Small Cap Value Report (10 Apr 2014) - MTC, NXR, ACM

10th Apr '14 by Paul Scott

13 comments 20110 reads

Good morning!

Mothercare (LON:MTC)

As you can see from the chart below, Mothercare has had an awful year so far in 2014, with the shares really plummeting. I last reviewed them on the big profit warning on 8 Jan 2014, where I came to the conclusion that with a weak Balance Sheet, and probably now trading at a loss, the shares if anything looked like a good short at 295p. As the chart shows, that was a very good call, even if I do say so myself!

A trading update this morning indicates that tradnig in Q4 has improved somewhat. Various sales data is given in a table, for the UK, International, in constant & moving currencies, for Q4, and the full year, etc. It's probably easier if I just copy/paste the table here:

As you can see, there's quite a big adverse currency effect, as overseas sales are translated into (stronger) sterling. Their overseas business is actually very good, and decently profitable. However, the problem is the UK business, which is heavily loss-making, and needs to be drastically down-sized or even closed down altogether.

I just can't get my head round why Moterhcare works overseas, but doesn't work in its home market. That is such an unusual situation, usually it's the exact opposite with UK retailers.

We remain profitable at Group level and are focused on eliminating UK losses whilst also continuing to exploit our growth potential across our International markets.

I reckon they can only be (at best) marginally profitable, and when I last crunched the figures it looked like they would make a loss for year ending 29 Mar 2014, so the statement above today surprises me. It depends how you measure profit though, so perhaps the company has managed to classify enough costs as non-recurring so as to eke out a paper profit? I'd like to see the full accounts before even considering a purchase here.

The other key issue to research is what their leasehold terms are in the problem UK division. If the bulk of those leases are going to expire fairly soon, then it might be the case that UK losses could be stemmed at a sufficiently brisk…

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MGinvestor

10th Apr '14

Hi Paul,

If you have time is it possible for you to revisit ACM please? They released an in-line trading update today and their in-house broker has upgraded the price target..

Disclosure - I hold.

Welshborderer

Morning Paul

MKL is not a Small cap but what about this for shareholder relations?

"This is your company. We as managers are stewards of your capital. You’ve entrusted us with the authority to run this business, and this annual report functions as our report card to you."

http://www.valuewalk.com/2014/03/tom-gayner-2013-letter-markel-shareholders/

I am a shareholder.

Regards and thanks for an interesting service. Please keep up the fight for more shareholder recognition

Paul Scott

Hi chillax,

Sure, I'm looking at Accumuli (LON:ACM) now actually. Looks interesting.

Regards, Paul.

bsharman

I suspect someone like Tesco will come in for Mothercare. a good statement from acm which is good value. I'm in!

lucien2k

Definitely interested in thoughts on ACM as well. I picked up some 7 days ago, given the current global security issues surrounding Heartbleed, and the Target breach last year, I think IT Security has a big future potentially.

kenobi

>> I suspect someone like Tesco will come in for Mothercare.

yes quiet possibly, though I think tesco have enough problems of their own, I don't know whats gone wrong at mothercare, I recall when they were part of storehouse and sold off the other bits and rebranded the company mothercare. Its had good times since then but I've always wondered if there's a market for this kind of shop, especially with the supermarkets and even toys r us have quiet a bit prams and cots business these days. they have a mixture of big out of town and smaller in town shops I wonder if one or the other is making a profit ?

I recall they spent a lot of money buying the ELC some years back, perhaps this is something to do with their problems.

K

Great write up Paul - thank you.

Good to have you on board to.

I have noticed that Spain, Italy and France have more boutique/specialist shop formats on their high streets. This maybe answers why mothercare is more successful abroad than in the UK? My money is on a takeover in the next 12 months - Tesco is moving towards large warehouse stores with boutiques, coffee shops and restaurants (Giraffe) so I recon that they would be the front runner. It is a bit of a gamble however, as this may not happen and a risk i'm not prepared to take.

Bezhe

"The word "Maiden" only arouses any interest from me if it is preceded by the word "Iron", or alternatively has the word "dividend" after it!" One of the wittiest statements seen on here. Like it.

kevanp

Paul
Apropos of nothing, I read in John Lee's article in last weekend's FT Money that he is invested in MS International (LON:MSI), a heavy engineering company that seem to take investor communication (or indeed any other sort of communication) to a new level. A low level.

But… they do have a rather green Stocko page, and Lord Lee's is a voice worth listening too. I wondered if you'd ever cast your analytical eye over them.

Cheers. Kevan

Hi Kevan,

Yes I have looked at MS International (LON:MSI). It looks great until you see what Director remuneration has been like in recent years. They run it like a private company, and help themselves to excessive salaries in my view, hence that makes it uninvestable in my opinion. Pity, as it looks quite an interesting business.

Regards, Paul.

I think it's extremely unlikely that anyone would consider buying MotherCare, other than some sort of aggressive vulture type finance company, who would have no qualms about putting the UK operation into a prepack Administration. Nobody in their right mind would take on all the lease liabilities of their heavily loss-making UK operation.

Paul.

Thanks for the response Paul. Point taken about remuneration: in their last financial year the three directors who control the company paid themselves £2.4 million — pretty steep for a company with an operating profit of £5m! Works out at 13p a share, vs 8p dividend a share.

I'd like to know what John Lee thinks about this apparent imbalance. I know he likes to invest to companies whose directors have skin in the game, but one would prefer that they derived the bulk of their income from democratic dividends rather than excessive salaries.

Best, Kevan

Small Cap Value Report (10 Apr 2014) - MTC, NXR, ACM

Mothercare (LON:MTC)

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Paul Scott

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