Small Cap Value Report (Tue 28 Mar 2017 - Part 1) - TRCS, TAST, SFR, CARD, CTO, HSW, FRP

28th Mar '17 by Paul Scott

17 comments 11969 reads

Good morning!

As it's a busy day for results, both Graham & I are working today, and both running late - our apologies! Graham's report is taking shape here.

Tracsis interview

It was a busy day yesterday. As well as writing a report here, I also recorded an interview with the CEO & CFO of Tracsis (LON:TRCS) . You can listen to that if you wish, here. I managed to ask all your questions, and thanks for submitting them.

Tracsis are presenting at tonight's ShareSoc seminar in Leeds. Click here for more details on that. Management at Tracsis are refreshingly open & straightforward. They've asked me to pass on the fact that they welcome contact from shareholders. So if there is anything you would like to clarify, or a question to ask, then please feel welcome to contact management yourself, directly.

Tasty (LON:TAST)

Share price: 74p (down 35% today)
No. shares: 59.8m
Market cap: £44.3m

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

Preliminary results - for the 53 weeks ended 1 Jan 2017 - note the extra week, which will give a boost to the profits.

The company is an expanding restaurant chain. So a roll out - my favourite hunting ground for investments. The company opened 13 new sites in 2016, mainly trading as "Wildwood". It currently has 63 restaurants, of which 56 trade as Wildwood, and the balance of 7 are a different format called "Dim T".

This page on the company's website shows a lot of the interiors of the sites, which seem to have quite pleasant, modern interiors. The menu looks rather boring & predictable - burgers, pizza & pasta basically. Very similar to numerous other chains. So it's not clear to me how this chain differentiates itself from the competition?

The first 5 bullet points in the highlights section look good, but then the final bullet point drops a bombshell - a profit warning for the current year:

Worse still, it's what I think of as an open-ended profit warning - i.e. it just says below, but with no indication of how much below. No wonder the share price has dropped 32% today.

Outlook - it doesn't really explain what has…

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Trident

28th Mar '17

Thanks Paul for the Tracsis interview.

Some general reassurance there I believe. I suppose some of the investor multiple has come off since this is evolving into a more typical acquire and grow enterprise. Management are sensible. Could surprise on the upside at any time if some of its core markets fire up.

Paul Scott

Hi Trident,

Yes, I got the impression that Tracsis (LON:TRCS) management are hoping to beat the new, revised forecasts (from Investec - lowered by 8% recently, I think).

There seem to be some quite good organic growth opportunities too - e.g. automating the people-counting business.

A nice group of businesses, with very good central management, in my view.

Regards, Paul.

Ramridge

Hi Paul - Re, Tracsis (LON:TRCS) very good interview.
I'd like to repeat that these kind of audio/ visual interviews are very valuable as it allows small investors to ask questions and listen to the answers, not just the words spoken but the tone, style and manner of the reply. To put it starkly, you know when the person replying is waffling and when he is in command of his subject and able to give you a straight and clear answer.
Overall John McArthur came across as a good, professional and competent CEO. I will not be surprised if he manages to hit current expectations despite the February turbulence.

Carcosa

Paul, Fairpoint (LON:FRP) a share you have commented about in the past, put out a Trading Update today. As TU's go it's relatively detailed and quite long, so much appreciated. Personally I was expecting a more 'kitchen sink' review (maybe that will come with the prelims?).

Fairpoint are saying 2017 will be “year of transition” with performance going to be well below that of 2016 (no surprise there whatsever) However 2017's restructuring should lead to an increase in legal revenues.

Overall management have seemingly taken real action and provided believable expectations. Much too early in the restructuring to make me buy shares in the company, but maybe 6-9 months from now if the turnaround seems on track and they manage to get the net debt situation under control - another placing, perhaps - then it might be worth revisiting.

tabhair

The blow up at Tasty (LON:TAST) isn't really that surprising.

First of all, the economics of the particular business that they operate are really not strong at all. I highly recommend that you compare Tasty (LON:TAST) to a similar business like Restaurant (LON:RTN) to illustrate this. By all metrics, operating margins, free cash flow, number of shares in issues, return on equity, Restaurant (LON:RTN) is by far a superior business, despite the two companies operating in a similar field. I think Tasty (LON:TAST) got a lofty rating based on what the founders had done previously with Prezzo, so investors seem to think that because they were successful there, they have a magic formula to replicate that again. However if you dig through the numbers at Prezzo, you'll see that the Wildwood concept is also a poorer quality business than it.

Looking at the results today, I think it's fairly clear that staff costs have just gone out of control. Doing some quick calculations, I estimate that staffing costs on a LFL basis when compared over the 2015/2016 years actually went up by £1.5M. When you have a business like Wildwood which is more labour intensive than competitors, things like the increase in the National Living Wage have clearly had an over-sized impact, and will recur into the future, which is probably one of the reasons why management have issued such bad guidance for 2017.

Getting to the valuation, is this a bargain? I would say no. Current enterprise value is about £47M, ebitda is £4.5M, that gives a EV/EBITDA ratio on 10.5 which I would consider with a reasonable pricing band for this business.

ridavies

Do you have time to assess the actions at XLMedia (LON:XLM) please. this is the second and final sell off after the last over-subsrcibed one in Feb. Where would we find which institutions have bought in? Thanks.

Hi tabhair,

By my calcs, 2016 EBITDA at Tasty (LON:TAST) is actually £6.8m - based on £4.8m operating profit, and adding back the £2.0m depreciation charge = £6.8m.

EV is currently about £45m, so that's an EV/EBITDA of 6.6.

I'd say TAST is an OK business, but not a great business.
The potential upside case is if management sort out the current poor performance issues, and the roll out goes well. Slowing down to 7 new sites this year seems very sensible to me, I think they need to better manage the existing business, rather than focusing on a breakneck speed roll out.

The impairment charge for under-performing sites is worrying. It depends what the lease terms are, whether they can get out of the problem stores easily, or are stuck with sites that are losing money.

OVerall, not a share I'm excited about, and my position size reflects this - I have over 10x in Revolution Bars (LON:RBG) for example, compared with Tasty (LON:TAST) . Also considerably more Patisserie Holdings (LON:CAKE) than Tasty. One can never have too much cake lol!

Regards, Paul.

Johns

Re Tasty, whilst an explanation for their troubles is completely inadequate or even non existent they do say "Post year end trade has been below expectations", which I understood to mean simply that sales have fallen.

From what I could figure out salaries per restaurant have actually reduced.

Hi johns,

For Tasty (LON:TAST) - salaries per restaurant won't be a valid measure though - because new sites are opening during the year, so only have a partial impact on the year's total numbers. A rough measure would be to divide the wages bill by the average number of sites open during the year, not the year-end total.

Also, there tend to be inefficiencies with new site openings - i.e. needing to over-staff them to a certain extent for the first few months. I saw this in evidence recently when visiting Franco Manca in Brighton - the staff all seemed to be Italian, and the place was teeming with them. I was the only customer there! It was about 5:00pm on a Monday though, and it was raining. I felt like I'd crashed some kind of manic Italian house party - the staff were shouting (in a friendly way) at each other, singing, etc. At least they were happy.

I'm not particularly convinced by the Wildwood format, but have not visited one.
The Kayes know what they're doing though, although I do wonder if they're maybe a one-trick pony, and are running out of ideas? There are only so many "me too!" pizza/pasta chains that the market can tolerate.

Regards, Paul.

Cisk

Don't know tasty but your comments about the management team being extremely experienced is precisely why they shouldn't have made these mistakes.

I remember owning Clapham house group some time back, it did well and then the shares tanked. That was enough to put me off the sector, best rule seems to be to make cash early and get out.

Also I'm giving such businesses a wide birth due to the impact of higher inflation plus rising wage costs, which will surely give an unfavourable economic backdrop for them to grow (at least outside the south east). Prefer to stick my cash into Fuller Smith & Turner (LON:FSTA) - people will always need a pint!

29th Mar '17

Re Tasty: As it happens that's exactly what I did, divide the salaries by the average number of sites during each year and it still came out lower per site during 2017.

I've visted a few Wildwoods, it was fine but nothing out of the ordinary. Franco Manca on the other other hand is a different kettle of fish. A simple menu and very reasonable in cost. Two of us ate in the Kentish town branch and it only came to £25, so I can imagine it being popular.

CAKE is also a favourite of mine, on paper it comes out as one of the winners among the roll outs. For several years I had a stake in Tasty but became concerned by the low return on capital of only 10% compared to double that for CAKE.

Paul wrote, in connection with Tasty (LON:TAST) " Overall, I'm prepared to give the company the benefit of the doubt," and "... I've satisfied myself that I'm happy to continue holding, and have speculatively added to my position today.."

Which is at odds with the very well received "The Anatomy of a Profit Warning" by Ed Croft and Co., which I vaguely recall Paul agreeing with and Confirmation Bias. Confirmation bias is the tendency for individuals to look for and interpret new information in a way that confirms what they already think or believe.

Overconfidence (assuming that one’s research is superior)
Relying on optimistic, and confirmatory, analyst forecasts (which are often wrong)

Will be interesting to see how this one pans out...

teetoro

Interesting analysis by Maynard Paton (disclosure,he owns shares in TAST) http://maynardpaton.com/2017/03/28/tasty-annual-results-dish-up-unsavoury-profit-warning-and-33-share-price-sickener/

doug2500

Hi Paul,

Thanks for the Tracsis (LON:TRCS) interview, it's very helpful.

£3.60 looks like a good price now, wish I'd bought some. I especially liked the quote about one soft quarter. I can use it as a stick to beat myself with!

1st Apr '17

Hi Carcosa,

Fair comments!

Although in my defence, I think position sizing is very important.

So, for me Tasty (LON:TAST) was initially a tiny, dip toe in the water position.
Now, after the profit warning, I've topped up, but it's still only 1% of my portfolio - so largely insignificant.

I'll watch & see what happens, and buy more if things improve.

Or if it languishes, will be happy to chuck it out.

Not a big deal either way.

The conviction buys are what matter, and this definitely ISN'T a conviction buy.

I tend to find that it's interesting to buy a small amount of something potentially interesting, then monitor it. These type of things can perhaps later become something one might scale into?

So it's very important to distinguish between big, conviction positions, and more dubious stuff like TAST. But each to their own!

Regards, Paul.

Dean brooks

Hi Paul, will you be reviewing CTO?

Hi Dean,

Re T Clarke (LON:CTO) - no, sorry I'm not planning on reviewing the recent results.
Have just had a quick look at the figures, and it just doesn't interest me. Very low margin contracting business. Not the sort of thing I would look at, these days.

Regards, Paul.

Small Cap Value Report (Tue 28 Mar 2017 - Part 1) - TRCS, TAST, SFR, CARD, CTO, HSW, FRP

Tracsis interview

Tasty (LON:TAST)

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Paul Scott

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