Small Cap Value Report (1 Feb 2017) - BOO, EPWN

Wednesday, Feb 01 2017 by

Good morning,

Boohoo.Com (LON:BOO)

Let's start with a few comments on the latest Dispatches TV programme. I think it's a good thing that Dispatches is keeping the pressure on the rag trade - because it's notorious for having a supply chain where conditions for workers can often be very poor.

Warehouse management procedures have come under criticism for Sports Direct, JD Sports, and now BooHoo. The trouble seems to be that the workforce is transitory - with agency temps being extensively used, to boost the workforce during peak times.

Overall though, despite the TV peoples' attempt to dramatise things, BooHoo didn't seem to be doing much wrong. Specifically, these struck me as the main negatives;

  • Docking pay by 15 mins for being 1 min late - clearly unfair, and should not happen.
  • Long queues for bag-checking, and workers unpaid whilst waiting - again, clearly wrong, needs to be rectified.

Other than that, the following points were presented as terribly negative, but which strike me as being par for the course;

  • Long shifts (12 hours), involving extensive walking - that's what warehouse work is like. So it's only suitable for people who are fit & active.
  • Workers being pressurised to meet targets - it was filmed at peak trading, and everyone would understandably be under pressure to reach peak productivity.
  • 3-strikes and you're out, with strikes being for quite trivial things. The company has denied this is their policy. However, when there is plenty of supply of willing agency workers, employers will naturally keep the most productive, and want the least productive replaced.

It's a fine line between urging staff to work hard, and crossing a line into bullying & maltreatment. The BooHoo supervisor filmed by Dispatches actually seemed quite polite in the way he spoke to agency staff, I thought. Certainly I've seen, and been personally on the receiving end of far worse treatment when working in warehouses! Bullying supervisors are a widespread problem.

This type of Dispatches programme can cause a lot of brand damage, so I think it's important that BooHoo properly reviews how it's treating agency staff. Overall though, on my visit to BooHoo HQ last year, I was highly impressed with how professional everyone was. So the culture of the company is good, in my experience.

The issue of goods being manufactured in factories where workers are underpaid, is an ongoing problem for the whole industry. The big problem is that…

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Boohoo Group PLC, formerly plc, is an online fashion retail group. The Company is based in the United Kingdom and has a presence in the United Kingdom, the United States, Europe and Australia, selling products to almost every country in the world. The Company owns the boohoo, boohooMAN, PrettyLittleThing, Nasty Gal, MissPap and Karen Millen and Coast brands. These brands design, source, market and sell clothing, shoes, accessories and beauty products targeted at 16-30 year old consumers in the United Kingdom and internationally. more »

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Epwin Group Plc is a manufacturer of extrusions, moldings and fabricated low maintenance building products, operating in the repair, maintenance and improvement, new build and social housing sectors. The Company operates through two segments: Extrusion and Moulding, and Fabrication and Distribution. The Extrusion and Moulding segment is engaged extrusion and marketing of polyvinyl chloride-unplasticized (PVC-U) window profile systems, PVC-UE cellular roofline and cladding, rigid rainwater and drainage products and wood plastic composite decking products. It operates from extrusion and molding facilities in Telford, Tamworth and Scunthorpe, among others. The Fabrication and Distribution segment is involved in fabrication and marketing of windows and doors, distribution of cellular roofline, rainwater and drainage products, and manufacture of glass sealed units. It operates from over five window and door fabrication sites, and approximately two glass sealed unit manufacturing sites. more »

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

42 Comments on this Article show/hide all

Paul Scott 1st Feb '17 3 of 42

In reply to post #169696

Thanks Glaws2,

We crossed in the post! I'd already added in that link, but thanks anyway.

Regards, Paul.

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Paul Scott 1st Feb '17 4 of 42

In reply to post #169699

Hi AlanJenkins2,

Yes I agree, Boohoo.Com (LON:BOO) shares do look expensive now.

Mind you, the company has now established a track record of beating (thrashing actually) forecasts. So the apparently expensive PER a year ago, was based on forecasts that were far too low.

Plus, there's scarcity value. There are only really 2 decent quality fashion etailers listed in the UK - Asos (which struggles with low margins), and BooHoo.

The high PER also reflects the international expansion potential.

The price is too rich for me now anyway, so I don't hold any personally (directly), but do hold some indirectly via my local share club. With the club, the members decided to take out our cost price, and just run the profit forever. So far that's been a great strategy!

Regards, Paul.

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hynesjp 1st Feb '17 5 of 42

Good morning Paul,
Is there any chance you could provide some commentary on 32 RED. They have just reported Stella gains but the big institutions refuse to buy and move the share price.
Many thanks.

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Paul Scott 1st Feb '17 6 of 42

In reply to post #169708

Morning hynesjp,

Sure, I'll take a look at 32Red next.

Regards, Paul.

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grb 1st Feb '17 7 of 42

Yes I hold some 32Red (LON:TTR) as well and would be interested in your opinion on today's figures.

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Ajay_Gajree 1st Feb '17 8 of 42

How did your meeting with MYSL go?

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Damien84 1st Feb '17 9 of 42

Does staffline (STAF) look intresting to you Paul? Its certainly interests me now that the market looks to be waking up to last weeks results and has started marking it up to where i would consider fairer value (£13-14). I know it reported last week but if its quiet and your not too busy im sure readers here and myself would love for you to share some thoughts.

Excellent work i am a huge fan of what you do here.


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AlanJenkins2 1st Feb '17 10 of 42

In reply to post #169705

Thanks,Paul !

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pgs501 1st Feb '17 11 of 42

Hi Paul,

Could you take a look at Wizz Air Holdings if you get a chance? It is larger than your usual size but they put out a Q3 update today that seems to be a mild profit warning. Can you explain what the very large exceptional finance income is? Profit for the period has doubled but underlying PBT has dropped by 21.5%.

I think you will also appreciate the clear annual guidance (previously 245-255m, now 225-235m), hopefully this becomes the norm.



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JohnEustace 1st Feb '17 12 of 42

I saw a report that a recruitment business has been started up (can't remember the name) to help Eastern European workers find jobs and resettle outside the UK. Also the number of EU nurses registering here was down from 1,304 in July to 101 in December.

So any business that is depending on plentiful cheap Eastern European labour is in for a mighty big challenge in my view. They may even have to treat staff properly to retain them.

Distribution centres, home delivery services, and the hospitality sector come to mind.

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Wimbledonsprinter 1st Feb '17 13 of 42

I have bought some Epwin (LON:EPWN) this morning. The trading update is not that informative but they have been talking to their two house brokers (Panmure Gordon and Zeus) who are both now estimating net debt at around £21 million for end 16 ( versus nearly £30 million at the half year). Assuming that is correct, then there has been very strong cash flow generation in H2.

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Cowlid 1st Feb '17 14 of 42

Hi Paul

As ever, the insight you provide above and beyond the financial stuff is always fascinating and useful! I always wonder who would have the more impact on a story like Boohoo.Com (LON:BOO) (and Amazon, sports direct etc) - those that want better treatment for workers, and those that like cheaper goods.

Anyway, can I second the request for a view on Staffline (LON:STAF) please - you ran an excellent interview with the CEO a while ago, and I'm not sure the share price has moved that much since, particularly given the latest results. Is this still a hangover from Brexit and worries about Eastern European workers, or more to do with the uncertainty about renewal of contracts from Government? I still hold, but had thought the share price should be higher than this....



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PhilipHanson 1st Feb '17 15 of 42

With Boohoo.Com (LON:BOO), the main factor to consider is that this is an international company and part of the investment case now is the very high levels of revenue growth in the USA. Frankly, US consumers aren't going to give two hoots if people in Burnley are working like slaves (I don't think they are by the way), nor are they going to have seen Dispatches.

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Laughton 1st Feb '17 16 of 42

With Boohoo.Com (LON:BOO), Lots of people saying that docking 15 minutes pay for being 1 minute late is not acceptable. OK, so when is it acceptable - 2 minues late, 3, 10, 20??

Presumably you're never going to get everyone to agree so the bar has to be set somewhere.

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Calalily 1st Feb '17 17 of 42

In reply to post #169732

I agree with Paul. Yes pay for extra time queuing for necessary checks and clocking out however the rest is legal and goes with the job. What does one really expect for a stock picker job? The comment 'they only pay minimum wage' did make me smile! As for laying off staff, what are they supposed to do? It was Christmas and that's what most companies do, Argos, Tesco etc.

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smatthews1 1st Feb '17 18 of 42

In reply to post #169756

Hi Laughton

If you had a excellent punctuality record and always on time great, but Every now and again you might get caught up in traffic, breakdown or late for no direct fault of your own, in which case this seems very unfair.

I've never heard of this before, seems quite an aggressive rule.


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timarr 1st Feb '17 19 of 42

In reply to post #169756

The point is that if you're on minimum wage and you're docked 15 minutes pay for 1 minute late that can take you under the minimum wage. And if it does it's not a question of whether it's morally acceptable or not, it's illegal.

It's not obvious to me that Boohoo.Com (LON:BOO) has actually done anything illegal, but it's perhaps noteworthy that they're now high profile enough to attract media attention. If I were a shareholder at this heady multiple I'd want to see the directors being proactive and making sure that there really are no issues even if that meant sacrificing a bit of margin, otherwise the dreaded three ring circus that is a Parliamentary committee surely beckons ...


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JohnEustace 1st Feb '17 20 of 42

In reply to post #169765

The thing is that thanks to EU immigration companies have been able to treat low skilled labour as a commodity to be driven hard and hired and fired at will. I believe that experience drove a lot of the resentment that led to the Brexit vote.
Shutting down immigration, or even having it go into reverse, will force companies to compete for labour, driving up pay and ensuring they have to treat people as people, not commodities.
That will be a big win for the low skilled and a potential hit for the owners of companies that rely on them. I'm re-thinking if I should continue to hold JD Sports and Boohoo for example.

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Trigger14 1st Feb '17 21 of 42

In reply to post #169705

While Boohoo.Com (LON:BOO) has a relatively high PE it is also growing at a very high growth rate and looks likely to continue to do so for some time. It is very hard to judge the valuation on the PE alone as you have to take account the compound growth which can have a drastic affect on the valuation, particularly if it is likely to continue above market average in the long term. I believe that most would underestimate the impact of compound growth on valuation.

I was playing around a bit with the valuation tools on Stockopedia (DCF and Graham rule of thumb). These are obviously v sensitive to the growth assumptions you put in so there is a big risk of putting rubbish in and getting rubbish out but it can give you an idea of how different rates of compound growth might affect valuation. The valuation is obviously v volatile if it grows at almost 100% in a given year - making predictions quite difficult! To me it seems that Boohoo would be fairly valued on quite reasonable assumptions for future growth though

The big question for valuation is how long do you think it will keep growing for (and at what rate and with what likelihood)? I think if it can do a CAGR of more than 30% for the next few years or a significantly higher rate than the market in the long term it seems reasonably valued. This seems likely to me. I believe its performance over the past couple of years suggests that its competitive advantage is growing and it has huge international prospects so I think it is still cheap. The other reason I think it is likely to be cheap is that many investors will be biased in their judgment from just looking at the PE ratio and share price chart and assuming it must be expensive.

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bobo 1st Feb '17 22 of 42

Nothing wrong with be deducted 15 minutes pay for 1 minute late. Note the "clock" will not be their work station, it will be at an entrance area, they still have to take off their outdoor clothes, go to the loo, get a coffee, chat to their friends. The start time is at their point of work, the clock is to manage that they struggle to manage their own time control.

Queuing to leave is just crazy, if management want to do this weird practice then they need to resource it properly or pay the people to be searched.

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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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