Small Cap Value Report (8 Apr 2016) - BON, MAI, BAR, PIER

8th Apr '16 by Paul Scott

29 comments 17905 reads

Good morning!

I'm still up in London, but don't have any meetings this afternoon, so I'll keep updating this article throughout the afternoon. I've had a couple of days of meeting companies, and other investors, and very interesting it has been too.

There are hardly any companies in my universe reporting today, so that gives me an opportunity to have a moan about another topic - companies giving inadequate profit guidance to the market.

Also note the comments section, where we discuss the ridiculous regulatory rules that block private investors from having access to broker research notes. This is madness, so we need to get writing to our MPs, to have this issue fixed.

Bonmarche Holdings (LON:BON)

Share price: 170p (down 9.6% today)
No. shares: 50.0m
Market cap: £85.0m

(at the time of writing, I hold a long position in this share)

Trading update - this is a slightly disappointing trading update. LFL sales are only just positive, at +0.5% in Q4 (13 weeks ending 26 Mar 2016), and +1.0% for the year (52 weeks to 26 Mar 2016). That's unspectacular, but not bad.

Full year profit - this sounds a little disappointing;

The Board expects that the PBT for the year ended 26 March 2016 will be at the lower end of the guidance outlined in the trading update issued on 16 December 2015. The Group`s financial position remains sound.

So looking back to my report of 16 Dec 2015, the company guided for a range of £10.5m to £12.0m. Therefore we're probably looking at c.£10.5m full year outturn for PBT. This compares with £12.4m equivalent last year. So down, but not out!

Valuation - the share price peaked at about 315p in Nov 2015, and has now fallen 46% to 170p. That seems quite an extreme move, for what is really just a patch of moderate under-performance. So I'm leaning towards seeing this as more of a possible buying opportunity than a threat.

Outlook - the outgoing CEO might perhaps want to put a favourable sheen on her record, so it will be interesting to see how the new CEO sees things in a few month's time.

"Post-Christmas, trading conditions have continued to be quite challenging, with the exception of January where we saw a higher than average demand for autumn/winter sale stock. Although helpful in clearing these ranges, the continued colder weather has been unhelpful…

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JDW72

8th Apr '16

Too hot, too cold, too wet, a bit windy, wrong kind of frost. IT'S BEEN A VERY NORMAL BRITISH WINTER!!! Some cold bits, some oddly warm bits, some wind, quite a lot of rain, some snow in the north, less in the south, the odd frost. Honestly, it's not 1976 or anything....I blame whoever started naming storms. It's just a wet and windy bit of weather - it happens. They'll start giving storms backstories next and ask other storms what they were like as little baby storms....

Try this - "Our clothes haven't sold as well as we thought they would. The reasons are as follows (wrong colour, style, size, fabric, price, quality etc.) We will do the following to reduce the risk of this happening again (change supplier, buying director, margin etc. "

If companies stopped looking outside for excuses and looked within they might actually realise what was holding them back.

I wonder if the new CEO will kitchen-sink this in a few months time. Strategic review, one-off staff related costs and all that.

CliveBorg

Top commentary, JDW72. I'd like to see the honesty bit taken to the next level: We didn't do as well as our competitors because...

WDWombat

You bought Bonmarche for most of the same reasons as myself. A niche but apparently steady market which looked to be growing alongside burgeoning online sales. I paid 2.50 however and sold after the double blow of the December forecast downgrade and the resignation of the much vaunted Beth Butterwick. Before I sold, at 1.75, I visited a store near Aldershot. I was not impressed. The clothes were cheap but I thought generally they were not stylish and indeed looked cheap though the men's pyjamas I bought for a tenner have been pleasingly warm in winter. Not a stock I will be revisiting anytime soon despite agreeing that the financials look extremely sound.

James RH

I couldn't agree more JDW.

I'm fed up with the usual 'let's blame the weather' rather than admit any other controllable problems the company may have caused.

From Bonmarche's statement:

"Although helpful in clearing these ranges, the continued colder weather has been unhelpful in kick-starting real demand for spring products."

For it to be continued would suggest it's been blinking cold for ages yet we've just had one of the mildest winters on record. Other clothing retailers have blamed the 'unusual' warm winter as to why revenue/profits are down yet Bonmarche seem to state the opposite to manage future expectations - now it's been 'too cold' to have started spring sales. They can't have it both ways...

It seems to be the 'go-to' reasonand I for one would welcome honesty as mentioned above by JDW. I appreciate there is an element of weather affecting sales but this now seems the norm.

steviej

Off top of my head easyJet (LON:EZJ) regularly provide forecast ranges for sales, earnings, capacity in its RNS'. I'm certain there are other FT100 companies doing it as well. If they can the others can as well.

So "we can't release forecasts" is either an excuse on the company's part or genuine ignorance, probably perpetuated by the advisory industry. Or a bit of both.

Paul Scott

Hi JDW,

Haha, I love it!

Retailers love to blame the weather, but in reality it does have some impact, but it's swings & roundabouts. If consumers keep away from the High St due to bad weather, then I used to see a catch up period the following month or two, in my days at Pilot. Over time it would average out.

I think it might have been Tom Singh at New Look, who coined the marvellous phrase that in retail, "the only weather than matters, is whether you have the right stock, at the right price" - and he's spot on.

I had a very interesting discussion with an investor friend in the pub, yesterday afternoon, after a very interesting company meeting. Unfortunately I forgot my wallet (like a typical Jaguar driver lol!), so he had to buy all the drinks. So when I got home, I made a donation to Water Aid in lieu of reimbursing him, and he emailed to say that he was pleased that our afternoon session had resulted in me "building a well"! That tickled me.

Why mention this? Ah yes, I remember now. It's because he said that all the excuses retailers are coming out with are missing the point - the point is actually over-capacity, and intense competition. The example he gave was Restaurant (LON:RTN) (in which I hold a long position) - there's nothing wrong with footfall, or consumer confidence. The issue is that they are facing more competition than before, in the out-of-town centres which previously they had to themselves.

I think that's absolutely right. There's nothing wrong with consumer confidence or disposable income. We just have more places to spend it these days.

Also remember that online is having an impact. New competitors are creaming off a bit of the incumbents each year - so it's like being permanently in recession for the incumbents. The outstanding Merryn Somerset-Webb wrote a piece in Moneyweek about this - saying that large caps are now incumbents in the firing line, rather than stalwarts - in many, maybe most sectors.

Regards, Paul.

Rusty2

I don't think that is quite true, its probably the warmest winter since records began in 1910.

What is true is that the seasons are starting later, autumn is now in November/December, retailers should have got used to this as its been happening for about 20 years, cold weather does not start until January quite often but March can be cold, 2013 was coldest for 50 years.

It may well even out but has anyone ever seen "at the start of the period we benefited from the cold spring as people had delayed buying their summer clothes from the previous period"?

Can't say I've ever seen that!!

Funnymoney

...if one can stomach going to virgin rain forest, burning it down and instituting a monoculture then all well and good. It's a bit like tobacco for me.

Each to his own!

DGW

Paul - many thanks for your explanation - this is the first time I have been able to get a proper answer out of anyone!!

Ramridge

Re. Eclectic Bar (LON:BAR) Yes, Luke Johnson is certainly flexing his muscles. He came on board in mid June last year and the sp jumped near 30%.
BAR's latest HY2015 report under his watch already shows a small profit versus previous persistent losses. So the recovery seems to be on the way.
This latest acquisition is on paper a reverse takeover. The current owners of Brighton Pier don't seem to have made any profits. Seaside piers require a lot of capital for upkeep and general maintenance. So the question to me is, can Luke J turn this into a profitable commercial business, something that has eluded others so far.
Well, he is a shrewd serial entrepreneur, and if anyone can, he certainly has the nous to pull this off.
Personally I will invest a small amount, as a pure bet on the man. Share dealings are currently suspended.

All IMO and please DYOR

Dearg Doom

Bought a small holding in Bonmarche Holdings. Is this my Value Trap?

I had been looking to buy them over the last few days at the €1.85, so I was somewhat delighted to pick up Bonmarche even cheaper. The profit forecast guided lower in today's RNS hit the share hard early on.

The original catalyst for buying was the appointment of a new CEO on 31st March 2016. The RNS announcement this morning gave clarity to current trading outcome at a lower level. Could have been worse!

Trigger happy in the excitement of the moment, I bought a small holding with the bid price being the offer price this morning for some particular reason. Even now with an apparent spread of 168 - 175 shares can be bought at 170. I expect some large tranche of shares to go through later that were done earlier at a lower price.

A few hours later, reflecting on my original thought processes for buying, I realise that I may have bought a value trap.

Firstly Bonmarche new profits guidance with be on target, but I expect some exceptional write offs to meet that target.

Secondly, the on-line increase in business in percentage terms was too poor to give confidence that the right fashionable stock is available. I think I recall their website was revamped recently which makes this point all the more very disappointing.

I visited their website today and previously. They seem to have good value but nothing too exciting. Views from their home page of an actual store also lacked some imagination in presentation of clothes which is a slight cause for concern.

My hopes for the company would be the new CEO closing down under performing stores in favour of on-line promotion and development. Better stock collection and point of sale display are key. Some international expansion would show confidence in the business model if not a little scary for an investor.

Otherwise the share price will keep reducing in price for a few more years like French Connection and Laura Ashley . Investors often buy these shares with initial enthusiasm and eventually sell them again later at a loss or marginal gain after losing patience or boredom.

In hindsight the catalyst is the new CEO and what can be achieved with a sound balance sheet and proper strategy. The profit guidance is only noise at this point. I will buy more if share price drops over next few weeks. Will however sell immediately when new CEO disappoints with future results or expectations.

I await my fate with Bonmarche!

Hi Ramridge,

I agree re the ongoing capex requirement on Brighton Pier. That said, it does have astonishingly high footfall, all year round, but especially in summer of course, and people go there specifically to spend money on leisure. The existing bars, etc, on the pier really are lamentable - filthy toilets, run-down fit-outs, surly staff, rough customers, etc, so I think there's considerable scope to make it a more attractive destination.

Of course pier owners always have the historically popular option of making sure it's fully insured, then torching it if the losses mount up too much.

Regards, Paul.

cic

Regarding regulators preventing us from getting research notes (comments 5 & 6), I think you will find that the regulations originate from the European Commission - another reason to leave Europe! However, I have had success in the past asking the company, rather than the research house. Worth a try.

Hi Paul -
I live in Southsea and the South Parade Pier was in such a state of disrepair that the council asked for it to be shut down on health & safety grounds. That's since 2010.
It clearly is no touch on Brighton Pier in terms of tourist attraction. Even the dossers who used to sleep under the rafters have abandoned it.

Hi cic,

It's very inconsistent, I find with broker notes.
Not long ago, some smaller companies would publish the house broker notes on their websites, although maybe that has stopped now?

Strangely, we ARE allowed to read commissioned broker notes from Edison, Equity Development, etc. Although some people rubbish paid-for research, personally I think it's very useful, and often high quality, more for background info, and then I make up my own mind on valuation, etc.

I do wish the regulators & City would treat us like adults!

Regards, Paul.

They'll hide from shareholders for as long as possible as they know that once they put their heads above the parapet they are going to get a roasting for the LTIP/VCP bonanza in place.

I guess they're hoping that business really picks up between now and then so they can try to deflect the ire with that.

gus 1065

I agree there is a huge inconsistency here. We're not grown up enough to read brokers reports which usually have some modicum of professional reputation at stake but can be trusted to receive the pearls of wisdom from financial journalists in the likes of the Daily Mail tipping micro caps on the basis of no real analysis but a decent free lunch from the company and their advisers. Doesn't really make sense.

alihaouas

Hi Paul
it would be really great if either you or someone can suggest a model letter to mps so that as many people as possible can influence matters

many thnaks

hayashi22

11th Apr '16

Some very useful comments on research distribution. I suspect that the reason why brokers can't or don't want to distribute research to private clients is the fear of being sued for duff recommendations. But in reality no 'house' broker writes negative copy on a company which is paying a retainer fee.You will note that many brokers now don't make recommendations on house stocks. One strategy where a company is struggling is not to write anything at all. Gets round alot of issues and you still get paid the annual retainer fee.

Small Cap Value Report (8 Apr 2016) - BON, MAI, BAR, PIER

Bonmarche Holdings (LON:BON)

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Paul Scott

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