Small Cap Value Report (Mon 19 Feb 2018) - MCLS, GLE, CLIG, SAL | Graham Neary

19th Feb '18 by Graham Neary

34 comments 14705 reads

Good morning!

Stocks crossing my radar today are:

McColl's Retail (LON:MCLS) - final results
MJ Gleeson (LON:GLE) - half-year report
City of London Investment (LON:CLIG) - interim results
Spaceandpeople (LON:SAL) - contract renewal

(Edit: the Photo-Me International (LON:PHTM) announcement wasn't interesting enough, so I've left it out.)

McColl's Retail (LON:MCLS)

Share price: 237.5p (-5%)
No. of shares: 115 million
Market cap: £274 million

Final results

I've just been reviewing the arguments for and against this convenience retailer. We last discussed it here in December at the full-year trading update, just after the fall of Palmer & Harvey, one of its major suppliers.

Thanks to the trading update, we already knew that LFL sales were +0.1% for the year ending November 2017 (improved from minus 1.9% the prior year).

Now we get these figures:

Adjusted EBITDA up 20.0% to £44.0m (2016: £36.7m)

Net debt increased to £142.2m (2016: £37.0m), in line with management expectations

Profit before tax increased to £18.4m (2016: £17.7m)

Basic earnings per share slightly reduced to 12.3p (2016: 12.8p)

Sales exceeded £1.1 billion so the pre-tax margin comes in at 1.6%.

Looking back at my previous writings on this stock, my criticisms have been less to do with the specifics of the company and more to do with the sector. I've suggested that it's too competitive to be attractive, while others have suggested that good locations and scale provide some form of a moat against competition.

There is no denying of course that margins are very thin, and that the chosen strategy of debt-fuelled expansion elevates the risk.

P&H: I also warned that the replacement suppliers for P&H (in administration) might be less generous on pricing, which would impact margins at 700 stores.

Today we learn that there have been "some availability issues" and then "further disruption" in the new financial year, following on from this issue.

We have put in place contingency arrangements, entering into a new short-term supply contract with Nisa on 4 December 2017 for the affected stores. We also began our new supply partnership with Morrisons (agreed in August 2017) earlier than previously scheduled to supply these same…

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BlueFrew

19th Feb '18

Spaceandpeople (LON:SAL) - I bought in after the 15th of January trading update, so pleased to see the update today.

With a market cap of around £6.5M a cash pile of £1.9M is pretty significant downside protection. Profit before tax of £1.2M is not to be sniffed at and a divi of 1.5p is handy to have. I'm also a big fan of companies with a Piotroski F-Score of 9.

As far as I can see they've had a few issues over the last couple of years, but management have navigated them without significantly diluting shareholders and are coming out the other side in much better shape.

Torn between sticking with what I have and tucking a few more away. Don't want to buy too many as it might be difficult to sell them all if I needed the money for any reason. But there still seems to be good value at the current price.

Graham Neary

re: Avation (LON:AVAP). Thanks for spotting that, and the link. D'oh! G

Hi Edward, re: City of London Investment (LON:CLIG). Thanks for the suggestion. Am reviewing it now. G

ridavies

Re your comments on Avation (LON:AVAP), than you very much for a very thorough analysis. The only comment I would make is that with a very slim team, the principal guy there Jeff Chatfield, is key. If he decides that he wants out, then I guess that a change of ownership is a distinct possibility.
Richard Wolanski seems to put himself about a lot in the UK - he is back at Mello Derby in April I notice - but I dont see any significant institutional shareholders (ie over 3%) on the company's website. I assume this must be a disappointment. Institutional support would presumably help on the credit rating and interest rate front?
As I say, thanks anyway and I will take the oppor5tunity to put some questions when I go to Mello Derby this year.

Boon

I used to be a Spaceandpeople (LON:SAL) holder.

This is great news, and I agree as well that I see it as being very lowly valued, but the spread, illiquidity, and size is what holds me back from investing, especially in these turbulent times.

Also the still open question about their German operations.

I do see them as being a good M&A candidate for a larger ad inventory player in the market, as they have a clean niche, some interesting real estate under contract, and marketing and advertising spending is still increasing in the UK. Would make a nice bolt-on for a highly rated advertising group (on PE 10-12) and earnings accretive for whoever takes over.

Carcosa

ridavies, have responded to your comments here:https://www.stockopedia.com/content/avation-plc-lonavap-aircraft-leasing-327223

Brookeda

Thanks for you in depth review of AVAP and your sentiments are part of the reason I have held AVAP now for the last three years. Its continued to see steady progress in that time and management are very heavy holders of the stock which gives me comfort they are also in this for the longer term.

Wimbledonsprinter

I like the valuation of Spaceandpeople (LON:SAL) - but as you state liquidity is dire. As for Germany, the company said in September that the continuation of its 2 German divisions depended on the successful renegotiation of its German contracts, which were due to end in January 2018. Since then no news -and today would have seemed a good opportunity to update the market. (So I presume this is negative.) SAL also said in September that German “closure costs would be limited and would not have a material impact on the Group profitability going forward.” So perhaps they can use this “non-materiality” excuse for not updating the market.

Hi Peter,

re: StatPro (LON:SOG)

Yes, I do study software companies and I like the SaaS model. I'm not investing in them at the moment simply because I think that valuations are in a very optimistic mood!

I did take a look at StatPro (LON:SOG) last year and felt that it must be doing something right to have maintained its independence for so long, in the face of industry trends toward consolidation. Revenue was very flat for a long time, however, so I wasn't not sure about its ability to generate organic growth. I should update my view on it when I get a chance.

Thanks for bringing this up in the context of Fidessa (LON:FDSA). Always happy to read insights about either company. G

Aislabie

Your comment on the lack of institutional interest in Avation (LON:AVAP) is one that I would certainly hope to see aired with the company at Mello. Last time around at Mello Richard Wolanski was asked about this, and at the time the market cap was below £100million which he said was the minimum capitalisation limit for many institutions. Market cap is now £142million so it would be good to know whether the company is seeing more interest from larger investors.

andrea34

I personally don't understand the huge rise in share price of Dart (LON:DTG) after the update today. 17%?!? Agreed, the current results are stated to be "materially above expectations" (whatever those expectations might be, and whatever materially means, because as usual we are supplied with no figures at all)... BUT they then go on to say "the Board currently expects the Group's trading performance for the year ending 31 March 2019 to be broadly in line with the current financial year", so this already looks like a profit warning for the year after in that trading is going to be practically flat.

As ever, Fowler Welch remains the ball and chain that seems to as ever be the drag to the performance of the travel-related operations.

Albertos

Hi Graham

Thanks for the analysis on City of London Investment (LON:CLIG) - as always, most illuminating.

Phil

cafcash49

A question for someone in the Stockopedia community. Has anyone been to the USA to attend the Minervini 3 day seminar he holds in October? I am considering it for this year and some feedback would be very useful. If you don't want to go public with the feedback I could contact you separately. I will be extremely grateful for any feedback. Regards, Charles

Reacher

I believe there are a couple of things to be aware of when investing in asset management companies. Firstly, MIFID II; whilst some firms may not be impacted by the cost of buying research because it is done in-house, I believe that may not be the case for many. Some firms will pay for research in order to have the leg work completed and then use that to develop ideas. Nevertheless, this will be a relatively minor cost in the scheme of things especially for a listed asset manager.

Secondly, and more importantly, whilst market performance will have an impact on profits, outflows due to "clients rebalancing" may offset some of those gains. More importantly, many institutional clients are placing significant pressure on active fund managers to lower fees. This is a significant issue in the industry especially for institutional asset managers. I consider the average fee rate of 82 bps in the case of City of London Investment (LON:CLIG) to be exceptional. As noted at Baillie Gifford, institutional clients were switching from active funds to passive funds (due to the fee rate being in the region of 15 bps). A number of institutional clients use consultants to find fund managers; if a consultant represents 5 pension funds with one asset manager and has negotiated lower fees for one, then more than likely it will push to replicate that fee across the other 4. There is very little the asset manager can do; either accept or loose a significant amount of AUM.

I wonder if CLIG has an economic moat or whether their fee rates will also succumb to the pressure the industry is facing.

I'd recommend reading the following:
https://www.ft.com/content/10f49fd2-067f-11e8-9650-9c0ad2d7c5b5

Hi gajri

Many thanks for those two insights.

Phil

Wol

Thanks for that on Dart (LON:DTG). I read the RNS exactly as you have and have stayed on the sidelines, though regretting missing out on a big rise today. I have held and done very well with the shares in the past but am holding off for now waiting on some clarity on the risks that may threaten the business
My thoughts on Dart (LON:DTG) are:
* strengths - a very well company that seems to be able to outperform its competitors to provide consistent profitable growth
* risks:
- for how long will the cost of opening two new hubs still be a drain on profits
- how will Brexit (whatever form it takes) impact the business:
* will Dart (LON:DTG) be allowed to continue operating all of its European routes?
* will the £ fall again (maybe after a harder Brexit)? DTG’s income is mainly in £’s while a large chunk of costs are in €’s (hotel costs, overseas airport fees) and $’s aviation fuel. If they don’t get their hedging right or find ways to pass on these costs to customers a fall in the £ could hit profits hard
Am I missing something here or am I right to wait for some clarity on these issues? Any thoughts?

20th Feb '18

I think that pretty much all of those are valid concerns on Dart (LON:DTG) - I'd be surprised if they were "not allowed to continue operating all of their European routes", although who knows if there would be extra elements of Euro-government taxation or other charges incurred on each flight/hub.

The other concern I have is if they will ever manage to get Fowler Welch to produce a decent return...

JohnEustace

Willie Walsh at International Consolidated Airlines SA (LON:IAG) says Brexit will be fine, nothing to worry about. Michael O'Leary completely disagrees and says he may have to force his UK Ryanair Holdings (LON:RYA) shareholders to sell up so he can be majority EU owned and keep operating.
easyJet (LON:EZJ) may be able to qualify as a European owned business as Stelios has joint UK/Cyprus citizenship for his stake.
For Dart (LON:DTG) I see that Philip Meeson holds 37.8%. If he is still a UK citizen then it's hard to see how they could qualify as majority EU owned. But they don't as far as I can see fly any routes that would be intra-EU post Brexit - their holidays are from UK to Europe, so perhaps they will not be impacted?

timarr

In the context of Fidessa (LON:FDSA) they've announced a possible bid by Temenos:

https://www.stockopedia.com/sh...

I really wouldn't want to be tendering my shares at any price really, but there you go.

schober

21st Feb '18

re post 32
You might like to read
http://www.eureferendum.com/blogview.aspx?blogno=86656
http://www.eureferendum.com/blogview.aspx?blogno=86655
to give you an idea of the complexity of the legislation covering flying - a real dog's dinner!

Concludes

"......................... If we were to rely strictly on evidence – bankable evidence in the public domain – that the government had a grip on this issue (airline legislation), then we would have to conclude that there was room for considerable alarm. And, where we do rely on evidence in the public domain, we must also conclude that it is extremely unlikely that UK Airlines can keep flying overseas in the immediate aftermath of Brexit.

And, if that is the case, we really do have to ask why those lying bastards are lying to us."

Small Cap Value Report (Mon 19 Feb 2018) - MCLS, GLE, CLIG, SAL

McColl's Retail (LON:MCLS)

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Graham Neary

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