Small Cap Value Report (27 Nov 2015) - FRP, CAKE, RSTR, CFYN

27th Nov '15 by Paul Scott

29 comments 28307 reads

Good morning!

I'm conscious that my reports this week haven't been up to scratch, so I'll try to do a half decent one today, before I head into Soho for lunch & a brainstorming session with the boss!

Fairpoint (LON:FRP)

Share price: 173.5p (up 3% today)
No. shares: 45.6m
Market cap: £79.1m

Response to Autumn Statement - as we know, earlier this week George Osborne announced the Govt's intention to clamp down on whiplash claims, and the like. This sounds like it could have a major, negative impact on the various ambulance-chasing claims & legals firms which have been profiting from this area.

This reinforces just what a lucky escape Quindell (LON:QPP) shareholders had. Not only was accounting fraud uncovered at the company (no surprise to those of us who had properly scrutinised the company's accounts, and found numerous red flags over the years), but also it now seems that its core business would be under serious threat from these Government proposals.

Indeed, you only have to look at the hapless (or should that be hopeless?) Aussies that bought Quindell's main operations, Slater & Gordon. Look at its share price, since they inexplicably paid £600m for Quindell's main business, despite the seller clearly being in financial distress.

It's down over 90% , and Tom Winnifrith (who did sterling work in exposing the various accounting frauds at Quindell) reckons that it's heading for zero. I don't know about that, but it certainly shows just what a minefield this personal injury legal claims space is, and reinforces my view that the whole sector is probably best avoided at the moment.

Anyway, getting back to Fairpoint (LON:FRP) let's have a look at what their statement says today.

Fairpoint Group plc ("Fairpoint" or "the Group"), one of the UK's leading providers of consumer professional services (including consumer legal services), notes the comments made by the Chancellor in yesterday's Autumn Statement regarding personal injury claims. The Government's outline proposals, which remain subject to consultation, seek to restrict the ability for sufferers of minor whiplash injuries to claim compensation. The expected implementation timetable is April 2017 following a period of consultation in which the exact nature of the proposals will be defined. As such the proposed changes will have no impact on the…

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cig

27th Nov '15

Isn't the idea that lawyers can't reclaim legal costs in small claims, and thus can't create all these spurious cases that only exist due to ambulance chaser marketing? Also, even if the number of cases stayed constant, the load on the legal system in aggregate should still be lightened due to simplified procedure.

Catstycam

Paul, many thanks for your coverage of CAKE today. I appreciate your comments and balanced view. Yes, at times we do have to pay for a good quality business and just because a share may look or indeed be expensive at face value doesn't mean of course it can't get more expensive, just as a share which looks cheap can't get cheaper (as I have learnt to my cost in a number of investments in the past!).

Additionally I appreciate you being upfront about taking a short position on REDD. As it happens and before I read your report, I sold my holding in REDD this morning. Just couldn't be sure of how much the personal injuries affair will affect it through one of its subsideries(?) Principia Ltd. Hope I have got my facts right.

Regards

CM

shauniekent

I also am bullish on Fairpoint. I think their strategy to unify a fragmented legal market will bear synergies and marketing advantages. Their hr long recent video is a must watch.

I also like the fact that their declining markets in IVAs are also a hedge (correct me if wrong) against a housing crash/correction. This declining part of their business would quickly grow again, adding to the growth already happening in the new parts of the business. I like this as its option money on housing slowdown (which in my mind must occur at some point).

Chrisfarrell21

Regarding Fairpoint (LON:FRP) we don't know the precise proportion of revenue which comes from the typical dodgy whiplash claims that Colemans ctts deal in, if any, but it doesn't appear as though its a significant part of revenue.

The last accounts of Colemans ctts stated it focused on 3 core types of work, (1) personal injury, (2) property and private client, and (3) dispute resolution. We don't know what the split is, which is part of the current concern, but within personal injury there are 9 or so sub-types, only two would probably be considered to give rise to the dodgy whiplash type claims - road traffic accidents, and trips and slips.

Whilst some clarification of the proportion of revenue related to this type of claim would have been nice, I don't think it would be a material amount of the total turnover/profit for Colemans ctts, and therefore even less so for Fairpoint (LON:FRP) .

As you have probably guessed, I am a holder.

00mrmark00

According to REDD RNS released 1:53pm any changes to regulation would only account for 2.5% of group revenue anyway. I'm holding...

Novice Investor

I wanted clarity from FRP, and got none. Having sold half immediately yesterday, I have sold the rest.

Regarding CAKE, as least the ROCE is good. No matter how many times I listen to David Stredder pushing CRAW (at every opportunity) I still can't force myself to buy a company's shares when the ROCE is under 2% and the PE over 200. How much growth for how many years would it take to justify this rating?

If anyone can explain the attraction I would genuinely welcome it. David/Carmensfella? We've heard how good their processed meat tastes, what is the investment case?

NI

If a company reinvests its profits for growth without fully capitalising the investment due to conservative accounting, you end up with crazy PE as the E is artificially low (indeed E should be about 0 or negative). You have to use other metrics to value it, like expected size and expected margin once it reaches the mature phase. Past ROE is not very relevant either, it's a bit like estimating the future income of a fresh graduate from their income as a teenager.

Richard Goodwin

Until a couple of years ago I was in the industry and although the arrangements were changing fast I believe that IVA volumes were hit by alternative mechanisms (banks doing direct deals with creditors, debt reduction orders etc) which are cheaper and more flexible and don't require an insolvency practitioner. Margins were hit by the Insolvency Service (https://www.gov.uk/government/organisations/insolvency-service) reducing fee levels for IVAs.
Although it is a beguiling logic I wouldn't bank on IVAs being an effective counter cyclical hedge.

woodcutter

paul

i think you would be wise to have a more detailed review of the REDD business model it is far from just a legal claims outfit indeed if you had visited their website i think you'd get a much greater appreciation of the range of outsourcing activities they provide to the car insurance industry as a whole. Also of the two law firms they have within their group one one is specifically related to the car insurance sector. I took the opportunity to top up today on the drop to the bottom and I'm not surprised at the move back into the blue at the end of the day.

common sense prevailed!

Robert Barton

Any views on impact on National Accident Helpline?

Camtab

Quindell is dead! Long live Watchstone!!!
Paul just wanted to say how much I enjoyed your interview with T Clarke the other day. Very interesting business, run in a sensible conservative way with a leader who has worked his way up through the business from the bottom. From my perspective a sound investment target, although I am not so sold on the timing as others.

garbetklb

28th Nov '15

I suspect the small claims system will cope fine - on a much lower volume of claims. A very large proportion of whiplash claims are spurious / fake.

Out of curiosity, I followed through one of the many "I'm calling about your accident" calls, claiming to be being made on behalf of a firm of solicitors. I was explicitly told to exaggerate & fabricate - "Say it was the whole family in the car because you can claim for each of them". It's an entirely destructive "industry".

To what extent Fairpoint are exposed to this sort of claim, i don't know. But until it's made clear, not one for me.

Larbert

Those of us who held Pizza Express shares at the turn of the century will remember with anguish that it was taken over at a price that seemed below its intrinsic value. We could not understand it. Pizza Express was controlled by the sucessful Luke Johnson whom analysts and shareholders begged, in vain, not to sell at such a basement price, or at all, as the potential cash flow was attractive.
Luke Johnson is the Chairman of private equity house Risk Capital Partners through which he is Executive Chairman and part-owner of Patisserie Holdings.

ridavies

30th Nov '15

Just out of interest Redde put out such a statement last week saying 2.5% exposure, so in effect very small.

HRISC

1st Dec '15

I am long on Patisserie Holdings (LON:CAKE) Yes, the valuation is high but the business model and momentum are key to the company.

TangoDoc

16th Dec '15

Given the very limited exposure of a very widely based company to whiplash injury claims, the lack of immediate reality in the government's statement which always sounded like populist kite-flying anyway, this continued fall in SP, with no other factual material looks like the classic self-fulfilling prophecy. I'd just be fascinated to know where the money released from sales of FRP is being better invested, or, is it all going on Christmas?
I'm content, as my own philosophy is to be a long term collector for reliable dividends not as a short term speculator. The UK is becoming more litigious, not less and the government is attempting to reduce legal aid all the time. Society is less cohesive, money and acquiring it is replacing religion and each new administration passes more laws than the one before. I mention the EU and Strasbourg only in passing. Everything I hear from my son and his wife, both solicitors in two distinct sections of the law business, convinces me that this company has a massive future. I have a modest holding in this very well run company and am sitting here waiting to double it when the knife seems to have fallen far enough.

Is it really a falling knife at this stage? It seems to be merely back in the range it's been for the last couple of years. It only was >150p for a few weeks. I would say falling knife territory would be <100p.

OK, perhaps merely a paper cut! I'll accept that but it pleases me to see if I can get them even cheaper!

Rusty2

I agree its not a falling knife its just had a knock. But it was over 180p for a few weeks and over 160p for a few months. I have not sold mine yet.

30th Dec '15

I waited and waited and added today at just over 132. No likelihood of there being less claims for injury or other sorts of damage while Storm Frank causes more havoc. Funded by selling AML,despite knowing that i would get a trifle more by waiting for the takeover to finalise. I was on a 58% profit and the small "loss" will be compensated for by its change of position, I'm thinking.

Small Cap Value Report (27 Nov 2015) - FRP, CAKE, RSTR, CFYN

Fairpoint (LON:FRP)

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Paul Scott

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