Good morning! They are not small caps, but as regulars know I take a keen interest in retailers, having been FD for a ladieswear chain in the 1990s, so I shall briefly peruse the results from Home Retail (HOME), ASOS (ASC), and Sports Direct (SPD). Also, they are good barometers for the health of consumer spending/confidence, so of wider interest. Here's an instant reaction to each;
Home Retail (LON:HOME) - Interims to 31 Aug 2013 - "good first half" with positive LFL* sales growth (2.3% at Argos, and 5.9% at Homebase). Margins are wafer thin though, with only £27m profit on £2.6bn of turnover, although their financial year is weighted towards H2. Impressive growth in sales via mobile devices. Very strong Bal Sheet, including £412m net cash. £1.5bn market cap at 184p per share. Vague but positive-sounding outlook statement. Fwd PER is 19, so not cheap, but strip out net cash & storecard debtor book, and arguably it's still reasonable value, especially if they out-perform against forecasts.
Sports Direct International (LON:SPD) - Trading update. Good grief, I had no idea these shares had reached 714p, that's a market cap of £4.3bn! Also on a forecast PER of 20, so not cheap. They are trading very strongly, with group sales up 15.1% for the 9 weeks to 29 Sep 2013. Trading in October has "remained strong", and they are confident of meeting EBITDA target of £310m.
ASOS (LON:ASC) - Final results for the year ended 31 Aug 2013. We all surely know this is going to make a spectacular short at some point, but when? I'm very tempted to open a short in it now. At £53.83 the shares are on a fwd PER of 83.9 times earnings, according to Stockopedia. That's just ridiculous - a market cap of almost £4.5bn. Sales grew 39% to £769m, and Profit before tax & exceptionals was up 23% to £54.7m. Diluted underlying EPS was up 24% to 49.2p. So put that on a PER of say 25, and you would have a share price of £12.30, which would be reasonable. The actual share price is over 4 times that! It's the international sales that the market is so excited about, as those are still growing strongly (up 44%) and are now 62% of the overall business.
(Edit: After writing this, I decided to open a short position on ASOS at £52.60, now done. I very rarely short anything, and am only interested in shorting large caps & keeping the position size small, to limit the risk)
Looking at retail generally, I think it's difficult to get too excited about economic recovery, because the key element needed, rising real wages, is not happening yet. In fact, household incomes are still falling in real terms, since average pay rises are below inflation. So a recovery in retail sales seems to have been driven by the Banks paying out on PPI claims, and people spending the money saved up for house deposits because they are increasingly finding that house prices have risen out of reach, hence apparently many younger people are simply giving up on the idea of ever owning their own home. What a sorry state of affairs, and the result of disastrous Govt policies in the last two decades, in stoking up a boom in housing, then being too frightened to let it deflate.
For these reasons I see the current economic recovery in the UK as being pretty fragile, and it does not justify chasing share prices up to inflated valuations where a recovery is assumed to be ongoing.
OK, I'd better do what I'm meant to be doing, and write something about small caps!
Zotefoams (LON:ZTF) is a £76m market cap (at 191p per share) specialist foam maker. They have issued a trading update for Q3 ending 30 Sep 2013. It reads like a mild profits warning to me. As you might expect, growth in Asia has been offset by de-stocking by European customers. Total Q3 sales are flat against last year, so not a disaster by any means. The final paragraph sums up as follows:
The overall impact of these factors is that the Company expects second half profit to be below the level seen in the first half and therefore profit for the year to be below previous management expectations.
Although it is disappointing to see the current shortfall in European polyolefin foams, the Board considers the impact to be short-term and is encouraged by the performance of the business elsewhere. A return to growth is expected in 2014, and the Board remains confident in the long-term prospects for the business.
Normalised EPS was 11.6p in 2012, so if we assume a similar out-turn for 2013, then at 170p today (down 20p on the day so far), the shares still don't look cheap, on a PER of 14.7, given that they are struggling to hold profits at the previous year's level. Personally I'd want to see the shares nearer the 120p level before it would interest me - because I have an aversion to over-paying for shares, and want risk/reward to be attractive before buying anything.
However, if you buy the story that growth should resume next year, then the shares might be worth a look. They have a pretty solid Balance Sheet I seem to recall. Previous comments on this company are here, where my caution has turned out to have been correct.
Actually, re-reading my previous comments, they seem to have done about 5p in H1. So as they are now saying that H2 will be below H1, then we could be as low as 8-9p EPS for this year. That's not good, and means the PER is nearer 20, which looks far too high to me for a business that is struggling.
Next I've been looking at audited results from ADVFN (LON:AFN) for the year ended 30 Jun 2013. The shares have been in a slow downtrend from April 2012 when they were 6p, to today when they are 3.3p. However, that still values the business at about £20m, which looks expensive to me, as historically it doesn't make any money or pay any dividends. So what do external shareholders see in it then? The hope for growth has sustained this high valuation, but there's not much sign of that happening.
Turnover was £8.1m for the year, and EBITDA improved from a loss of £362k last year to a positive £108k this time. Of course, EBITDA is nonsense for software companies, as they capitalise development spending, so a truer picture is shown by the operating loss of £871k for the year (down from a loss of £1,439k in the prior year).
The cashflow statement is often the best guide for how businesses are really performing, and in this case it generated £523k cash from operating activities, and spent roughly the same amount on capitalised development spending. So the business is effectively trading at cash breakeven.
To my mind this is a lifestyle business, that probably shouldn't be Listed at all. The joker in the pack is whether they can find a lucrative new way of monetising the large, and affluent user base. So far, nothing much has happened on that front, and you have to wonder whether it ever will? This is a very difficult space to make money from. Investors want everything free, and are very reluctant to pay for premium services. Also they are highly resistant to being cross-sold anything. So personally I wouldn't put a premium valuation on any business in this sector. To my mind a sensible valuation for the business as it stands is probably around £5m.
As a result of these various factors, the Group now expects that the results for the year ended 28 September 2013 will be ahead of market expectations.
Their shares have more than doubled since May 2013, but don't look particularly expensive - Stockopedia shows them on a forward PER of 14.6 times, and with a forward dividend yield of 2.45%, but those figures were based on last night's closing price of about 333p. They are up another 8% today to 358p.
Given the nature of the business, that's probably priced up with events. The outlook sounds positive, although a potential fly in the ointment is that they refer to aggressive pricing from Asian competitors. Personally, I wouldn't be inclined to chase this stock any higher after the recent stellar rise:
However, they have put out a bullish contract win announcement today, which caught my eye as they make it sound pretty significant;
Gavin Lavelle, CEO of Brady, commented: "This is a very substantial transaction which further validates Brady's strategic direction in the CTRM space.
Let's hope this is a bit more accurate than his previous gushing statements about their strong Balance Sheet, which isn't strong at all. It's too much of a shot in the dark for me, this one, so will pass on it.
Finally, OMG (LON:OMG) has issued a rather confusing trading update. It's a profit warning, but they strip out their one loss-making business, and report on combined profit for the other three profitable subsidiaries. Those three will generate adjusted profit of £3.0m, compared with £3.9m market expectations.
The trouble is, they don't then specify what sort of loss the loss-making business will make, but just indicate that it will be £0.4m worse than expected. It would have been much clearer if they had included a table setting it all out more clearly.
Interesting to note that they report a cash balance up from £4.3m to £7.8m.
Looks potentially interesting, I've picked up a tiny amount personally, just as a punt.
That's all for today, see you back here at 8 am tomorrow.
(of the companies mentioned today, Paul has a opened a new short position in ASOS (LON:ASC), and a new long position in £OMG)