Small Cap Value Report (28 Jul 2016) - BON, IPEL

28th Jul '16 by Paul Scott

28 comments 15297 reads

Good morning!

It's starting to feel like a bull market again, with some remarkable recoveries in share prices from the recent Brexit sell-off. This is probably because most companies reporting seem to be dumbfounding the doomsters, and saying that it's pretty much business as usual.

Although we should also bear in mind that economic downturns happen gradually, and then feed on themselves, so we could have a deterioration yet to come. I have been pondering the recent comments from Victoria (LON:VCP) (in which I hold a long position), saying that the impact of Brexit is positive for them - mainly due to weaker sterling.

This got me thinking - we don't have to buy or hold the entire market. We can & should cherry-pick. So based on reports from many companies in the last month, at the moment I'm looking for bombed out shares with the following favourable characteristics;

Dollar earnings - or a broad spread of international earnings, which insulates (or benefits from) translation into weaker sterling. E.g. Empresaria (LON:EMR) , or 4imprint (LON:FOUR) .

Exporters - companies based in the UK which export a lot of product - they just got a lot more competitive (although bear in mind that any imported raw materials they use will also rise in price).

Import substitution - UK vendors of products, which are benefiting from weaker sterling, and can steal market share from imports - e.g. Victoria (LON:VCP)

Hospitality - forex movements, and terrorism means more people holidaying in the UK. Also there is some evidence that UK consumers want to do more things, rather than buying more stuff. Pub groups have been reporting good sales recently.

Defensive - anything non-cyclical, or counter-cyclical is worth considering, if it's cheap, and you think there's a recession coming (personally I'm not convinced there necessarily will be a recession, but we'll have to see).

Growth companies, particularly small caps, which have found an exciting niche, tend to carry on doing well, even in an economic downturn. So I'm thinking here about successful, rapidly growing e-commerce businesses, for example Boohoo.Com (LON:BOO) (in which I hold a long position).

Oversold - companies which are trading well, and have stated a positive outlook recently, but where the share price has been battered…

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browndogwork

28th Jul '16

HI Paul. Enjoy reading your articles. Are you going to be looking at Just Eat or are they too big?!

steviano3141

Proper divirsificaiton means hating a part of your portfolio permanently (it will be different parts at different times but if you don't hate a portion your eggs are in one basket). I have Begbies and H&T as natural hedges, they don't even cost anything as insurance given very nice yields. Key conviction is Accrol Group Holdings, 40% market share with discounters for tissue supply and gaining ever greater momentum with the multiples to supply private lable tissue where branded are seeing their market share erode. 5% yield and minimal CAPEX now after £18m invested over last 3 years. They even have exclusive rights to import New Tissue Techology, yes such a thing exists. Ultra soft apparently.

Paul, can you check your emails please from me, titled Kindred Spirits...

best
Stephen

Rusty2

Thanks Paul, sorry I missed the part you said you had sold. Yes I agree with you about the full years figures, I can see another profit warning later this year unless they have an exceptional autumn.

I see Waterman (LON:WTM) have a new contract and the shares are up 6% today.

Brackendale

BON - agree entirely, poor figures and poor outlook, however isn't a lot of this built into price? Price seems to include Brexit fear, general retailer market sell off, anticipated profit warning & exit of rated MD. Or clutching at straws?

IR35

I have now had a response from Morningstar regarding brokers forecasts ad they are now telling me that it is due to the MAR regulations. Funny that shortly before my annual subscription became due it was a bug that they were working very hard to fix.

I have asked them to look at the issue again - especially as they have the consensus forecasts in the Stock Report PDF. I don't hold much hope based on previous experience of reporting problems to them.

drvodkaquickstep

I am anticipating a Trading Statement / IMS from Waterman (LON:WTM) either tomorrow or next week and this will hopefully state, as I expect, that currently it's "business as usual" although clearly we must all expect some slow-down in decision making by their clients. I hope that the prices on offer during Brexit fever have encouraged some new investors on board - I have stuck firm with my holding as the business is in great shape from a valuation perspective and the current weakness of Sterling may even encourage a bid from an overseas player.

LW25

Paul (and also other commenters). Totally agree with your positivity surrounding Boohoo (Lon:Boo). Are there any other high growth e-commerce businesses you are tracking currently that fall into the 'Growth' category in your overview above?

ISAallowance

I walk into my local town center every fortnight or so, and glance into Bonmarche Holdings (LON:BON) every time I pass. I have barely seen a single customer in there outside of the Christmas period, and only a handful over Christmas. It's almost like a ghost shop. And I mostly walk in at the weekend when it's not raining - I can't imagine how few customers they have during quiet times or rainy times!

I don't hold (even though I'm normally a sucker for contrarian cheap valuations).

gsbmba99

Mortgage Advice Bureau (ticker MAB1, the £ marker brings up Mitchell & Butlers) had a trading update today. I hope this isn't considered bad form. I think it's an interesting company.

1. It's very profitable. Looking at the income statement you wouldn't necessarily recognise this because about 75% of their revenue is redistributed to their appointed representatives in contractually agreed commission payments. If you look at net income as a % of gross profit, it's about 50% (FY15).
2. It requires very little capital to grow and distributes a large percentage of profits in the form of dividends. Projected dividend for YE 12/16 is 17p on EPS of 19.3 and a share price of 300p. It's quite possible that the 17p EPS excludes the previously announced special dividend of 4.25p resulting from their being bought out of a JV. YE 12/17 projected dividend is 20p on 22.6p EPS. They paid 14.4p for FY15.
3. The company has a stated target to grow the number of advisers at 15% per year. This was, in a previous results presentation a 5 year term, subsequently changed to medium term. However, the Rule of 72 tells me that a 15% CAGR in advisers means that adviser numbers should double in a little less than 5 years. Assuming that adviser efficiency is constant, revenues should be double if the mortgage/remortgage market is flat. At 30 June, the number of advisers is +13% on YE 12/15 so they've nearly met their full year target at the half year stage.
4. You can check on the market the company operates in by looking at the CML figures for gross mortgage lending (yearly forecasts and monthly after the fact estimates). It provides a useful sense check. In the post-Brexit aftermath, the shares dropped to about 200p (from 400p earlier this year) even though the CML figures indicated that Jan-May 2016 numbers exceeded Jan-Jun 2015 (ie Jun could have been zero and the company still should have had a decent first half). Indeed the shares rallied when the Jun CML numbers came out a few days ago and showed YoY growth.
5. There could potentially be a network effect here as the company grows. The company represents about 4% of the mortgage market (not sure whether that's total mortgage market or 4% of the 70% of mortgages that are advised) and intends to double that with the 15% adviser growth target. If they do get to 8% there could be modestly better terms (relative to other advisers or non-advised customers) they might be able to offer through their adviser network . Maybe something along the lines of how Hargreaves Lansdown has negotiated slightly lower OCF for their fund holders holding through HL with an exclusive fund class (most of which HL takes back in the form of a higher custody fee).
6. I think there are still risks to 2H16 forecasts even though the company said they were "overall" on track. 2H15 was £44.3m in revenue and they need £50m in 2H16 to hit the £93m FY16 target. The good news is they have 23% more advisers (891 vs 722) entering 2H16 than 2H15. The bad news is that 2H15 was very strong (£118.5 bn gross mortgage lending vs 1H15 £93.5bn and 1H16 about £140bn). Also, they will lose a small number of advisers when the JV is officially sold though this will reduce exposure to London to about 6% of revenue.

I am a holder.

JoeRob

BON has gone from £3 to £1 in around eight months, anyone who was expecting good figures in the short term is deluded, the existing valuation implies trading is currently very tough, retail in general is tough and Bonmarche clearly isn't doing as well as it could be however the company could make 4 - 5 million this year and the shares won't look too expensive, also the dividend is not very important when the share price has tanked 50 - 60%, as far as I'm concerned they could scrap the dividend until trading improves, I've picked up a few today around £1.05.

Reynart

Great list Paul. I would add luxury goods retailers - especially high end jewellery etc. They will benefit from wealthy foreign tourists visiting London - so an extension of your hospitality/exporters categories.

Richard Vasey

Do feel nervous about BON but, having bought some last month, am holding on. New CEO doesn't take up duties until next month.. so not implicated in these poor figures & am hoping she can have a positive impact.

DurhamMike

Totally agree, MAB is a cracking business, I know it well having held since IPO (recently topped up on price weakness), and knowing one of the original founders too. They have committed to paying out 90% of earnings, and even with a potential slowdown in the market the increase in adviser numbers should at least keep earnings steady, though I can see them beating expectations if the market does hold up.

I see the London disposal as positive, as that top end market seems the one most likely to come under pressure in terms of volumes, which is more important to MAB than house prices, and also investors don't tend to buy the add ons like life insurance that a first time buyer usually does, and which make up a large % of MAB revenues.

Calahan

@IR35 (and FYI for those interested)

I contacted my broker (TD Direct) last week regarding Morning Star's removal of broker information (because TD Direct gives its users access to MS's data), and after a few minutes wait while the person I spoke to sought clarification on the issue from his supervisor , I was informed that Morning Star would be making the broker information available again "at some point". I asked if MS had given any sort of guidance regarding a time-frame for this happening, and apparently they had not, and had simply said "at some point". I also asked why MS removed them in the first place, and I was told no reason had been given (apparently the first TD Direct knew of it was when users starting contacting them regarding it).

No idea how much of the above is true, or how much of it is simply TD Direct's choice of spiel (or MS's for that matter) for anyone who asks about the missing broker information. I suspect TD Direct know the reason why the info was removed, but are choosing not to tell their users for some reason (or I just phoned at the wrong time and when nobody was around who knew what was happening). Either way I intend to contact TD Direct again at the start of September if MS's broker information has not reappeared by then (or they have not offered their users an alternative source for this information). Doubt it'll do much good in getting the broker information returned, but a clear and precise answer would be nice.

Trident

Calahan

I could could be wrong but a previous respondent referenced I believe the Morningstar absence of broker note info is down to new regulatory guidelines that giving broker notes may amount to investment advice.

Obviously silly if true, but sounds very plausible to me, as an example of compliance creep.

I have contacted Morningstar support again and asked them if I need to report them to the FCA as they are making the consensus forecasts available on the Stock Report PDF :).
Support are going to contact the responsible people and get back to me.

Paul Scott

Hi eddiegoldstein!

You asked me to look at figures for Angle (LON:AGL) today.

I've had a quick look, but it's a jam tomorrow thing, so the figures for y/e 30 Apr 2016 look terrible;

Only £361k turnover

£5.1m LOSS after tax credit

Cash has dropped from £8.4m to only £3.8m in the last year - a cash burn of £4.6m in the last year.

Therefore, if cash burn remains unchanged, then it's going to run out of cash in about Feb 2017 by my rough calculations.

Aha, I've just spotted that it's fixed this problem with a £9.6m Placing (after expenses, done in May 2016). So it's actually now fine for cash, for the time being (i.e. over 2 years), so that's OK.

Overall though, it's just a complete punt. This is a jam tomorrow story stock, and there's a vague chance it might become a multibagger, but the vast majority of this type of stock fails.

So if you fancy a gamble, and like a good story, then this is the type of stock you might like. It's not an investment, it's a total punt! Punting in this kind of thing was the biggest leak from my portfolio, so I've (almost!) stopped doing it now, and the results are much improved.

Regards, Paul.

"and even with a potential slowdown in the market the increase in adviser numbers should at least keep earnings steady"

Yes, exactly. And, I think, they have potential to improve profitability over time with scale provided they can hold adviser compensation.

Incidentally, for others, their results presentations are pretty helpful with useful trackers that you can use to measure the progress of the business.

Nah, Just Eat (LON:JE.) is about 10x too big for me to cover in this report!

Sparkling figures today, but lofty valuation.

P.

ganthorpe

Re Bonmarche
I have an interest in a small retailer of ladieswear for the over 45s , and we had a very difficult Spring period , but started clawing back sales from May onwards till we are about level by now.
I think 8.1% drop is not entirely due to the weather and that there must be other factors.
Also the idea of clawing back in the Autumn is not a given - with a new season range there is a whole new ball game .
Just my 2P worth

Small Cap Value Report (28 Jul 2016) - BON, IPEL

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