Small Cap Value Report (24 Jun 2014) - SHOE, UNG, THW, ANP

24th Jun '14 by Paul Scott

16 comments 17546 reads

Good morning! I had a burst of energy last night, and reviewed three more company results (Porvair (LON:PRV), Accumuli (LON:ACM), and £ODX ), so here is the link for yesterday's updated report. Also, I reviewed last week's accounts from Norcros (LON:NXR), updating my report from 19 Jun 2014, for anyone interested in that company. It looks good value to me, but as always please do your own research (DYOR), that's just my personal opinion, not a recommendation.

Shoe Zone (LON:SHOE)

This is a mainly UK discount shoe retailer, which recently floated on AIM (23 May 2014). I've been having a read through the AIM Admission Document to understand the background. Interim results for the six months to 5 April 2014 have been published this morning.

It's a family controlled company, with the IPO releasing 22.5m shares at 160p to new shareholders. That leaves the Smith family with 55% remaining. No new cash was raised for the company itself, it was the family selling down part of their interest, but retaining control. So it's really a private company that happens to have a Listing - so not ideal in my opinion.

At 175p the shares are usefully ahead of the 160p IPO price. The company is based in Leicester, and has 553 stores, selling shoes for an average price of £9.77! I must visit one of their stores, as I'm clearly being profligate by paying 3-5 times that amount at Marks & Spencer!

Unfortunately there are no broker forecasts that I can find, so it's a bit difficult to value the shares on a PER basis. Today's interim results show turnover down a surprisingly large amount, from £98.9m to £82.9m for the most recent H1, which is said to be due to the "planned closure of a number of temporary stores". That's a 16% drop, so there must have been a lot of temporary stores, and I wonder how many they still have, and if more closures are likely? I would need to know the ongoing scale of the business in order to value it.

A modest profit of £3.2m was reported for H1 this year (up from a £0.5m loss in the prior year H1). So it's a…

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Munday

24th Jun '14

Just a watching post.

it_trader

Thwaite's Wainwrights ale, mmmmmm.

MichaelFBS

Paul or anybody else who can explain.

If you have a moment can you explain

"Although having said that, payments of £300k per half year are being made into the pension scheme, according to the cashflow statement, which I'm pretty sure doesn't go through the P&L."

Why do pension payments not go through the P&L? Surely they are an expense, which ever way you look at it. To me pension received in retirement, by a former employee, is just deferred salary/wages, so if the pension contributions had been paid as wages for the employee to do as he wished then the "pension contributions" would have gone through the P&L as an expense.

Understand if you dont have the time but as a relative newbie I am perplexed.

Thank you.

Ramridge

Shoe Zone. I have been in couple of these stores over the past year. Basically warehouses with 'pile them, sell them cheap' philosophy. Not sure but the shoes appeared to be seconds or end of lines. The pair I bought didn't last long, but it was dead cheap!. Is this a Lidl equivalent? Mmmm I don't think so. Based on my customer experience, not one for my share portfolio.

Deegee Eff

Paul,I agree with you on THW. When the sale to Sainsburys does eventually go through,debt will be reduced further.
As you say,I cannot see the family selling out at anything like these prices.They fairly recently bought more shares,at the same time as buying in some for cancellation when a corporate raider threw in the towel (Brierly,I think).
A very good ,conservatively run(with the exception of the disastrous interest rate swap,(I think one of the family worked in The City!)),long term buy.
Cheers,Graham.

rmillaree

Ref Thwaites pension

Hello purpleski

The pension deficit is sat on the balance sheet as a liability on the accounts - so any payments made towards this "past quantified estimated expense" have already been made in earlier years. Main thing to watch for is the size of the deficit and the scheme assets (they are 100 million of this company) - the higher the scheme assets then the more the potential there is for a later material adjustment for extra provisions (can go the other way too).

Note there will be normal pension payments made within the profit and loss business expenses - so the expenses you are expecting will be there within staff costs (note 8 indicates this is the case)

There is also another profit and loss adjustment for the change in the pension deficit for the year (2.7 million this year) - so the extra amounts payable doing the math this year above and beyond what was previously expected have an equivalent profit and loss entry here - although the timing of the amounts will be completely different from the amounts paid towards the deficit.

Thanks for pointing this business out Paul - Pubs if run conservatively tend to make good investments as they can be nice cash cows - although the presence debt can bring risk - so deffo worth more research - particularly with the discount to book value. Seems a no brainer that this company should be on AIM if major shareholders want to maximise an exit route - perhaps there are some Aim rules that would make life more complicated with regard to red tape or financials.

Delpher

Hi Paul
Thanks for working overtime to produce more reviews. I, and I think many others, appreciate your efforts in going the extra mile.

Hi rmillaree

Thanks for the comprehensive reply and makes sense now I think. But just to clarify at some point in the past the company will have done the following accounting:

Cr Pension Liability account (Balance Sheet item)
Dr Staff costs pension payments.

So the retained profits reflect the cost of the pension?

Have I got that right?

Hello purpleski

The entry for the "specific increase in liability due to a re-evaluation" will have primarily been

Cr Pension Liability account (Balance Sheet item)
Dr Recognised actuarial gain (loss) on pension schemes less related taxation **

** this bit is shown on the section labelled "statement of total recognised gains and losses" this section takes the profit from ordinary activities and add/deducts other P&l type adjusts to get the overall total gain/loss for year.

If you look at the 2011 accounts the comparative column shows shows there was a £7.4 million hit in 2010 - in that year the balance sheet liability for pension deficit increased by a similar amount.

Best to check all the notes to find the full details as there may be other minor adjustments shown elsewhere on the profit and loss or w/off of elsewhere.

"So the retained profits reflect the cost of the pension?"

Pretty much - there is the charge for this years costs - and an adjustment to correct any under or over provision previously made.

The problem with pension adjustments is that they can be lumpy and large - hence that nasty 7 million hit in 2010.
Pensions tend to be reviewed in more detail once every few years to the lack of a hit in any particular year doesn't mean that there won't be one hiding around the corner.

Thank you for this very enlightening. No wonder companies are going over to defined benefit schemes!

muckshifter

Er.. I think you mean "defined contribution schemes" purpleski. Slip of the typing finger?

Paul Scott

Hi,

Thanks for the comments on pension scheme accounting. I must admit to finding this area horribly confusing, and I seem to tie myself in knots whenever I seek to unravel how it works! Maybe I should have paid more attention when studying for my accountancy exams, instead of going clubbing 5 nights a week in the 1990s, lol!

As I understand it, the overview is that when a deficit opens up on a pension scheme, the company agrees a recovery plan with the trustees, whereby an agreed amount of extra cash is paid into the pension scheme. This seems to by-pass the P&L, since it's a Balance Sheet movement - reducing a liability.

However the confusion arises because there seem to be two methods of accounting for the pension scheme which operate in parallel. One is the way it is presented in the accounts. The other is the (usually) three yearly actuarial valuation, which usually seems to be far more conservative - i.e. often producing a much bigger deficit than is shown in the accounts.

To my mind this is a crazy situation, and the accounts don't show a true & fair view in my opinion. So I tend to look in the notes to the Annual Report, to find out what the actuarial deficit is, and how much is being paid each year in recovery payments. Those are the numbers that matter the most, and really those are the numbers that should (but don't) go into the published accounts.

The way I see it, the recovery payments are a cash outflow that would otherwise be available to be paid out as dividends, so one should reduce the valuation of a company somewhat, depending on what recovery payments they are making, and how long you expect them to be making those payments.

An additional factor is that rising interest rates should reduce (or even eliminate) many pension deficits, dependent on bond yields rising in due course (as bond yields are used for the discount rate by which future liabilities are discounted to present value - i.e. the lower the interest rate on bonds, then the higher the pension scheme liabilities will become).

I've only tried to understand the overview of pension accounting, which hopefully is correct (above). It's not an area that I want to get into in too much detail, as one loses the will to live after a while when digging into technical areas like this!

Regards, Paul.

cig

In so far as equity is some sort of perpetual bond, increasing rates should also decrease the value of the equity on the asset side of pension funds, which will dampen the rates' effect on deficits/surpluses. A fund which has the bulk of its assets in corporate bonds of a similar maturity and risk profile as those used for discounting liabilities will have almost no exposure to rates.

DarwenLad

Paul, great to see that you have spotted Daniel Thwaites’ under valued potential. However, I fear that it could be a very long haul.

As a DarwenLad I have always had a soft spot for Thwaites’ ale, (particularly Wainwrights). But the company has a big estate of marginally profitable pubs in some of the most depressed parts of Lancashire and its efforts to diversify into the higher margin hospitality business with a small chain of upmarket pubs (6 ‘Inns of Character’) and another 6 regional hotels, proceeds at a snails pace. It sold off the Stafford, its one London crown jewel, for £77.5m in September 2009 – a price which looks a real bargain now.

It has spent the last three years trying to sort out its new brewery and realise the value of its existing site in the centre of Blackburn with limited success. It has finally announced a plan for a new brewery on the outskirts of Blackburn. But can it afford this investment before it has sold its redundant city centre brewery site? Perhaps New River Retail, which recently bought a load of Marstons pubs, could buy Thwaites’ site and help it unlock its undoubted property potential?

The undervaluation of Thwaites’ shares has attracted predators in the past. Guinness Peat built up a stake of around 10%, in the hope of using it as a lever to trigger a consolidation of asset rich regional brewers. But it gave up hope and exited in July 2012 selling its stake back to the company and directors at a rock-bottom price of around 82p a share.

There is undoubtedly a lot of potential in the 217-year-old Thwaites, the biggest independent brewer in the North of England. But there are three problems for investors – a weak management and board, the illiquid ISDX listing, and the domination of the founding families which control around 40% of the capital. (Reed Elsevier Pension Scheme, the only substantial outside shareholder, appears to be running down its strake which now stands at 4.2%.)

In particular, the family orientated composition of the board appears to stand in the way of a fundamental reversal of Thwaites’ slow long-term decline.

Ann Yerburgh, Thwaites’ chairman, has been on the board since 1974 and chairman since 2000. Richard Bailey, Thwaites’ chief executive, is her son-in-law, and her daughter, Arabella, is also on the board. Until this month the company had only one independent non-executive director on its five strong board. (John Barnes, who built up the Harry Ramsden’s fish and chip shop chain, has just joined the board – after a 15 month search).
The company shows no appetite for wanting to upgrade its listing to AIM, and refuses to post its slide presentations at its annual meeting on its website.

The one catalyst that might change things is the recent death of John Yerburgh, the current chairman’s husband, who was a director for nearly 50 years, including 27 years as chairman. Although he stepped down as chairman in 1993, he remained a powerful figure behind the scenes.

It is unclear what will happen to his shareholding. However, the younger generation of the Yerburgh family (he has five children) may not be quite as committed to Thwaites’ independence as the current board.

25th Jun '14

Hi DarwenLad,

Some great background in there, thanks for posting.

I've held shares in Daniel Thwaites (OFEX:THW) for about a year now, so I'm up about 8% on the purchase price, plus have received almost 5% in divis into my SIPP, so a 13% return so far is perfectly acceptable.

To me it seems a get rich slowly type of share - just something to tuck away in the darkest corner of your SIPP, and forget about. Then at some point a larger group might well make a bid for it, and you could suddenly wake up having doubled your money.

The key feature of THW in my view is under-utilised assets. The asset values on the Bal Sheet look fine - not overstated at all - they write down property to realisable amounts, and disposals have tended to happen at or near book value, a good sign.

So at some point, maybe further into the economic cycle, someone could well bid for it, and make the family an offer they cannot refuse. Let's hope so anyway!

In the meantime I'm along for the ride, and get my 4.5% divis each year, plus the upside at some point from the significant value in the property.

It's not one I would go crazy over, and have only got about 2.5% of my SIPP in it.

Regards, Paul.

Small Cap Value Report (24 Jun 2014) - SHOE, UNG, THW, ANP

Shoe Zone (LON:SHOE)

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Paul Scott

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