to see revenue growth outstripping customer order growth - to me, that suggests increasing comfort/trust with the service, as customers make higher-value orders.

Reported revenues were up 46% to £118.9 million (Q1 2016: £81.5 million).

On a currency neutral, like for like¹ basis, revenues grew by 40%...

Total orders of 39.0 million (Q1 2016: 31.5 million), up 25% on a like for like¹ basis.

The interim CEO, who is also the CFO, reiterates guidance for the full year.

I still think some nerves would be justified here until the management/Board decisions have been finalised, as it doesn't strike me as a company which would be able to run itself on auto-pilot.

Earnings estimates for 2017 have been stable and if it does achieve estimates through to 2018, then the PE ratio would fall to 25x. So it doesn't need to maintain momentum for all that long to grow into the current market cap.

59086c67c682cJE._20170502.PNG

PPHE Hotel (LON:PPH)

Share price: 783p (+2%)
No. shares: 42.2m
Market cap: £330m

Trading Update

This is a mid-range hotel group with interests in the UK, Netherlands, Germany and Croatia.

The interesting thing about the Park Plaza brand is that it's actually owned by the Carlson Rezidor group, which also owns the Radisson chain. But PPHE has the exclusive territorial license in various countries to develop and operate the hotels.

The latest quarter has gone really well, with help from a hotel expansion, exchange rates and also from a general upturn in the sector:

On a like-for-like basis¹, revenue increased by 17.0% to £53.3 million (three months ended 31 March 2016: £45.6 million), driven by a…

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DGW

2nd May '17

Graham - Any chance of looking at Access Intelligence please, following publication of their 2016 results?

Tortoise investor

I thought the update from Palace Capital (LON:PCA) this morning was interesting, although as it's just a market update without many figures it's probably not worth Graham reporting on. In its update it said NAV will exceed market expectations for y/e March 2017. NAV per share was 404p last June and brokers expect this to rise to 430p for y/e March 2017. The share is currently trading at 360p and management have been buying back shares. There's nervousness around property prices at the moment but the discount seems unjustified to me especially as the management seem to execute well. Further in the update today the company suggests some growth prospects in northern England where it has a strong footprint: 'The Board considers that the Northern region is fast becoming one of the best performing residential property markets due to the increasing demand for a limited supply of property.' Palace Capital (LON:PCA) also pays a 5% dividend.

The bear case is that property prices are about to crash due to Brexit and there's some evidence that house price growth is slowing for example. Looking at the chart, Palace Capital (LON:PCA) has frequently traded at a 10% discount to NAV too. My personal view is residential and commercial property prices will remain largely flat over the next year due to housing demand and an economy doing OK.

I'm long in the share so I am very biased but I wanted to flag it as there aren't many value buys in the current market.

daveinthelakes

Graham,
Thanks for the report on PPHE Hotel (LON:PPH) but with reference to -

"PPHE has the exclusive territorial license in various countries to develop and operate the hotels."

Without knowing the terms of this arrangement I think it is very difficult to place a value on the business. If it is a multi year agreement, other than in the case of non performance, then fine but if say a year or two's notice can be served to end it then presumably we would need to heavily discount for the cost of rebranding?

Dave

Graham Neary

I agree with that Dave, the license is described as "perpetual" but yes I think there are risks associated with it.

LongbeardRanger

Just Eat (LON:JE.) is one of those interesting cases where the incremental cost of growth is very, very low. It doesn't need to invest significantly in fixed assets or working capital. Indeed, most of its growth investment is expensed in the P&L whereas at a more asset intensive business that investment would be capital expenditure that wouldn't be fully deducted.

The consequence of this is that, while Just Eat is currently building up cash as it invests in its businesses (and may make further acquisitions), once it matures to a slower, steadier growth rate, such that investment levels off, it will be able to distribute all of its profits while still growing.

That's really quite a rare trait and (assuming, of course, that Just Eat (LON:JE.) can maintain its market position) means it should be rated much more highly than average businesses - even fast growing average businesses.

The problem here of course is that the takeaway delivery marketplace business model is clearly highly attractive and is thus attracting well funded, capable competitors such as Deliveroo and Uber, and, while I am confident that Just Eat has seen off Hungry House (even if the takeover doesn't go through), I am less confident that its model will beat out Uber and Deliveroo, who integrate delivery. It's not clear to me which model is best here. But, I guess we'll see over the next few years.

Roland Head

Re. Just Eat (LON:JE.)

I think it's worth noting that one reason revenue outstripped order growth in Q1 is last year's commission increases:

Q1 update: "On a currency neutral, like for like basis, revenues grew by 40%, driven by strong order growth, last year's commission increases, including the UK, and the inclusion of SkipTheDishes."

FY2016 results: "Group average revenues per order ("ARPO") increased by 10 per cent from £2.35 to £2.59, driven by a 100bps commission rate increase in the UK, along with an increase in commission rates in Australia and New Zealand."

I'm not sure what Just Eat's commission rate is, but the commentary in last year's results suggests to me that a fair amount of the Q1 LFL revenue increase is down to a higher commission rate than in Q1 2016.

Regards,

Roland

Good point Roland, cheers

Ramridge

Re. Just Eat (LON:JE.) If you look at the performance in terms of orders, the UK seems to be slowing down.
From the full year 2016 accounts, UK growth of orders was 31% Y-on-Y
Today's RNS for Q1 2017 gives UK growth of orders 17% or 19%, Q-on-Q, depending on inclusion or exclusion of Easter and leap year.

The UK accounts for some 65% of their total business, so the slowdown from 31% to say 18% in orders is significant.

Graham - thanks for the look at ACC, you thoughts agree with mine.

gus 1065

Another attraction of PPHE Hotel (LON:PPH) is the "hidden" asset backing in that as per page 18 of the attached presentation in the 2016 Results the "Fair" as opposed to "Book" value of the hotel estate has been appraised at roughly £450m higher at over £1.5bn.

http://www.pphe.com/~/media/Files/P/PPHE/documents/2016_Results_and_Company_Profile.pdf

Whether they could be liquidated at this level is unlikely but gives decent asset coverage and a wide moat against potential competitors. Company also has a good record with paying ad hoc special dividends and clever refinancing of the estate to recycle capital. Not a holder, but thinking about it ...

Gus.

I would be wary of any long term involvement in £JE as there is a small company to the West (goes by the name of Amazon) delivering hot food in the states and for now you need an app but in a year or two you will just ask Alexa!

https://local.amazon.co.uk/businesses/merchants/restaurants/how-it-works/restaurant

simoan

I don't think you'll even need to do that. Alexa will know everything there is to know about your sad little life. Firstly, she will understand you're sad enough to need an electronic listening device to control and organise your life. She will also know you have nothing edible in the fridge and that the only take-out food you ever order is Chicken Madras from the Tandoori down the road. She will know what time you eat every night and that you are in the house because you wanted to stay in and watch Corrie rather than go with friends to the Theatre. Your whole life will be pwned by Amazon. George Orwell will be rolling around laughing in his grave...

All the best, Si

PhilipHanson

4th May '17

Two points on Alexa. 1) Just Eat (LON:JE.) was one of the first apps to be set up on Alexa, Amazon approached £JE. to do this. 2) Alexa is not very good for takeaway orders because you need a visual element, i.e. a menu to look at. Is Alexa going to reel off the whole menu for you to choose from? I don't think so.

It's actually easier to tap and click on a tablet/phone from a visible menu than to order verbally from Alexa. So I see little to no threat from Alexa. We have one and it has serious limitations.

The threat of a "big beast" entering the market is always presented as a major risk for internet portals but as the experience of Rightmove (LON:RMV) shows (it was always supposed to be just about to be squished by Google Property) or Auto Trader (LON:AUTO) (eBay Motors) the network effect makes the business model highly resilient.

The threat of a "big beast" entering the market is always presented as a major risk for internet portals but as the experience of Rightmove (LON:RMV) shows (it was always supposed to be just about to be squished by Google Property) or Auto Trader (LON:AUTO) (eBay Motors) the network effect makes the business model highly resilient.

Philip,

Yes - this is true. I think there are two factors to consider here.

Firstly, while the likes of Just Eat (LON:JE.) , Rightmove (LON:RMV) and Auto Trader (LON:AUTO) are very profitable - they are also (in comparison to the really big internet companies) very small. So for example, for Google, taking over Rightmove's listing business wouldn't move the needle. Whereas, of course, Rightmove's entire focus is on their listings business. So, they're likely to do it better (or at least more obsessively) than Google does. The same is true of the other portal type businesses.

Second, as you say, the network effect for these businesses is very strong. I think there's two parts to this. First, once a business like this becomes dominant it is very hard to dislodge. It's a "chicken and egg" thing - to attract customers, you need listings; but to attract listings, you need customers. So, how do you break in? Secondly, I think these are markets which (and this is really quite rare) tend to monopoly. Why? Because they provide more utility to end users that way. It's better for people searching for a property that there's one dominant portal to look at, not two; it's better for car buyers to find more or less the whole market listed on one portal; it's better that all takeaway options are on one portal, not several. (Though market leadership here is a bit less settled IMO as there are differing business models - Just Eat (LON:JE.) 's main competitors offer delivery services whereas Just Eat doesn't, instead leaving that side to the takeways themselves.)

Rgds

Phil

Hi Philip,

Are you not concerned about the potential privacy implications of having a listening device in your home? You may be OK with this and understand what the next jump in AI technology is going to be but the implications are not great if someone can listen to, and record your voice for long enough:

https://www.scientificamerican.com/article/new-ai-...

Small Cap Value Report (2 May 2017 - Part 1) - JE., PPH, ACC

Just Eat (LON:JE.)

PPHE Hotel (LON:PPH)

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Graham Neary

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