Small Cap Report (22 Mar) - MOSB, JDG

Friday, Mar 22 2013 by

Pre 8 a.m. comments

A fairly quiet day for results today, after an absolute deluge yesterday. As usual I'll take a quick look at the most interesting (to me) results and publish just before 8 a.m.. Then a more leisurely look at a few more companies between 8-10 a.m..

Given my retail background, I'm drawn to today's results for the 52 weeks to 26 Jan 2013 from Moss Bros (LON:MOSB). Performance is expected to be good, as the share price has already factored in rather too much recovery for a business that has struggled to be profitable for several years now.

At 66p and with 99.3m shares in issue, the market cap is £65.5m.

Basic EPS rose from 1.63p to 2.43p, so that puts them on a lofty rating of just over 27 times. The total dividend for the year has been more than doubled, but is still only 0.9p, for a yield of only 1.4%. Put another way, the quoted bid/offer spread would consume over 2 years dividends!

Although the 2.43p EPS figures seems to be well ahead of broker consensus forecasts of 1.88p.

MOSB have a particularly strong balance sheet, with £25.7m in net cash, although that is likely to be at/near a seasonal peak at the year-end date. Current assets total £44.2, and current liabilities are only £15.9m, so there is a very healthy working capital surplus of £28.3m. Long term liabilities are only £7.5m, so working capital less all liabilities is a very solid £20.8m.

This is important, as a strong balance sheet means the company is not likely to go bust - de-risking the investment for shareholders, and giving potential upside if something good is done with surplus cash (e.g. a special dividend, buybacks, acquisitions, etc). Cash also gives suppliers confidence, giving you the pick of the best suppliers & stock, and it means you can use your financial strength to increase profit, by e.g. paying suppliers cash on delivery if they give you a discount.

I note from the narrative that they are looking at refitting 90 stores over the next 5 years, so the business will be capex hungry, and cash could decline. Although it's also worth noting that EBITDA of £7.9m last year is considerably higher than PBT of £3.0m, which implies a fairly hefty depreciation charge of…

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Moss Bros Group PLC is engaged in retailing and hiring formal wear for men. The Company operates through Moss Bros branded mainstream stores. The Company's segments include Retail and Hire. The Company offers various types of suits, skirts, jackets, trousers, coats, casualwear, ties, shoes and accessories. The Company offers clothing and accessories for various occasions, including weddings, prom, race day suit, tuxedo and black tie, interview attire and graduation. The Company also trades through Savoy Taylors Guild fascia. It has approximately 100 Moss Bros and Savoy Taylors Guild branded stores and over 20 Moss Bros outlet stores, which trade Moss Bros own brands and selected third-party brands, including Hugo Boss, Canali, Ted Baker, DKNY and French Connection. The Company has approximately 120 Moss Bros Hire outlets, which are contained within Moss Bros Retail and Savoy Taylors Guild Stores. The Company's sub brands consist of Moss London, Moss 1851 and Moss Esq. more »

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Judges Scientific plc is a United Kingdom-based company, which is engaged in the acquisition and development of a portfolio of scientific instrument businesses. The Company's activities are predominantly in or in support of the design and manufacture of scientific instruments. Its segments include Materials Sciences and Vacuum. Its subsidiaries include Armfield Limited, engaged in the design and marketing of engineering equipment and research instruments; Fire Testing Technology Limited, which is engaged in the design, manufacture and service of instruments that measure the reaction of various materials to fire; Scientifica Limited, which offers micropositioning equipment, microscopes and advanced imaging systems used in electrophysiology and neuroscience; Quorum Technologies Limited, which manufactures scientific instruments primarily used for electron microscopy sample preparation, and Sircal Instruments (UK) Limited, which designs, manufactures and distributes rare gas purifiers. more »

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  Is LON:MOSB fundamentally strong or weak? Find out More »

8 Comments on this Article show/hide all

Boros10 22nd Mar '13 1 of 8

A stunningly good piece of analysis for so early in the morning. Essential reading for anyone trying to get their heads around retail and the state of the retail commercial property market.

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bobdouglas 22nd Mar '13 2 of 8

If you believe mosb has a good enough cashflow to finance the planned store re-fits then why does the company not offer potential investors the prospect of a meaningful dividend or special dividend or share buyback or anything to encourage people to put their hands in their pockets and invest in their company?

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Paul Scott 22nd Mar '13 3 of 8

In reply to post #71861

Fair point bobdouglas. Remember that I'm typing up these reports as I'm reading the results, so I do sometimes contradict myself when a point becomes clearer, as it did in this case.


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Blackthorn Focus 22nd Mar '13 4 of 8

Remember, as per my message yesterday, that you can meet David Cicurel of Judges Scientific (LON:JDG) at AIM Investor Focus 2013 in London on April 17th.

AIM Investor Focus is a Blackthorn Focus event comprising presentations from Judges Scientific (LON:JDG), Mattioli Woods (LON:MTW), Portmeirion (LON:PMP), RWS Holdings (LON:RWS) and WYG (LON:WYG).

The event is free to attend, you can register your interest here:

David O'Hara, Blackthorn Focus

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shipoffrogs 22nd Mar '13 5 of 8

Hi Paul

I dont really understand why a company growing by acquisition can justify treating the write off of intangibles as exceptional - they did the same last year, seems pretty normal to me: but then, bang go all the profits.

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Monty9 22nd Mar '13 6 of 8

Judges CEO presents the company in terms of return on total invested capital ("ROTIC") which neatly cirmcumavigates all the goodwill / exceptionals / derivatives issues. For the most part these (certainly in the past) have been dictated by IFRS's that don't really suit the Judges operation.

I hold at a cost of about £6 having waited for a cutback since £4.2. My own judgement is that there is plenty of life in the model yet as its increasing size makes the rating of its own shares higher relative to the target companies, or in line with larger targets. I still know institutional buyers who admire the operation but cannot (or will not) buy because it is just too small - potential aid to the future rating when it reaches a MCap of, say, £100M.

But then nothing goes up in a straight line .....

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marben100 22nd Mar '13 7 of 8

I dont really understand why a company growing by acquisition can justify treating the write off of intangibles as exceptional - they did the same last year, seems pretty normal to me: but then, bang go all the profits.

To understand that, you need to understand the nature of  the intangibles. NB they are "amortised" not written off - those are two different things.

This issue is to do with acquisition accounting. Referring to the 2012 accounts, see note 16. The £3.29m amortisation charge comprises the following items (all non-cash, obviously):

Item 2012 £K 2011 £K
Non-compete agreements 238 188
Distribution agreements 302 219
R&D 502


Sales order backlog 792


Brand and domain names 492


Customer relationships 968


TOTALS 3,294



Due to IFRS acquisiton accounting rules, all of the above have to be capitalised (as part of the acquisition consideration) and then amortised over their useful lives. However, once the acquired businesses are integrated, further expenditure is not generally required, except in the ordinary course of business, to retain their value. In a sense, the amortisation charge is double counting costs such as marketing which are required to maintain/build the sales order backlog and customer relationships. We already have marketing accounted for and the organic growth reported shows that this spend is sufficient to not only retain customer relationships (for example) but build new ones.

Most importantly, from the perspective of the investor, if Judges didn't make further acquisitions then these amortisation amounts would disappear after a few years and we'd expect the reported profitability of the business to reflect actual profitability excluding exceptionals.

Acquisiton accounting is a minefield and can be used to hide a multitude of sins, so it is wise for investors to be wary (those that followed the RCG Holdings (LON:RCG) story will understand what I mean!). Judges track record of strongly growing operating cashflow and management's delivery on expectations gives me sufficient confidence to retain Judges as one of my larger shareholdings, though I have topsliced along the way.


Concerning the £1.6m of derivative charges which Paul refers to, this is a compex issue relating to redeemable preference shares issued when the company was floated. They had the effect of hitting reported profits whenever the share price rose! This has distorted the accounts for several years, but in 2012 the Board took the decision to change the T&Cs associated with them, which has permitted directors to redeem or convert nearly all of them, so this effect should not impact future years. I covered this issue at length in my report on their 2012 AGM *, where we voted on that change.

I also recommed this excellent article by CantEatValue to readers.


*Only accessible to ShareSoc members, but you can sign up here, FOC if you wish.



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Boros10 22nd Mar '13 8 of 8

For an excellent summary of the issue of intangibles take a look at the following which comes from Warren Buffett's annual shareholder letter - 2012 (pages 12 to 13). Although he refers to US GAAP rules, IFRS differ little on this subject.

"I won’t explain all of the adjustments – some are small and arcane – but serious investors should understand the disparate nature of intangible assets: Some truly deplete over time while others never lose value. With software, for example, amortization charges are very real expenses. Charges against other intangibles such as the amortization of customer relationships, however, arise through purchase-accounting rules and are clearly not real expenses.

GAAP accounting draws no distinction between the two types of charges. Both, that is, are recorded as expenses when calculating earnings – even though from an investor’s viewpoint they could not be more different. In the GAAP-compliant figures we show on page 29, amortization charges of $600 million for the companies included in this section are deducted as expenses. We would call about 20% of these “real” – and indeed that is the portion we have included in the table above – and the rest not. This difference has become significant because of the many acquisitions we have made.

“Non-real” amortization expense also looms large at some of our major investees. IBM has made many small acquisitions in recent years and now regularly reports “adjusted operating earnings,” a non-GAAP figure that excludes certain purchase-accounting adjustments. Analysts focus on this number, as they should.

And that ends today’s accounting lecture. Why is no one shouting “More, more?”

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About Paul Scott

Paul Scott

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »


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