Small Cap Value Report (9 May 2016) - GRG, BHS, FRP, PVG, RSTR

Good morning from Abu Dhabi!

So far so good, on my holiday. The hotel is absolutely wonderful - it's called the Viceroy, on Yas Island. There's lots to see & do here, including a gigantic shopping & leisure mall, attached to Ferrari World. Although of course it's quite a conservative, Muslim country, so one has to respect the local customs & laws whilst here.

Although I've been pleasantly surprised at how Westernised it seems in the tourist areas anyway. They even sell Yorkshire Tea in the hypermarket here! Although at £6 for 80 bags, I had to resist the temptation. I'm sticking instead to the hotel's perfectly satisfactory English Breakfast Tea.

The staff at the Viceroy are amazingly courteous & helpful. They're nearly all from third world countries, and apparently there can be exploitation here of foreign workers. Although I haven't detected any of the tell-tale signs of maltreatment & overwork that you see etched in the faces of staff on cruise liners for example. It's great to see their faces light up when you tip them as little as £2, which is a lot here.

Greggs (LON:GRG)

It's always interesting to look at what the larger retailers say about trading, as that often has read-across to other retailing shares which I hold. Greggs have seen an improvement in recent weeks:

Total sales for the 18 weeks to 7 May 2016 grew by 5.7 per cent and like-for-like sales in company-managed shops grew by 3.7 per cent over the same period.

As has been widely reported, conditions on the High Street were softer in March before recovering in recent weeks; these conditions were reflected in our own performance.

This reinforces my view that there are some smashing bargains available right now in this bombed-out sector. Although one has to be very careful to avoid retailers that might be in structural decline.

I believe that the outlook for the UK consumer is fairly positive. In my view, Brexit doesn't make the slightest difference to how much people spend in the shops, so that's a red herring. Disposable income has risen quite nicely in the last couple of years, if you look up the economic statistics.

The issue is that there is so much competition in retailing. Just think about how many new shops have opened in the last few years. They are taking market share away from other existing retailers.

Also, the best retailers tend to do well, whatever the weather, or the economic backdrop.

BHS

This is a good example of an old retailer which has simply been squeezed out by better competitors. Primark & others have swallowed up the low end of the market. Whilst Next, and others have relentlessly expanded in the middle market. Plus of course new online only competition is increasing rapidly (e.g. ASOS (LON:ASC) and Boohoo.Com (LON:BOO) ) - so they are taking market share away too.

We should not mourn the demise of tired brands which were not able to compete effectively. Their death actually frees up resources for better, more efficient operators, which is good for the economy, and jobs.

Sir Philip Green may not have exactly covered himself in glory with the method he used to dispose of BHS. However, we can hardly expect him to have carried on pouring cash into a dying business at the rate of about £50m p.a. (and worsening). If you look through BHS Limited's accounts, it's quite clear that it would have gone bust about 3-4 years earlier, if Green's group had not extended financial support. When it did go bust, it owed the group about £200m, and had not paid any dividends since 2004.

So I remain of the view that much criticism of SPG is wide of the mark, and thinly veiled politics of envy. The Left tends to despise flamboyant, ostentatiously wealthy people. Especially if they are very outspoken, unrepentent about their lavish lifestyle, and dare I say it, also Jewish.

That has left BHS with nowhere to go, and unable to support its hefty rent/rates bill for large, prime sites. I made this point, and others, when I was asked to call in to Radio 4 last Friday, at New Broadcasting House in London. They wanted me on a panel show this Thursday, at 8pm, to discuss BHS, but as I'm abroad this week, that wasn't possible.

So they recorded me answering questions about BHS, and going through the figures, for about 20 minutes. They may use some recorded clips in the show. So who knows, this may be the start of my thoughts on retailers finding a wider audience!?

EDIT - in the above section, I didn't even mention the huge growth in clothing sales by supermarkets as another factor which accelerated the demise of BHS. Asda was the first to really exploit this area, with its very successful George brand. Since then Tesco and Sainsburys have followed suit. Today a friend told me that Sainsbury's oddly-named "Tu" clothing brand is the UK's 6th largest by volume, and 10th largest by value. So again, little wonder that BHS could not compete, given its exorbitant prime High Street rent/rates cost infrastructure.

A mention might also be made of resurgent House of Fraser, and Debenhams (LON:DEB) which seem to be executing quite well these days - but on quite slim overall operating margins. There was really no hope at all for BHS. I reckon SPG extended its life by years. An unpopular view, but one based on facts & figures, unlike many.

Fairpoint (LON:FRP)

Share price: 121p (down 14.5% today)
No. shares: 45.6m
Market cap: £55.2m

AGM statement - trading update - it's surprising to see the shares down 14.5% today, as this sounds an in line update:

Overall the Group is performing in line with management expectations during the historically quieter first three months of the year.

However, the update makes no comment about full year expectations. So perhaps some shareholders have been worried by the following additional points. Are the comments below laying the ground for lower expectations later this year, perhaps? That's how I read it, and so does Mr Market, judging by the share price fall today.

The first half of the year is anticipated to feature:-

Growth in the Legal Services division to reflect the additional contribution from the acquisition of Colemans-CTTS LLP and CT Support Services Limited ('Colemans');

- Good progress on the integration of Colemans and Simpson Millar, albeit with a quieter than anticipated start to the year in conveyancing, given housing transactions have not been as expected;

- the Group's continued investment in infrastructure to enable the pursuit of acquisition opportunities to further develop the Legal Services platform;

- As expected, market conditions in the Group's core debt solutions market remain challenging and focus remains on cost control.

So overall that sounds mildly negative to me.

The CFO is moving on too - it sounds like he's getting bored with this role:

John Gittins, who has been the Group's Chief Financial Officer since 2011, has indicated to the Board his desire to step down from his executive role with Fairpoint to pursue a portfolio career of non-executive positions (having been appointed to one such role last year). John will work with the Board to ensure a smooth transition to his successor and recruitment consultants have been appointed to identify suitable candidates. A further announcement will be made as and when appropriate.

Being aged 55, perhaps he just fancies winding down a bit, from a full-time role into holding NED positions?

Valuation - based on current forecasts, the forward PER of 6 is now very low.

Also the forecast dividend yield is about 6% now too. It's not often you find a stock where the PER and divi yield are the same number. These are either a great bargain, or the market is worried about something going wrong in the future.

My opinion - the main activity of this group is now legal services - including fixed fee work, done efficiently from call centres. There's also some compensation claim type work, which I'm not keen on. Shares which operate in that sort of space nearly always seem to go wrong - e.g. Quindell, and others. It's too easy for the goalposts to be moved by Government.

Someone told me that apparently there's a new legal framework for the insurance sector being created by the Govt. I don't know any details, but have been told that this could undermine some companies in that area. This could perhaps explain the softness in the share price of Redde (LON:REDD) recently, despite its regular excellent trading updates?

So it's not a share that appeals to me, and today's update sounds slightly wobbly. Although the very low PER, and excellent divi yield do look attractive. Therefore I'll keep a watching brief only for now.

A few quick snippets, before I head up to the rooftop pool!

Premier Veterinary (LON:PVG)

I've had a quick look at this company's interim results. It seems very small, and loss-making - turnover of only £1.4m for the 6 months, generated a loss of £1.1m. That doesn't look any good to me.

Rightster (LON:RSTR)

In an update today, it says trading is in line with expectations. Forecasts are for a £3m loss this year, which sounds bad, but is actually a big improvement on the massive losses incurred under previous management.

Cost savings of £4m have been implemented. This is a second attempt to make this company work, but it's still not clear whether a viable business model is emerging. Blue sky things like this don't appeal to me, as they nearly always go wrong, as indeed this one has so far.

The £19.2m market cap (at 3.4p per share) hardly looks a bargain, given that no commercial success (i.e. profits) have been delivered yet.

EDIT - today's theme is CFOs moving on to pastures new. As with Fairpoint above, Rightster has also lost its CFO, who is leaving on 20 May. In my view, if exciting things are afoot, then the CFO usually wants to stick around. So not a good sign.

All done for today!

Regards, Paul.

(usual disclaimers apply)