Small Cap Value Report (20 Sep 2016) - FCCN, JDG, FJET, PTD

20th Sep '16 by Paul Scott

34 comments 18733 reads

Good morning!

I so enjoyed the documentary on TV last night about the problems within the Labour Party. It's even worse than the militant tendency infiltration of the 1980s. Much, much worse. The resulting schadenfreude gave me a surge of energy, which I put to good use by writing up 6 new company sections in yesterday's SCVR.

Here is the link to yesterday's full report.

These are the companies I commented on yesterday evening;

SKIL Ports & Logistics (LON:SPL) - total car crash - yet another overseas AIM company craps out. Foolishly, I got caught on this one, breaking my own rule on not buying overseas AIM stocks.

7Digital (LON:7DIG) - poor results, and running out of cash. Fundraising coming, probably.

DP Poland (LON:DPP) - poor interims. Still loss-making. Painfully slow progress. But good LFL sales growth. Bonkers market cap, for such a poor roll-out. Forecast to reach breakeven in 2018!

Adgorithms (LON:ADGO) - awful interim results, but pots of net cash. Shares at a discount to net cash, but beware - it's overseas & AIM.

Styles and Wood (LON:STY) - interims are nothing special, but it has heavy H2-weighting to trading. Shares have had a great run, but price looks up with events now.

Spectra Systems (LON:SPSY) - strange little company. Lacklustre interims, but optimistic noises about future potential. Cash-backed balance sheet. Has delivered nothing in last 5 years, so could just be more of the same?

Right, on to today's news.

French Connection (LON:FCCN)

Share price: 40.5p (down 7.2% today)
No. shares: 96.3m
Market cap: £39.0m

(at the time of writing, I hold a long position in this share)

Interim results, 6m to 31 Jul 2016 - bit of a mixed bag here, there's something for both bulls and bears. This is a strongly H2-weighted business (relying on big sales of party dresses for Xmas), so the interims are always ropey.

This time the loss before tax is flat against last year, at £7.9m, on turnover down 8.7% to £69.2m. Falling turnover is not necessarily a problem here, because it's a special situation where a massively loss-making retail division needs to be down-sized,…

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fanmail

20th Sep '16

Hi rhomb. I used to own Billington years back when they were called Amco and Lenny Licht, remember him?, had a stake. Still got a butt end of Billington hanging around and I like the cut of their jib so going to retain. As you say it is cheap but they do need to maintain a strong balance sheet in my opinion to see them through the cycle. For choice though I prefer SFR which has Indian market upside in for nothing and a very dominant UK market position.

rhomboid1

Hi fanmail

I hold SFR as well but BILN seem to have a few cute ways of adding value, I like the Architect specified stuff that http://www.tubecon.co.uk does and the http://www.marshallstairs.com stairs business is a good one. Finally http://www.easi-edge.co.uk is great HSE driven niche that is growing fast and Billington Holdings (LON:BILN) has a leading position in the market.

I agree re balance sheet but they're generating huge cashflow, near £4m in the first half alone after accounting for the Shafton acq.!

Sorry Kenobi missed your post earlier!

No debt , except for a £2.375m mortgage on the Shafton freehold which was put in place on acquisition , 6.2m cash, thinly traded as c.73% is held by insiders so has tended to drift between RNS's , the CEO is relatively new, been there since June 2014 and I think he's done a great job of revitalising what was a fairly moribund business . The key is being an added value supplier rather than just moving big lumps of metal around the place , and that is where the business is transforming itsel in my view.

Cheers

LongbeardRanger

Seadoc,

Yes I agree with you re DP Poland (LON:DPP). I did hold but sold out recently (for a near 100% gain in short order, if only all my picks were that successful....) as felt the share price had got ahead of itself, sales growth is good but there are still significant operational and financial risks which I felt weren't reflected at current levels.

But I absolutely agree with your assessment of the business and am very cognisant of the Domino's Pizza (LON:DOM) precedent (not coincidentally I also hold £DOM). I am keeping a close eye on DP Poland (LON:DPP) and expect to reinvest in it at some point in future when risk: reward is more favourable. The franchising model DPP is using means that the profitability of the rollout will take longer to come through but it is the right approach IMO as means they can roll out a more capital light business and the incentivisation of the franchise model (with ownership pushed down to franchisees) works well I feel.

Rgds,
Phil

jonesj

Regarding leases, I presume the contracts have terms to prevent FCCN selling leases onto some company that could even be set up to fold in a couple of years. If such lease transactions were allowed, well even BHS could have just exited it's unprofitable stores via such a mechanism.

Regarding DPP, I think Paul's previous argument that delivered pizzas are too expensive in Poland must be a big factor. If people are getting well under half UK salaries, they will be less inclined to order delivered pizzas. Although, of course Polish salaries should grow faster than those here, so it might work in the long term.

JohnEustace

Re DP Poland (LON:DPP) I think the argument that delivered pizzas are too expensive in Poland assumes that the prices being charged are UK ones whereas looking at their website they are considerably lower. The ingredients for a pizza are very cheap in any case and if wages are lower in Poland then so are costs. It doesn't prevent them making a profit there. I'm tempted to order up a small slice.

John,

Yes, agreed. I also think the sales growth of the business suggests their pricing is OK.

For me the problem is that the market cap is now £50m plus, yet they are still loss making and have some considerable way to go to even get to a 20x multiple... especially when you consider there may well be another round of dilution before they become self funding.

The current valuation really bakes in that they will get to a quite large number of stores doing material sales. That is certainly possible (hence why I invested earlier this is year) but by no means a given - after all the scope for large numbers of stores outside the major metropolitan areas) must be more limited than in the UK. They really need both continued like for like growth (which I do think they'll achieve) and a large rolloutb(which I think they might achieve, but it's more questionable) to justify the current price, IMO.

Paul Scott

Hi FREng,

Re Fairpoint (LON:FRP) webinar yesterday, you commented;

Someone called "Paul" (!) asked about the poor online reviews and got a bland response. That was the weakest point in the webinar, IMO.

Haha, you've rumbled me! Yes, I submitted a question as to why the reviews mentioned here on Solicitor.info were so terrible, and what are they doing about it? My question was sanitised by the moderator!

I agree that their answer was weak. They mentioned TrustPilot reviews - so I checked, and there are only 2 for Simpson Millar, although more flattering that on the other site.

The rest of the webinar went well I think. I like the strategy, and have bought some stock in it. With a PER of 7, and a 7% divi yield, it looks good value to me. Especially as running down the IVA book should clear all debt.

Did you noticed also that mgt comment on dividends was encouraging - suggesting that the direction of travel for divis is only upwards. I liked that bit.

Regards, Paul.

I tried to buy some Billington Holdings (LON:BILN) shares ages ago, spotting the value in them when they were about 100p. But sadly the stock was so illiquid, that it proved impossible to buy, so I gave up trying.

Did a similar thing with Trakm8 Holdings (LON:TRAK) when it was 20p a few years ago (since 10-bagged).

Just goes to show, that if you find a winner, then it's best to just pay up to get the stock. That's what I tend to do now, if I find something really good.

Regards, Paul.

It would be interesting to go back to the early days of Domino's Pizza (LON:DOM) and compare its figures, growth, etc, with that of DP Poland (LON:DPP) to see if they are similar, or different.

Also, I wonder what DPP pays to licence the Dominos brand?

Broker forecast is for DPP to only reach breakeven in 2018.

A decent retail roll out should be thundering into profitability quite early on, and then generating all the cashlow it needs to expand. DPP isn't anywhere near that stage. Repeat placings, with very little to show for it. The figures remain dismal. The market cap is factoring in 4-5 years of continued growth, which is bonkers I think.

I prefer online growth companies, as they're not constrained so much with having to open dozens of new sites. £G4M is my current favourite online growth stock. It has a lower market cap than DPP, but recently announced 73% organic sales growth in H1, and profits ahead of forecasts. Doesn't need to raise any cash, and is expanding even more rapidly in Europe now. It's just a vastly better investment proposition than DPP, in my view.

Regards, Paul.

My remark on the Labour Party was only intended as a tongue in cheek reason for me having a sudden burst of energy last night. Wasn't intended to be taken too seriously!

Regards, Paul.

21st Sep '16

Paul,

Yes you make some fair points. In fact your sober analysis helped stop me getting carried away here - so thanks for that!

My recollection is that Domino's Pizza (LON:DOM) 's expansion was slow and took a while to reach critical mass. However, that is ling before I became a Domino's Pizza (LON:DOM) shareholder (more 's the pity...) so I may well be wrong. Hopefully I will get time to look at that this weekend, if I do I'll write up my findings in a post here.

On the topic of rollouts, it's not a small cap, and is eye wateringly expensive, but one of the most interesting ones around at the moment IMO is Metro Bank (LON:MTRO). Again, I'm hoping to put my thoughts together on that one on here in the near future, as I've not seen much discussion of it, here or elsewhere.

Rgds,
Phil

FREng

Paul,

Yes, I guessed the question had been sanitised. I had asked whether they were concerned about the terrible reviews too, so the management will have received a hint about investors' concerns, which can't be a bad thing. The didvidend reply was helpful, so I'm a relaxed holder for now.

Did you see the acquisition RNS from Styles and Wood (LON:STY) this morning? The vendors drove a hard bargain, but it looks strategic to me and should enhance earnings from 2017 (and earlier if Styles and Wood (LON:STY) manages its allocation of overheads between divisions well :-).

There is an important issue in the current Labour Party turmoil, IMHO: the PLP have lost the support of many of the LP members who selected them as parliamentary candidates. The members are significantly to the left of the PLP it seems, which (if it stays that way) implies that more left-wing candidates will be selected over coming years, giving a stronger parliamentary voice to the left wing just at the time when the economic hit from Brexit reaches a lot of the electorate.

So far, the comments about inflation have focused on the fall in Sterling, but the bigger hit (again IMHO) will be the increase in wages from, firstly, the Living Wage and then from the removal of a million or more low-wage workers from the economy. In a competitive market, it is the price at the margin that sets the prices throughout the market, and the UK just voted to eliminate a large number of workers earning marginal wages. That doesn't seem to be in the inflation forecasts yet.

seadoc

Paul,

For DP Poland (LON:DPP) The Master Franchise Agreement runs for 15 years from June 2010. It is amortised in straight line over this life with currency adjustments each year, and is usually just under £40K a year. So my best guess is that it is $500,000 for the fifteen years. They are also buying software, I think from Domino's Pizza (LON:DOM). Last year about half the new staff taken on by Domino's Pizza (LON:DOM) were IT related. 70% sales in Poland are ordered on-line.

Regards, Seadoc

kenobi

sorry Paul , sense of humour failure there then ! (on my part)

TamzinPiworld

2nd Oct '16

Further to the H1 results, here's a subsequent video of Judges presenting at Mello 26.9.16

Length: 20 minutes

http://www.piworld.co.uk/videos/2016/10/1/judges-scientific-jdg-an-update-at-mello-26916

Brad Ormsby, FD. Talks through the H1 results, where trading has been difficult, and how things have been going since.

David Cicurel, CEO. Talks through the acquisitions, particularly Dia-Stron, and the general market place, and the outlook.

Thanks for the presentation/video it was interesting but I found the net effect was to make me rather glad not to be a shareholder, I'm not sure they've really got a grip on the factors impacting their sales pipeline and frankly as the number of businesses they've got has increased their earnings should have become more predictable not less imho.

hayashi22

3rd Oct '16

I have found over many years that companies making lots of acquisitions usually go wrong. Trouble is these acquisitions obfuscate the progress of the underlying and results can flatter for quite a while. But sooner or later it all starts to unravel. But there are a few exceptions.

Carcosa

7th Oct '16

Industry comment regarding the failure of Fastjet (LON:FJET) to gain traction

http://aviationweek.com/commercial-aviation/fastjet-s-failure-missed-opportunity-african-air-transport

Small Cap Value Report (20 Sep 2016) - FCCN, JDG, FJET, PTD

French Connection (LON:FCCN)

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Paul Scott

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