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

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 in kick-starting real demand for spring products.

Overall, consumer confidence does not appear buoyant and, given that context, I believe that the provisional results represent a creditable performance. Our financial position continues to remain healthy and our final autumn/winter terminal stock position has ended better than expected, and lower than last year. Our expectation is that trading conditions will remain challenging, and therefore our outlook for the FY17 result is cautious."

The most important sentence is the last one - a cautious outlook for 2016/17. That's bound to put a dampener on the share price, so I might hold off from buying any more of this stock.

My opinion - I think this is an interesting company, with a niche offering (value clothing for middle-aged & older customers, including larger sizes). The valuation appears undemanding. However, there are plenty of bargains to be had in this sector, so investors are spoiled for choice, for retailers which have disappointed recently, but which are fundamentally very sound businesses. Examples of which (all of which I have bought fairly recently) are Next (LON:NXT) , Sports Direct (LON:SPD) , and Restaurant (LON:RTN) .

Given what good value those large caps are now, I'm struggling to find a reason to buy more BON shares, given how illiquid it is, and that brokers will probably now reduce forecasts for 2016/17.

I think if the shares do another big lurch down, then that's the point that I would start building up a bigger position. So for the moment, I'm just keeping my small initial purchase, but not adding to it.

"We can't give forecasts to the market!"

I've lost track of the number of times that companies & brokers trot out the above statement. Instead they seem to think that they have to hide behind the house broker, who of course puts out forecasts which he's extensively discussed with, and been guided by, the FD of the company being reported on! All a bit of a charade.

So as one AIM CEO once said to an investor group, "The house broker's forecasts are in reality the company's forecasts".

Yet, as we've seen with BON today, companies can, and do give forecasts for expected level of profits directly to the market, through their RNS releases. BON stated on 16 Dec 2015 that:

Given the ongoing volatility of trading conditions, the Board considers it likely that the PBT will be within the range of £10.5m to £12.0m.

What's that, if it's not a forecast?!

BON is listed on AIM, so maybe the rules are looser there? No - because some fully listed companies also give forecasts in their RNSs - e.g. Next (LON:NXT) starts off with a wide profit forecast at the start of the year, then narrows & adjusts that profit range as the year goes on. This is a superb method of managing investor expectations, and it also demonstrates that the Directors are in control of the business.

Overall then, I would like all companies & their advisers to drop this charade of not being able to issue profit forecasts. You can, and some companies already do.

One of the biggest difficulties that investors face, is how to interpret trading updates, as they usually don't tell us what we really need to know - namely what the profit figure is likely to be. Instead investors have to untangle the sometimes vague, or misleading language used in trading updates. I've made a career out of doing just that - it's the main focus of these reports, after all.

In many cases though, we are left in semi-darkness, and have to wait until the house broker has updated his numbers, to be able to judge whether to sell, hold, or buy more of the shares. This really isn't good enough, as broker notes are difficult for private investors to get hold of.

I can help guide people through this maze, but the whole situation really isn't good enough. I'd like to see all companies start guiding the market more specifically - publishing a range of likely profit outcomes for the current year, say once a quarter, in an RNS. It doesn't matter if that range is initially very wide. I'd much rather know what the forecast risk is - so we need a range, rather than a specific figure for likely future profits.

I discussed this with the CEO & FD of Lakehouse (LON:LAKE) at a recent investor evening. Again, they had been wrongly advised that they couldn't publish forecasts, and such figures had to be done through the house broker. A number of us there pointed out that this is nonsense. Plenty of companies do advise the market of what profit they think is going to be achieved this year, in their RNSs. I've given two examples above (BON & NXT).

The point is that accurately guiding the market's expectations is a key part of the Board's role, at every company. Whenever you see a large vertical move up or down on a share price chart, it's a sign that the company has guided the market badly. Big moves in share price should not happen. Companies should prepare the market for potential disappointments, by publishing a range of possible profit outcomes for the year.

Companies already do this internally. Most companies prepare a good, normal, and bad forecast for the year. So why not publish those figures for the market to see, and keep us updated throughout the year? This would certainly make for a much more efficient market, where some of the guesswork is removed.

Maintel Holdings (LON:MAI)

Share price: 705p (up 1.1% today)
No. shares: 10.8m
Market cap: £76.1m

Results y/e 31 Dec 2015 - this company appears to be an acquisitive telecoms group, on similar lines to Alternative Networks (LON:AN.) and Adept Telecom (LON:ADT) - both of which I have looked at recently.

I last looked at Maintel this time last year, reviewing its 2014 accounts here on 9 Mar 2015.

Adj EPS - has come in slightly ahead of expectations, at 60.3p, up an impressive 29% on prior year. Although note that this might be flattered by an unusually low tax charge in 2015, due to utilising tax losses in one subsidiary - I'm not entirely sure what they have adjusted, whether it's normalised tax or not - the figures are in note 9 to today's accounts, but I find them a little confusing - but am flagging it here as something to check if you intend taking this share further as a potential investment.

PER - looks quite good value at just over 11. Although that's similar to other companies in this sector - I think they tend to attract relatively modest ratings because customers shop around for the best deals, and therefore profits may not be that sustainable.

Balance sheet - this is weak, and therefore the company doesn't have resilience in the event of a trading downturn.

Dividends - fairly generous, producing a yield of about 4.3%. The cashflow statement looks very good, so this company does seem to be generating genuinely strong cashflow, and is using that to pay good divis, and make acquisitions.

My opinion - my main concern with this sector is the sustainability of profits. Technology is constantly changing in this sector, and often the companies are re-selling services from the big operators. So I feel there may be a risk that companies in this sector might be making hay whilst the sun shines, but possibly may not have much sustainable profits perhaps?

As things stand now though, I do like the cashflow & nice divis. So if you can satisfy yourself that its profits are sustainable, then it might be worth considering this share.

Stop Press! - a major acquisition has just been announced by Maintel, with the shares being briefly suspended. A Placing at 700p is being done to part-fund it, and this looks fine - only a 5p discount - so excluding private investors is not a problem. Nobody minds being excluded from a fundraising, if there's negligible discount. It's only an issue when there's a deep discount.

Eclectic Bar (LON:BAR) or £PIER

I see that Luke Johnson has not wasted any time shaking things up at bar/nightclub operator Eclectic Bars. The CEO is out, and a transformational acquisition has been agreed - it's buying Brighton Pier, a profitable business. I note the EBITDA multiple looks reasonable, but the capex requirement to keep it standing is considerable.

An accelerated book build usually means that the deal is already done. A £9.5m Placing at 55p has been agreed. A new £13m facility with Barclays is part-funding the acquisition.

Looks interesting. I'm regretting having sold my small position in this company, as I quite like the strategy of broadening out from bars, into experience-led attractions.

That's probably it for today. Have a great weekend!

Regards, Paul.

(usual disclaimers apply)