Small Cap Value Report (26 Jan 2017) - HYNS, CMCX, RNK, ARDN

Thursday, Jan 26 2017 by
48


Good morning,

Quite a few announcements today.

I provisionally intend to cover:

I'll update this with a link to Part 2, if there is a Part 2 today.

Regards

Graham




Haynes Publishing (LON:HYNS)

Share price: 138p (+13%)
No. shares: 15.1m
Market cap: £21m

Interim Results

A really mixed bag of results here but the overall tone is encouraging (and hence today's share price increase).

I'm going to focus on the constant currency results, since they are more reflective of the company's competitive positioning and those elements which are under its control.

North America & Australia: sales down 20% to $7.5 million. Small operating loss (from small operating profit last year). Has been restructured. New sales initiatives being implemented.

UK: Sales up 17%. Excellent result.

Europe: Sales up 25%. Excellent result.

UK & Europe operating profit: £1.1 million.

Big picture: excluding FX movements, revenue was 1% higher in this period.

Other bullet points:

  • Huge investment in the product range (vs. the market cap) of £3.3 million.
  • Pension deficit up to £21 million after lower interest rate assumptions.
  • Interim dividend maintained at 3.5p (same level since 2013).

My opinion: I am really warming to new management here (though still part of the Haynes family).

Even though the FX-neutral revenue gain was very modest, I like the online direction the business is headed in. Digital products were 36% of revenue in this period.

A lot will come down now to the returns made on £3 million + of product investment, and synergies on acquisitions.

The pension issue shouldn't be ignored either.

Overall, an interesting and potentially lucrative value stock. If you can satisfy yourself that demand will be resilient for these products (on balance, I tend to think it will be), and if you could have faith in the management and in the balance sheet, it could be worth a closer look.




CMC Markets (LON:CMCX)

Share price: 111p (-2.4%)
No. shares: 288m
Market cap: £320m

Q3 Interim Management Statement

[Update: After writing this report, I took a long position in IGG.]


This spread betting / FX…

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Disclaimer:  

All my own views. I am not regulated by the FSA. No advice.

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Haynes Publishing Group P.L.C. is a United Kingdom-based company, which creates and supplies practical and informative content to consumers and professional mechanics in print and digital formats. The Company operates through two geographical segments: UK & Europe, and North America & Australia. The UK & Europe segment has subsidiaries in the Netherlands and Italy, among others. Its core business is the publication and supply of automotive repair and technical information to the professional automotive and do it yourself (DIY) aftermarkets in both a print and digital format. The North America & Australia segment publishes DIY repair manuals for cars and motorcycles in both a print and digital format. It publishes titles under the Haynes, Chilton and Clymer brands, in both English and Spanish. It has a branch operation in Sydney, Australia, which publishes various products under both the Haynes and Gregory's brands. Its consumer content is delivered via both print and digital channels. more »

LSE Price
163.5p
Change
 
Mkt Cap (£m)
24.7
P/E (fwd)
16.2
Yield (fwd)
4.6

CMC Markets plc is a holding company. The Company is a provider of online and mobile trading servicing both retail and institutional clients. The Company enables clients to trade over 10,000 financial instruments, including indices, commodities, foreign exchange (FX) and equities through its trading platform. It operates through three segments: UK and Ireland (UK & IE), Europe, and Australia, New Zealand and Singapore (APAC) and Canada. Clients can trade the markets via contracts for difference (CFDs), financial spread bets (UK and Ireland segment only) and binaries. With the Company's spread bet, a client bets a specific stake size per point movement of a product, rather than trading a specific number of shares or units. The Company offers four types of binaries: Ladder, One Touch, Up/Down and Range. It also offers Australian wholesale and retail clients the ability to buy and sell Australian Securities Exchange (ASX) and SSX (formerly APX) listed products and managed funds. more »

LSE Price
126.25p
Change
-1.6%
Mkt Cap (£m)
363.7
P/E (fwd)
13.1
Yield (fwd)
4.5

The Rank Group Plc operates gaming services in Great Britain (including the Channel Islands), Spain and Belgium. The Company's segments include Grosvenor Casinos, Mecca and Enracha. The Company's Grosvenor Casinos is a multi-channel casino operator in the United Kingdom. Grosvenor Casinos offers a range of casino table games, including roulette, blackjack, baccarat and poker, as well as electric casino and slot machine games. The Company's Mecca is a multi-channel community-based gaming brand for the British market. Mecca's digital channel offers a selection of games from bingo to a range of slots games. The Company's Enracha is a community-based gaming business for the Spanish market. Enracha offers a range of community games, such as bingo, as well as electronic roulette and slot machine games, sports betting and food, drink and live entertainment. The Company has a portfolio of over 150 venues. more »

LSE Price
222.2p
Change
1.4%
Mkt Cap (£m)
868.1
P/E (fwd)
13.5
Yield (fwd)
3.6



  Is Haynes Publishing fundamentally strong or weak? Find out More »


18 Comments on this Article show/hide all

Virgil Solozzo 26th Jan 1 of 18
4

Any views on STAF at all? Completely missed off from yesterday's report, cheers.

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andyi 26th Jan 2 of 18


Paul / Graham Any views on EMIS (LON:EMIS) which reported today?

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Graham N 26th Jan 3 of 18

In reply to Virgil Solozzo, post #1

I will check with Paul on this, thanks

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FoolishBen 26th Jan 4 of 18

Graham - Just to be sure, did you mean IG Group (LON:IGG) might survive very well or CMC Markets (LON:CMCX) ? Or perhaps both?

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edgrove 26th Jan 5 of 18

Graham, The price for CMC Markets (LON:CMCX) is 111p-not 695p.

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Graham N 26th Jan 6 of 18

In reply to FoolishBen, post #4

Both look like they should survive but when I double-checked the French proposals and IG's reponse to them, I particularly felt that IG would do well. So I've now bought a few IG shares, putting my money where my mouth is.

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Graham N 26th Jan 7 of 18

In reply to edgrove, post #5

Thanks Ed, I've fixed it.

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Howard Marx 26th Jan 8 of 18
3

Re CMC Markets (LON:CMCX) & IG Group (LON:IGG), it was interesting listening to the latter's conference call yesterday.

The CEO claimed that as a constant in any period, 50% of the profit came from 2% of the clients.
I had previously assumed an 80/20 ratio i.e. that 80% of the profit in these businesses came from 20% of clients. Maybe it's nearer to 90/10. Regardless, if these 'high-end' clients get designated as 'experienced' or 'professional', then the new FCA rules will barely impact them.


Furthermore, given that IGG currently spend 14% of their revenues on advertising & marketing, any FCA proposal to reduce such activities' e.g. bonuses would be welcome in my view given the current excessive levels.

Investors may have overdone their pessimism towards this industry.

| Link | Share | 1 reply
rhomboid1 26th Jan 9 of 18
6

In reply to Howard Marx, post #8

If 50% of profits come from 2% , does that mean they're large scale clients or just large losing clients? If the latter then a more sensible definition of "professional" could knacker them? I recall receiving very generous hospitality from SB companies when I held a very large and ultimately large loss making series of positions, now I'm small scale and profitable they appear to have lost my telephone number!

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Howard Marx 26th Jan 10 of 18
4

In reply to rhomboid1, post #9

Rhomboid

A key use of CFD's/spreads is to hedge a portfolio rather than to take directional 'bets'. This is a core source of underlying profitability for IG Group (LON:IGG) & CMC Markets (LON:CMCX)

NB The CEO was clear to point out that the '2%' of clients in a period evolves into a different cohort into a following period i.e. it is not the same 2% clients that generate 50% of their profit in each successive period.

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daveinthelakes 26th Jan 11 of 18
3

Graham,
CMC/IG/RANK etc

If you want a little flutter in the gaming sector I suggest you look at Playtech who have a financials (CFD/spread betting) operation but more importantly are the leading provider of software to the industry having contracts with the likes of William Hill, Ladbroke Coral Group, Sun Bingo developing the gaming apps and providing the tech for their mobile gaming (THE growth sector) together with in store betting terminals.

The potential for Playtech with the US opening up on gambling is unlimited and a look at Playtech's leading shareholders will reveal a couple of US hedge funds.

Playtech throw off cash, have no debt, in fact loads of cash in the bank, buy up smaller gambling tech companies with this cash and hand out special dividends.

Playtech is my biggest holding. Years results out 23 Feb.

Dave.

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dscollard 26th Jan 12 of 18
3

agreed with your take on the likely effects of regulations on the likes of CMC Markets (LON:CMCX) and IG Group (LON:IGG), I read through the various regulatory announcements which didn't seem too draconian to me and wouldn't greatly affect a relatively well-run business like IG Group (LON:IGG). Their platform and tools are probably the best in the industry while crucially their spreads keep costs low. Great for taking longs and shorts in the US and other markets: net-net spreadbetting a share is just a leveraged position and still needs the same rigour and rules as physically buying them: with the advantage that there is no tax
I'm of the view that no matter how much help support and tools you give some individuals, they won't change their habits and attitudes. A cursory look at some of the AIM bulletin boards reaffirms this ( I am currently fascinated by the CloudTag Inc (LON:CTAG) fiasco as a good example of story stocks and the madness of crowds).
Took a position in in IG Group (LON:IGG) in the 450s so nicely in profit on it but will hold a while. In my view many investors made more assumptions on what they thought would be regulated and shied away.

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Thomas Stendall 26th Jan 13 of 18

Graham - re: £CMC, have you taken a look at their peer Plus500 (LON:PLUS) and do you have view? Whenever I've looked at it, it has always been on a very high yield and very low PER valuation even before the regulatory announcements. As I write, at about 400p, it trades on a trailing yield of just under 15% (even taking into account the Israeli withholding tax) and PER of below 6. H1 2016 EPS and divi appear better than last year + I am guessing that the UK referendum and US election results will have led to increased trading activity? It is due to announce results on 7 Feb.

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Connor Davidson 26th Jan 14 of 18
3

I noticed that Luke Johnson took a stake in Arden Partners and joined the board recently. Usually stealing his ideas and backing his activism works well. However I've dumped the stock in the too hard pile for now. There might be a great opportunity here or the company could just keep bleeding money.

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fdthomas 26th Jan 15 of 18
4

I'M sorry I can't comment, I'm in Cape town for the winter until May, spending last year's GAINS☺bought Thomas Cook at 55p & sold at 91p two weeks ago, it's lovely & sunny here

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drvodkaquickstep 27th Jan 16 of 18
2

Details of Haynes Publishing (LON:HYNS) Tennessee property for sale:

https://www.commercialsearch.com/listings/1299-Bridgestone-Pkwy_La-Vergne_TN_37086_b6CT34THKC4WKCEB16HK68T1J60TKERTQ64R3ACHJCTH36D9GC5H34CB26XJKAT1R

US$ 6m = GBP 4.7m or 22% of mcap alone (mcap on stocko site is wrong as there are 2 classes of share hence actual mcap is circa GBP 21m)

UK HQ site with OPP due to be marketed shortly and I anticipate a GBP3-4m asking price so those two properties alone = 40% of mcap hence investors are getting a significant part of the excellent Haynes business for effectively nothing.

Note: original post edited due to error (purely mine!)

| Link | Share | 1 reply
Damian Cannon 27th Jan 17 of 18
2

In reply to drvodkaquickstep, post #16

Surely the problem with Haynes Publishing (LON:HYNS) is it's sizeable pension deficit? This could suck up the proceeds from both of these sales and still come back for more: http://www.iii.co.uk/news-opinion/richard-beddard/haynes-publishing%3A-whiff-panic

Blog: Ambling Randomly
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drvodkaquickstep 27th Jan 18 of 18
2

Hi Damian

This was discussed at the AGM (see notes of AGM on ShareSoc website) and is a very valid point. Mgt said that yes it was a concern but one that is manageable and something they keep a close eye on. With bond yieds now on the move the deficit could in fact be dramatically reduced as discussed elsewhere at length on this site:

http://www.stockopedia.com/content/pension-deficits-has-the-worm-turned-120746/

http://www.stockopedia.com/content/introducing-the-new-pension-deficit-ratios-152117/?comment=5#5

The US element of the deficit also uses a very high discount rate and much heavier mortality; this seems to be common practice in the US and is something often noted by Warren Buffett. The US liability is only a quarter of the total, however.

The pension deficit is also not on the balance sheet of the parent company and this is helpful because the existence of distributable reserves in the parent determines the ability to pay dividends. If the deficit is on the parent balance sheet, an increase can wipe out distributable reserves.

Still, its something to keep a close eye on for sure.

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About Graham N

Graham N

Full-time investor and independent analyst. Prior to this, I spent seven years in the financial markets as an analyst and institutional fund manager. I'm CFA-qualified and hold an audited, FTSE-beating investment track record.  Away from finance, my main interests are recreational poker and everything to do with China, especially Mandarin Chinese. more »

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