Small Cap Value Report (17 Aug 2016) - ALY, TRCS, VCP, LOOK

Good morning!

Laura Ashley Holdings (LON:ALY)

Share price: 22.1p (up 4.1% today)
No. shares: 727.8m
Market cap: £160.8m

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

Results for 74 weeks to 30 Jun 2016 - one of the headlines in my newsfeed this morning was "profits up at Laura Ashley", which surprised me. However, on closer inspection there's a catch - the period being reported on today is an extended one - 74 weeks to 30 Jun 2016, or 17 months. The change in year end was announced here on 14 Sep 2016.

I very much dislike year end changes, as it completely throws out comparisons of performance for several years. Although often companies use pro forma figures for comparison purposes, which is helpful. Unfortunately ALY has not done that today - so the 74 week period is compared with the previous accounting period of 53 weeks, which of course is a totally meaningless comparison.

There were however, a set of accounts reported for the 52 weeks to 30 Jan 2016, which I reported on here. This showed a solid performance in the UK, but disappointing international performance (mainly due to Japan being weak).

We can of course deduce the more recent performance, by taking the most recent 74 week figures, and deducting the 52 weeks to 30 Jan 2016. The result of that is a profit of £5.1m for the 22 weeks to 30 Jun 2016.

The nearest comparison is the 26 weeks to 1 Aug 2015, which showed a pretax (and pre-exceptional) profit of £8.4m. However, that's not a valid comparison, since the missing 4 weeks are in July, which will be a highly profitable month.

So my conclusion is that it looks as if performance is currently running in roughly the same ballpark as last year.

LFL sales - a key measure of performance for retailers, since like-for-like figures strip out any impact from new store openings & store closures. Therefore it's a good measure of underlying performance. However, there is no standard method of calculation, so some retailers are naughty and include refitted shops in LFL figures, which of course is wrong! A refitted store is quite clearly not a like-for-like comparison.

ALY reports decent LFL sales growth at +4.1% for the 74 weeks. That's impressive, at a time when many retailers are struggling to report positive LFL sales growth. Although I note that this has fallen back from +4.8% reported for the 52 weeks to 30 Jan 2016 - suggesting that sales growth has fallen back in the most recent 5 months, probably to something like +2-3% at a guess.

Online sales - quite impressive, both in size, and amount - online sales of £73.5m represents 20.2% of total UK sales of £363.2m. Also, online grew by 15.7% against the prior period, on a LFL basis - so clearly ALY is doing well online - therefore I feel this should be seen as a successful business which is coping with changing technology. It is not a declining business in my view, but is priced as if it were - an opportunity perhaps?

A lot of investors forget that traditional retailers also sell online, and some are making a considerable success of it. Their shares would probably be worth a lot more, if they didn't have any shops at all! Investors would put a racy rating on a growing online business, yet they ignore that side of things if it's attached to a bricks & mortar business.

There might be an opportunity there, for some conventional retailers to achieve a higher PER if investors notice that they're doing well online.

Dividends - this is one of the main attractions of this share, as it's paying out stonking divis. So if you add up the divis paid, the overall investment return isn't too bad, although it depends where you start to measure it from.

Divis are being paid at the rate of 2p p.a., so that's a yield of 9%!

It's not well covered though.

A 0.5p divi has been announced today, taking the total for the 74 weeks to 2.5p.

Outlook - currently trading in line with expectations, so that's reassuring;

Trading for the six weeks to 13 August 2016 is performing in line with management expectations.

We will continue to focus on enhancing the design and quality of our product ranges upon whose provenance the Brand has been built. In a time of uncertainty for retail and the global economy at large, we are optimistic and confident that Laura Ashley will remain a business with solid foundations to withstand challenges as they arise.

International - still a problem area. Overseas stores operate via franchisees, so the turnover looks small (only £30.7m), but this is not the retail value of goods sold. It is actually just the franchise fees and licensing. So it's a much bigger business than this figure would suggest.

International is also much more significant to profits than the small turnover figure suggests, so this is an important area. The Australian franchise partner went bust, causing a £1.3m exceptional loss (previously reported). This is the main drawback of franchising - there's often not enough margin to share with the franchisees, and they can end up going bust, leaving behind a bad debt for the franchiser.

A large freehold office building was purchased recently, so this is designed to be the spearhead for a major expansion in Asia.

Balance sheet - key points;

• Fixed assets have shot up from £21.2m to £52.0m, which is due to the large freehold acquired in Singapore.
• Cash of £19.8m, less S/T debt of £16.1m, less L/T debt of £21.7m, comes to net debt of £18.0m. Although remember that the freehold office building is worth more than this, so it's a sound position overall.
• Pension deficit of £16.2m

Overall, it's fine, there are no solvency or financing issues to worry about.

My opinion - overall, I like it. Performance is fairly solid, with LFL sales growth much better than many other retailers. Plus online is growing well. It's a tremendously valuable brand, in my view, something that is certainly not reflected in the valuation.

Some investors don't like the ownership structure here, with controlling Malaysian management having a messy & very expensive divorce. However, that's the only negative I can see. Their salaries are modest, and they pay out huge dividends to all shareholders, so that to me seems positive. Also I feel that the controlling shareholders/management seem to take a long-term view of growing the business, and performance has not been bad at all. So for me, the ownership structure is not a problem.

My hunch is that, at some point, maybe years in the future (who knows?) shareholders here might get a nice payday, on a sale of the business. Hence why I want to hold, and in the meantime I'm collecting in 9% p.a. in divis. What's not to like about that?!

I should add that UK retailers will of course be facing significant cost pressures next year - from Living Wage, and higher priced imported goods.

Tracsis (LON:TRCS)

Share price: 480p (up 11.6% today)
No. shares: 27.5m
Market cap: £132.0m

North American contract win - I don't normally comment on small contract wins - this one is only $0.4m. However, it's a long-awaited breakthrough into the American market. This is a potentially very lucrative market for Tracsis's lead product - condition monitoring equipment for the rail system - e.g. points, and overhead gantries.

Director comments;

"We are delighted to have secured this significant order with a major class 1 operator having clearly demonstrated the business case and benefits of our remote condition monitoring technology.

We are hopeful that this contract will lead to a further roll out across the client's network in the fullness of time and also act as a valuable reference case with other US rail customers."

My opinion - with the UK market fairly mature now, growth into the huge USA market looks potentially exciting. The PER is now in the low 20s, but with exciting growth potential, that doesn't strike me as outrageous.

There are other good software businesses within Tracsis too, as well as the condition monitoring stuff.

I've interviewed Tracsis CEO John McArthur twice, in 2014 and 2015, here is the link for those.

Victoria (LON:VCP)

Share price: 1470p (up 1.7% today)
No. shares: 18.2m
Market cap: £267.5m

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

Proposed share split - the AGM notice today says that the company is seeking shareholder authority to split its shares into 5. Therefore the price would reset to one fifth of the current price, so about 294p, with shareholders owning 5 times as many shares. Therefore the overall value of everyones' shareholdings will be unchanged.

It's purely a cosmetic change, to bring the share price back within a range which is more usual for UK shares.

There's a saying, something like, "Buy the split, sell the consolidation", and there's a lot of truth in that. After all, it's the most successful companies which see their share price break out of the upside range of what is normal. Also, it's the least successful companies which need to issue huge amounts of new shares, and end up with a ridiculous share price of 1p or less, which need to do share consolidations. Therefore, it's not a surprise to see the strongest performers continue to out-perform, and the worst companies to continue to under-perform.

I reported here on 26 Jul 2016 on VCP's stellar results, with the shares then at 1218p. At 1470p, there has been a 20.7% price rise (less spread & dealing costs) in a smidge over 3 weeks - not bad!

EPS is forecast at 113.3p for this year, so I make that a PER of 11.0 - hardly demanding. Although once you factor in the significant net debt, the valuation looks less of a bargain.

My opinion - I like it because the company said that weaker sterling has made it more competitive in the UK market, where about half of product is imported from the EU (mainly the low countries). So this is likely to mean further profit growth this year.

Also note that the company is seeking authority to buy back up to 10% of its own shares, which would further enhance EPS, if carried out.

Opinion is mixed on this company, but in my view the last set of results blew the bear case completely out of the water. So sceptics have been proven wrong in this case.

Am running out of time, so just a couple of quickies:

Lookers (LON:LOOK)

Good results out today, for the 6m to 30 Jun 2016.

The new car market continues to be in rude health by the sounds of it;

New car market conditions have been favourable during the first six months of the year and the new car market continues to be relatively healthy with our order take for the important month of September continuing to build in line with our expectations.

Industry forecasts suggest that the new car market will stabilise in the second half of the year with growth of 1.5% and an anticipated outturn for the year of 2.7 million units compared to 2.63 million in 2015.

Used car sales, and higher margin aftersales, all sound healthy too.

This is an interesting comment;

...This proven strategy should also correct any lingering misperceptions that our sub-sector and Lookers' business model specifically, leaves us overly exposed to the economic cycle any more than general retailers.

Brexit concerns are largely brushed off;

However, the result of the referendum has created a degree of uncertainty in the UK economy, although it is fair to say that we have not noticed any significant difference in terms of customer behaviour so far, particularly in respect of orders for new and used cars. Notwithstanding the uncertainties over consumer confidence and the Pound : Euro exchange rate, the board is confident that the group will make further progress during the rest of this year with revenue and profits ahead of last year's performance.

My opinion - evidence is mounting that the sector is doing just fine. So it looks very good value, in my view. I think there's very little to choose between the various smaller car dealerships - they all look good value to me.

Robinson (LON:RBN)

Interims to 30 Jun 2016 look disappointing to me.

Stripping out last year's exceptional costs, underlying profit fell from £0.8m in H1 2015 to only £0.2m in H1 2016. Clearly a poor outcome.

The balance sheet isn't as strong as it was, due to the large Polish acquisition made a little while ago.

There's upside potential from surplus property disposals.

My opinion - the market cap is about £24m at 143p per share. That looks somewhat warm to me, for a business that is clearly struggling to maintain profitability.

That's me done for today. See you tomorrow!

Regards, Paul.

(usual disclaimers apply)