Small Cap Value Report (Wed 22 Feb 2017) - HOTC, PRSM, MCB, TMMG, LGT, NCC

22nd Feb '17 by Paul Scott

42 comments 25506 reads

Good morning!

Apologies, but I got distracted & was very tired yesterday afternoon (haven't been sleeping well lately), so I didn't get round to updating yesterday's article any further until early this morning. I've added new sections on dotDigital (LON:DOTD) and Utilitywise (LON:UTW) to yesterday's report, which is here.

It's quite difficult to clear the decks and write about companies here, because I've just got so much else going on during the day, constant distractions. Hence why it's sometimes easier to finish off articles in the evening, or early morning. Also, during market hours, It's terribly easy to drift into "ticker-watching" - where I end up just monitoring prices, and not actually doing anything constructive. Although having said that, ticker-watching can throw up opportunities, when you sometimes spot unusual price movements, and a jump in trade volumes - which can be turning points, or signs of someone stake-building, etc.

Right, on to the trading updates & results today which have caught my eye.

Hotel Chocolat (LON:HOTC)

Share price: 266p (up 4.2% today)
No. shares: 112.8m
Market cap: £300.0m

Interim results - for the 26 weeks ended 25 Dec 2016.

Seasonality - a key point to note with this company is that its profits are pretty much all generated in H1. This is important because, when skimming through the results at 07:30 this morning, I looked at EPS for the half year (of 7.8p), doubled it to annualise it, then thought hang on that doesn't look right, as it implied a PER of only about 16. Either the company has massively out-performed forecasts, or I've overlooked a large seasonal variance between H1 and H2!

It was the latter of course - I then checked back to last year's adjusted profit of £8.2m for the full year, and it looks as if more than the whole lot (£8.8m) was generated in H1. So H2 looks to be slightly loss-making.

Aside from forgetting about seasonality between H1 & H2, the other clanger I'm sure we've all dropped before, is forgetting that you're looking at half year figures altogether, and wrongly doing your sums based on them being full year numbers!

These pitfalls reinforce the importance of at least one strong cup of coffee before work starts at 7am.

Anyway, back to the figures, and the highlights look…

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RMundy

22nd Feb '17

Just reading through the PURP release and the US market is unsurprisingly enormous:

"The Company's management estimates that total real estate commission income in the US is in the range of c. US$70 billion annually (compared with US$4.3 billion in the United Kingdom)."

Partly because the fees charged in the US are incredibly high at 7%...

"The Listing Agent will agree with the seller a commission (typically up to 7 per cent of the sale price) and list the property on a Multiple Listing Service (MLS)"

I'm a happy PURP holder but I need to do a lot of work on understanding the US market better. Obviously the opportunity is huge but the US has been a graveyard for a few UK expansions and I wonder how the incumbent competition will react to this.

thirty fifty twenty

In fairness to the mgt team at TMMG - I think their business and record is miles apart from PEB.

It was a new mgt team that rescued TMMG in 2010 and since then they have reduced debt considerably and increased EPS.

Their track record of Robert Day and Peter Fitzwilliam is good (completely different to the Vislink story)

TMMG is in effect a holding company with 3 staff members. The Board appears so large because the directors of each agency is also on the Board. These directors are in effect mini entrepeneurs and are doing a day job as well as being on the Board.

The business has a track record of EPS growth, debt reduction, and dividend growth

Shareholder communications are clear and the website informative

A very high % of their client base has stayed with the firm for 10 years

Over c.20% is going to senior managers - not huge but significant.

The mgt team own 40% of the shares so a 'pump and dump' is not likely as they would be destroying their own wealth.

In specific numbers
- the dilution is 6% of the company if it doubles in price
- the mgt team are getting 12% of the gain between today and 75p

If 75p is achieved ....
- it will be the highest share price in over 10 years,
- it will be 75% above a range bound price over the last 3 years
- it will be 7.5 times the share price of their rescue rights issue 7 years ago.

And for clarity of my opinion ...
are the directors very well paid - yes
is their pay excessive compared to other companies with EBITDA of 10m - probably not
should they need an extra incentive or reward - no

has the company weaknesses - yes
- high intangible on B/S
- uses good CASH flow to make in fill acquisitions (in fairness not unlike NFC)
- people based business so profits can walk out the door (maybe GSS prevents this?)

So it is far from a perfect company, and it is not a model example,
but I do feel it is miles apart from the situation at Vislink.
The mgt team do already own 40% of the business (so shareholder friendly has an interesting context!)and as, on most metrics, the share price is lowly valued,
I think this puts a floor on the share price (back up by chart) and is a good trading opportunity with FINALS only 4 weeks away and the mgt now incentivised (even more to double the share price)

declaration: I first bought in 2010 and currently hold

Steve L

Really appreciate the effort you've put into today's report. Thanks gents.

Mark Carter

Thanks for writing about NCC (LON:NCC). It seems they made a bunch of acquisitions without knowing what they were doing.

I see they raised £124m last year, which went to fuel acquisitions. That's a bit of a red flag right there. IIRC correctly there was some criticism over the price paid, too.

FTAlphaville today reported on comments made by Cannacord: "On our new forecasts, the stock trades on 17.3x 2018 earnings" and express an "ongoing concern about the weak cash conversion linked to accrued income".

Considering the hash that NCC has made of things, it's difficult to see how that rating is justified.

All a bit of a mess, really.

Roger Lawson

Re NCC, the share price drop is undoubtedly as a result of the total lack of confidence now in the management of the company - you can read my comments here: https://sharesoc.wordpress.com/2017/02/22/ncc-group-all-credibility-gone/

ithomson1

Thanks for the write up on NCC (LON:NCC) Graham. I bought some of these shares before all the profit warnings rolled in. Fortunately I felt that the valuation was quite high at the time so I only dropped a very small amount of money into this. This sector is still very appealing to me and I hope that they can get things back on track.

Chrisha100

23rd Feb '17

NCC management believe that the EU General Data Protection Regulation which comes in to force in 2018 will bring in more work for their assurance business. The fact that we are supposedly leaving the EU is irrelevant. Whilst Britain may not be a signatory to this regulation, it will require compliance if identifiable data is held for EU citizens.

N Harley

Amazingly good statement from Treatt today - will really look forward to your write up later I hope

fwyburd

How on earth was a non executive director allowed to buy shares in Treatt (LON:TET) a couple of days before their great announcement today? Surely this is insider trading (or have I not understood the rules)?

brucepackard

Thanks for this: we are both long term holders of Mission Marketing (LON:TMMG) and we both agree management should not need an extra incentive or reward.
On the 40% ownership: I have worked at a couple of stockbroking firms which were 100% owned by management. Yet that didn't stop the management putting their own self interest ahead of that of the organisation. Those stockbroking firms have not survived.

PERHAPS the shares Mission Marketing (LON:TMMG) are lowly valued because investors think that management can not be trusted. Or investors feel that management are more keen on feathering their own nest, rather than creating a valuable business?

PeterW

Re Mission Marketing, if you own 40% of the shares isn't that incentive enough??

simoan

I read somewhere that the advent of migrating software to the cloud such as to AWS and Azure has changed the dynamics of the industry. The cloud services companies provide cyber security services as part of their client services so previously some of the cyber security needs of individual firms migrated to the cloud providers which decreased the addressable market. I have never looked at NCC in great detail so not sure if that applies to them.

I assume you probably read this in an Amazon Web Services marketing brochure because unfortunately it is false and the worst kind of misleading rubbish possible!! To connect to any cloud service you need to use a computer network (normally using a web browser on a PC or mobile device) which is connected to the internet through a series of routers before it even gets to the cloud service provider network and at every step of the way the security of your connection and data is open to cyber attack. It is the devices, networks, routers etc. that NCC helps to secure from attack and for most companies their current security apparatus is totally inadequate. It may well be that the cloud provider has impeccably secure network infrastructure of their own, although I somehow doubt it and it can be safely classified under "they would say that, wouldn't they".

Unfortunately, it's not the first time I've read comments like this. I didn't want to start a technical discussion and I'm only replying because it's important that false information is not allowed to grow legs which it can easily do on the Internet. Cloud services are no more immune to cyber attack than anything else you do using a PC or mobile device to access the internet. If you want ultimate security use a PC not connected to any network or the internet sat inside a Faraday cage! :-)

All the best, Si

arfournier

Your assumption is incorrect. It was from one of the tech blogs I regularly read. Unfortunately I can't remember which one I would have to do a search for it.
I also just have a basic understanding of networks etc... but the point being made in the blog post was not that individual companies needed to forgo basic cyber security just that they did not need as broad spectrum of services as was anticipated several years ago. Hence the Cyber security market was thought to be much bigger than what reality is currently showing.

Like I said I don't follow NCC but their numbers seem to indicate they have a sales problem or their technology and services are not competitive.

Cheers,

Al

Sorry, my assumption was meant tongue in cheek, but it's important that we only deal in facts here so that people can make investment decisions. This thread has a few "I read somewhere..." or "A mate told me..." type posts which frankly are not good enough for a high quality discussion, particularly where they are used in hindsight. Let's have links to references we can all read to make our minds up and leave conjecture passing as fact to other lower quality discusson boards.

Well I agree obviously that one's opinion should be based upon facts. Its a fair criticism that one should be able to back up statements with evidence. At the same time what about your statements you made about cyber security. How do you know about the subject? Do you have some qualification or are you expressing something you learned on the internet.? Nowhere do you present any evidence to back up your statements.

Cheers,

Al

It's my day job. The only facts I have stated are to describe how the internet works which is pretty common knowledge. I also understand the range of services that NCC provides and the market they address and that this has no relevance to cloud providers - this is not the target market at all and I think you will find beyond a point companies like AWS leave you to your own devices e.g. network penetration testing which is exactly what NCC do.

If you believe the internet is not constantly prone to cyber attacks ranging from 14 year olds in their bedrooms to nations states with buildings full of highly trained hackers, then you must be living on a different planet to me! There is totally a place for companies like NCC, particularly as things will get exponentially worse with the Internet of Things.

gus 1065

9th Apr '17

Glossy article in yesterday's Saturday Telegraph magazine on Hotel Chocolat (LON:HOTC) . Great scoop to have it placed the week before the Easter chocolate binge positioning the confectionary company as a broader "lifestyle brand" doing good things with local farmers in the Caribean while taking chocolate from being a commoditised treat for the kids to an aspirational purchase for "right on" metropolitan adults. Kind of Willy Wonka meets Jamie Oliver meets Terence Conran. Marvellous.

I agree with Paul's original comment that the shares look expensive (even more so following a further rise since the original commentary in February) on conventional metrics but having balked at buying Fevertree Drinks (LON:FEVR) at 500p on the same grounds at the start of 2016 (now north of £15), I can't help thinking that I might be missing a trick here as another premium brand takes root and appears to defy gravity. May just have to have a nibble ......

Best,

Gus.

Ramridge

Gus
You may want to read up about the rise and fall of Thorntons, the premier chocolatier. They had a great business until they crashed and got rescued by Ferrero, the Italian company. 2014 or 2015? This is just my recollection and can't remember the full background. Could be worth researching before you commit your funds to HOTC .

Thanks Ram - will do. I am by nature more of a Value investor who gets a nose bleed when the p/e gets above 20 so I'll probably look but not touch for now. It does intuitively seem like a decent business which is probably sufficient reason for me not to jump in based on previous experiences.

Best,

Gus.

Flackwell

10th Apr '17

Re:TMMG - I for one certainly hope they are planning for a pump and dump

As that'll give me the opportunity to sell out of this company !!!

As I too, am appalled at the need to incentivise what are already well paid executives

Small Cap Value Report (Wed 22 Feb 2017) - HOTC, PRSM, MCB, TMMG, LGT, NCC

Hotel Chocolat (LON:HOTC)

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Paul Scott

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