Small Cap Value Report (27 Oct 2016) - DEB, RIC, ALU

27th Oct '16 by Paul Scott

27 comments 15814 reads

Good morning!

An earlier, and shorter report today, as I have to dash to an investor lunch.

Debenhams (LON:DEB)

Share price: 55.6p (up 3.5% today)
No. shares: 1,227.8m
Market cap: £682.7m

Full year results - for the 53 weeks to 3 Sep 2016 - note the extra week, which is necessary every few years to maintain a roughly similar year end date, for companies which use weekly, instead of monthly accounting.

In my experience, monthly accounting is better, as it evens out management accounts throughout the year, making monthly prior year comparisons more meaningful. However weekly accounting is easier to do, but results in horrible 4 & 5 week mismatches when you try to compare each month the prior year equivalent.

Overall today's figures from Debenhams look alright to me, given the strong headwinds which bricks & mortar retailers are experiencing - from online-only competition, rising costs (especially from Living Wage), other cost increases, and of course now all the problems coming through from weaker sterling.

Mind you, Debenhams should benefit from the recent demise of BHS, and I note that it is introducing lighting departments into 30 stores, to grab some of that business. It's a pity that BHS went bust, but it was a tired old format. Green managed to breath fresh life into it for a few years (boosting profits substantially in his first few years of ownership), but its demise was inevitable in my view - especially after the 2008 financial crisis, which resulted in its pension scheme liabilities soaring, due to interest rates being lowered so much.

It's bizarre the way the facts re BHS have been twisted by the media & politicians after the event, in order to create a pantomime villain in the shape of Philip Green. When actually if he hadn't been involved, BHS would have almost certainly gone bust years earlier.

The further I go on in life, the more I realise that human beings are predominantly emotional, and are not actually interested in the facts, in many areas of life. People really want simple stories, which reinforce their existing prejudices, not facts. You can see the same effect going on with shares all the time, on bulletin boards, etc - once someone owns a share, they block out and angrily shout down negative opinions or facts on it. This is very dangerous indeed, and is one…

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ridavies

27th Oct '16

Thanks for that. I guess you have to trust in the quality of the management. They are long standing and very experienced in their fields. They expand slowly as you will have noticed; they upgrade their accommodation and services constantly. They made a shrewd move with the ground rents, and so dont make silly calls on the market for cash. They invest in training and staff in a way no other organisation of its kind does, as far as Im aware. I hope that all of this experience works through when they are assessing what they are acquiring. Seems to me they are much better than any others I have come across. They also seem to stay very close to the ones they are providing the service for - LAs etc. As a result they provide the best service and seem to be able to get cost increases through. Still lowly rated by the market, and unfairly so in my view but unlikely to change because I think it is unlikely there is an organisation out there who could better their performance by a takeover, and the management seem well positioned to stay. All IMHO, and always keen to have my assumptions and my research tested!

Flackwell

So Green's facts have been twisted after the event have they?

And you ask that we open our eyes

Perhaps the public opprobrium is entirely justified and based on a solid understanding of the facts - and perhaps there's none so blind as those that cannot see

Deegee Eff

Hi Paul. Re BHS. If interest rates had not been cut in 2008 and the banks baled out and QE etc.,etc. then no-one would have had any money to spend in BHS, ...you can't have it both ways ! Also, do you really think that they would have gone bust earlier if £400m odd had not been not been taken out of the business ?- I find that hard to believe,even if Green is a wizard retailer.,though I also (vaguely)remember him from his WEW days,which did not end well either.
Whatever,he did or did not do,surely he can not be allowed to pass on his liabilities to the pensioners to a penniless buffoon ?!

mrmodha

Not specifically BHS/Green but we live in what I've seen coined as a "post-fact world", where the truth - or finding out the truth - is far too much hard work so there is an over reliance on other people doing the research (or not) and basing opinions on that. It's what costs businesses and society as a whole every single day

rhomboid1

Hi Flackwell

I think you've demonstrated Paul's point admirably, you've just ignored the real timeline and judged BHS dividend policy on the basis of facts that didn't pertain at the time the dividends were declared.

Bill OY

" I realise that human beings are predominantly emotional, and are not actually interested in the facts, in many areas of life. People really want simple stories, which reinforce their existing prejudices, not facts"

So true!!! The facts have been twisted, in what is merely a political circus with no interest in the actual timeline and events surrounding the demise of BHS

Not in the slightest

and for the record I worked with the ex-knight of the realm and formed my opinion from those experiences

Indeed , from what I know he's not someone I'd want to have a pint with or indeed hold onto my wallet but that doesn't change the facts regarding the dividend timeline.

stepone

The bottom line is that he paid £200 million for it and sold it for a pound 15 years later. Other similar size clothing retailers in the UK have had their problems, but are still going strong (ish). I think it's pretty clear he wasn't fussed about the long term future of BHS.

But its not just a timeline issue - look at how the dividend was funded and how the loans were structured

And we now know of the broken top up promises as well which reveal plenty about the real motivations at play

alan000@yahoo.com

Regarding Debenhams. Reading through the extensive detail their statement, I can scope and put some numbers on 3 Headwinds that Debs face, in the context of a business that made £118m PBT last year.

1) Simplest one first, the 53rd week, which added £4m of PBT and obviously drops back out next year.
2) Minimum Wage: Increases by £9m in the new financial year. Despite talk of mitigating a lot of those through "further cost efficiencies", the two points I would make are "If the cost efficiencies can be easily found, why haven't you done them already?". Taking out costs isn't that easy, especially in a business like Debs which is well run and lean already. Also, the Minimum wage isn't just a one off increase next year...it keeps increasing year on year on year.
3) Less specific, but more frightening by far, is currency. They state that the year ahead is fully hedged at $1.50, and that 35% of their sales are sourced in dollar denominated. So 35% of £2.4bn sales is £850m. If one crudely assumes Gross Margin is 60%, then dollar denominated cost of goods sold is £335m. the difference between a current $1.22/£ and $1.50/£ is a c£80m increase in Cost of Goods. Their hedging may protect the year ahead...but if sterling stays at these levels, that's a huge potential problem for the year following. Can they pass any of it on through price rises? Who knows, and if market conditions remain like this, it may be tricky, and will obviously depend on the price elasticity of demand.
That's is 3 problems totalling over £90m pa for them to deal with, before whatever mitigating actions they can take, in a business which made £118m and has £279m of debt.
Was long, was having thought about these issues, I no longer am.

Beginner

28th Oct '16

I am afraid the truth has never mattered, and never will. What we BELIEVE to be the truth is the foundation of our decision making. It does not matter if it is the witch crazes of the 17th century, the Wall Street crash, the outbreak of the Great War, or the invasion of Iraq, the truth has never been of much consequence in this world. (In picking stocks we tell ourselves we rely on facts and evidence, but largely we project the aspirations of ourselves and others onto our choices).

PhilHofGrowYourDough

Morning Paul,

The psychological term for the emotional reaction you are describing is called transference. It's an unconscious process whereby you link the other party to a character from your past. The character from your history can be positive or negative. You then react to the character in the present as if they were the character from the past. So if I was the victim of an exploitative headmaster or bully at school I am more likely to find bullies in my present life.

It cuts both ways though as one can also identify with the character in present given your history. So perhaps you have an unconscious identification with Philip Green and how you perceive he has been victimised. Perhaps there is something in your history as an FD whereby you felt you were unfairly criticised?

Just some ideas as to how we all become unconsciously emotionally involved in stories.

Best of luck
Phil

xcity

The truth does matter, however inaccessible it is. The person with the best estimate/approximation has the opportunity to make the most money because they see the future more accurately.

PJ0077

Ray Dalio & Bertrand Russell would agree!

Truth—more precisely, an accurate understanding of reality— is the essential foundation for producing good outcomes. Ray Dalio

When you are studying any matter, or considering any philosophy, ask yourself only what are the facts and what is the truth that the facts bear out. Never let yourself be diverted either by what you wish to believe, or by what you think would have beneficent social effects if it were believed. But look only, and solely, at what are the facts. Bertrand Russell

dfs12

Fulham Shore (LON:FUL) also has David Page as chairman (ex ceo of Pizza Express) so you can be pretty sure they know what they are doing regards building the brand and rolling out nationwide. Fulham seem to have stayed well and truly out of the spotlight so far with extremely low daily share turnover. Surprising, especially when you consider how popular the restaurants are (take a look at trip advisor or the queues outside).

Is 'the best estimate/approximation' the truth? Seems more like a subjective estimation of events and factors to me (i.e. a belief system based on probability, not 'the truth').

A CND supporter suggesting you should not be 'diverted..by what you think would have beneficient social effects'? Wee bit of a hypocrite? (He made a big show of leaving the Labour Party because he believed Wilson would send troops to Vietnam, I think!)

Very much like the Dalio quote, but surely our ability to form an 'accurate understanding of reality' is dependent upon our ability and willingness to consider context and circumstance. Thus our personal truths are always based upon subjective considerations. (Probably not though!)

You either believe in an objective reality or you don't.
If you do, then there is an objective 'truth'
If you know the truth, for today and the future, then you would be able to make a lot of money (eg gambling on results of events etc - you would already know the result)
If you know the truth for today, but not the future, you are still in a better position to model the likely future than someone who has a less accurate view of today (eg Man City more likely to win the PL than Sunderland).
Since we do not know the truth for either, we simply model on the basis of experience (and maybe theory). The more accurate the model, the better position you are in to make money. Most people limit themselves to a small portion of reality/truth because they know that maximises their accuracy.

ricky65

29th Oct '16

I agree with the points made. David Page has a good track record @ Pizza Express.I'm also surprised at the low volume of the shares though I think it's a matter of time before more people become aware. The Franco Manca restaurants seem very popular - the central London branches nearly always have a queue outside the door when I walk passed. To my knowledge, they only have two Franco Manca restaurants outside of London (Guildford and Brighton) so there is lots of room for expansion.

Small Cap Value Report (27 Oct 2016) - DEB, RIC, ALU

Debenhams (LON:DEB)

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Paul Scott

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