Small Cap Value Report (10 Jan 2017) - BOO, SOM, CALL, TPT, WINE, GAW, TUNE, TCM, KBT, CARR, HAT

Tuesday, Jan 10 2017 by

Good morning!

Graham is travelling today, so it's just me reporting.

There's tons to cover. Here is a quick summary of the companies I report on below;

  • BooHoo - another excellent trading update.
  • Somero Enterprises - good trading update & increased divis - all positive.
  • CloudCall - good trading update - has it turned the corner? Possibly.
  • Topps Tiles - Q1 trading update - possibly good value now?
  • Majestic Wine - Xmas trading update. Looks expensive to me.
  • Games Workshop - excellent interims. Worth a closer look.
  • Focurite - encouraging update, nice quality company.
  • Telit Comms - trading update - short squeeze imminent possibly?
  • K3 Bus Tech - profit warning, down 21%.
  • Carr's - in line update. Dull, ex-growth company. Not especially cheap either.
  • H&T - slightly ahead of expectations. This share looks good value & is going up I think.

Market getting toppy?

It's all feeling a bit frenzied at the moment, isn't it? I'm starting to get worried about a correction in the markets. That said, I can justify the valuations of everything in my portfolio quite easily, and I keep away from speculative stuff on daft valuations. So everything should be OK in the long run, even if there is a market correction.

These days, my portfolio is generally newsflow-driven. So I tend to buy after positive trading updates & results. That tends to make my portfolio quite resilient when market corrections occur. This could be because people are loath to sell shares in companies which are performing well, even in a market downturn. You can see this from the chart of Beam Me Up Scotty, my fantasy portfolio, which wasn't affected at all by the sharp market correction in Jan 2016, and didn't suffer too much on the Brexit vote either.

Talking of market corrections, I spotted a fascinating chart, posted by Urban Carmel on Twitter, see below. This chart shows very clearly how intra-year sell-offs are usually very good buying opportunities. The S&P usually finishes the year strongly up from its intra-year low.

So, unless there are serious macro-economic problems (like the credit crunch in 2007-8), then buying market corrections seems to be a very good strategy. Whereas of course our natural, emotional response to a market sell-off, is to panic sell. Usually that urge needs to be suppressed, as it can be very costly. I can't be the only person who has, quite frequently, capitulated and sold a poorly performing share absolutely bang on the 5 year low. Only…

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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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Somero Enterprises, Inc. is a manufacturer of laser-guided equipment. The Company's equipment automates the process of spreading and leveling volumes of concrete for commercial flooring and other horizontal surfaces, such as paved parking lots in North America. The Company's products include S-22E, S-15R, S-15M, STS-11M, S-840, S-485, CopperHead XD 3.0, Mini Screed C, PowerRake 3.0, 3-D Profiler and SiteShape. Its Somero Floor Levelness System monitors Laser Screed performance, operator performance and reports alert percentages of issues. The Somero SiteShape System allows for grade shaping automatically using users' motor grader, dozer or other grading machine. The Somero 3-D Profiler System allows automatic paving of contoured sites using a Somero Laser Screed equipment. The CopperHead XD machine encounters applications, such as chaired rebar, low slump and poor subgrades. The Somero eXtreme Platform (SXP) allows users use their Laser Screed equipment. more »

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Cloudcall Group plc is a United Kingdom-based holding company. The Company and its subsidiaries are engaged in software and unified communications business. The Company provides a suite of cloud-based integrated software and telephony products and services under the name cloud. The Company is a full-service communication provider. The Company designs, develops and operates integrated communication services for customer relationship management (CRM) systems. The Company's CloudCall portal enables to manage organization’s call profiles, configures all settings and manages user and service accounts and access real time activity reports and call recordings. Its automatic call distribution (ACD) feature routes the callers directly to available team members in the organization. The Company’s subsidiaries include Cloudcall Ltd, Cloudcall BY. LLC and Cloudcall, Inc. more »

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

60 Comments on this Article show/hide all

herbie47 10th Jan '17 41 of 60

Paul, I understand your views on H & T (LON:HAT) but if these people could not get these loans then they would be in an even worse position? Would you want them to go to unregulated loan sharks? Also on a previous post it was said about how much they make, they don't make that much because of the high number of defaults. People pay high rates because of the risk, if you have a good credit record and security you can borrow at low rates.
Also one reason why the profits have increased is the price of gold.

What is your view on gambling?

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purpleski 10th Jan '17 42 of 60

Is Cloudcall (LON:CALL) not just another Outsourcery? I cannot see their edge and a back of the envelope calculation is that accumulated losses are around £45m. Anyway is the too hard category and goes onto barge pole list for me!

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AlanJenkins2 11th Jan '17 43 of 60

Perhaps Graham could give his opinion on whether Telit is truly profitable when he gets back ? It really is a fascinating conundrum.

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shanklin100 11th Jan '17 44 of 60

Majestic (LON:MJW) seem to have been chasing sales at the expense of margins over Christmas. For example, through MJW were offering £20 off a £60 spend, with free delivery, on top of all their existing available offers. This encouraged me to make my first purchase through them for over 5 years, a period throughout which I have found their wine to be more expensive than their competitors. This has been followed up with further discount offers direct with MJW albeit not as large as the one above.

If MJW tighten up their prices more generally I will continue to buy through them. If not, this will have been a one time purchase.

Similarly I recently bought a case of wine from Naked Wines but doubt I will be buying again as, beyond the initial offer which was excellent, I am not convinced they offer particularly good value.

I should state that I am generally looking to spend up to circa £7 per bottle which is probably less than is typical through either Majestic or Naked Wines.

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john2hughes 11th Jan '17 45 of 60

Having recently sold out of BooHoo (and kicking myself) I'm looking at things that may put me off getting back in. I've got two issues with BooHoo
1 - Corporate governance after the botched takeover of PLT
2 - Cash generation in last four months

Can anybody dismiss these for me?

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pka 11th Jan '17 46 of 60

In reply to post #166122

I have another issue with buying BooHoo at its present high Price Earnings Ratio, which some people justify with the prediction that BooHoo will do very well in the future by expanding its operations in the USA. However, many British companies that have done well in the UK market have failed to succeed in the American one.

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john2hughes 11th Jan '17 47 of 60

In reply to post #166131

I originally had three issues, but couldn't remember the third as I wrote. That was it!

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FREng 11th Jan '17 48 of 60

In reply to post #166086

Carr's (LON:CARR) have an interesting industrial handling subsidiary, as I recall, doing specialised work in the nuclear industry. Is that all that's left now the flour business has been sold? If so, will they change sector and be rated differently as a result?

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FREng 11th Jan '17 49 of 60

In reply to post #166116

I really don't understand the value end of the wine market at the moment. Despite the fall in Sterling, there are really decent wines available at less than £7.50 a bottle and a surprising number of OK wines at £6. That hasn't happened for a few years until recently. Competition must be severe, for some reason, as I can't see any reason why costs could have fallen sharply.

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IR35 11th Jan '17 50 of 60

In reply to post #166164

CARR still have the Feedblock business and are expanding that in the US. They also bought another industrial company in Germany (Staber) for about 7M GBP that they have previously worked with.

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linhurst 11th Jan '17 51 of 60

In reply to post #166179

Attended AGM. Lot of criticism about profit not moving forward over last 3/4 years. Been boom time for Feedblock in USA but current market conditions and outlook is poor. nuclear contract delayed. Institutions hold 10/15% and putting the pressure. Problem is that agriculture and nuclear are cyclical industries and very competitive.

If oil and gas move to better conditions it would help but too early in the cycle
I am holding for long term.

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Lennart 11th Jan '17 52 of 60

Naked Wine
A few years ago I fell for a half price promotional offer. At this price level the wines were barely acceptable. They plug unknown wines hard and expect the customer not to notice the inferior quality. Much better to go to Waitrose or a trusted wine merchant.


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JohnEustace 11th Jan '17 53 of 60

In reply to post #166167

I think that's the Aldi/Lidl effect. There's some surprisingly drinkable stuff in there at around £6 - £7.
And of course at that price point the tax is probably more than the cost of importing the wine in bulk. It tends to come in in shipping container sized bladder packs and get bottled in market.

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Paul Scott 11th Jan '17 54 of 60

In reply to post #166020

Hi Mothy9,

I mentioned this to Graham by email this morning. He likes financials, insurance, and property sector, so I've encouraged him to cover stocks in those sectors when he finds anything interesting.

So we should be covering a broader range of stocks between us, as time goes on.

Regards, Paul.

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Paul Scott 11th Jan '17 55 of 60

In reply to post #166086

Hi IR35,

CARR forecasts have decreased because they sold the flour business and returned some of the cash to shareholders. A special divi of 17.5p per share was paid out in October.

Ah yes, good point, I forgot about that.

Thx for flagging.

Regards, Paul.

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IR35 11th Jan '17 56 of 60

In reply to post #166380

No problem. I have held them for the last 4 years so almost have an idea of what has happened to them. Not the most exciting of companies but I have been in and out of them a few times over the last 15 years and they regularly deliver on expectations.

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222matt 11th Jan '17 57 of 60

I take your point on HAT that you're not comfortable with the ethics in some ways. However I've always considered HAT to be at the more ethical end of its particular "proffesion" (pawbroking). They're well regulated and certainly abide by the rules laid out by the regulators.

Ultimately they're not a bank and they are lending to folk who may not get loans from other sources because of the higher risks. As we all know, risk has to be balanced by greater reward if one is to deploy capital wisely. I'd prefer to see loans dished out by HAT than some of the alternatives open to the least wealthy in our society.

I agree you MUST be comfortable ethically but then there's always the option of donating a portion of profits to a good cause :-)

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peterthegreat 11th Jan '17 58 of 60

I would agree with Paul that the reason investors such as me are happy to see Majestic on its current rating relies heavily on the belief that Naked is transitioning to sustainable profitability and will create significant international growth prospects for the company. Naked is making use of the online community to generate interest and has, for example, created separate web sites for its US and Australian communities of customers to interact on. In common with some other posters, I don't use Naked myself but I know plenty of people who have an interest in wine and think it is worth subscribing to. I think it chimes with the current interest in this country and the US on artisan type foods and drinks and it also adds a bit of fun to the process of buying wine. There are initial signs of expansion into spirits, I had some gin produced through Naked during the Christmas period which was very good. Naked is also a first mover in its business niche as far as I am aware and looking at how long it is taking to transition to profitability, I don't think it would be easy for a competitor to grow! I also like the transparent way Majestic reports its results so shareholders get a good idea of what is going on and why. I would also point out that, although Paul is correct in saying that retail sales of £244M make retail by far the largest part of the business, Naked's sales of £104M are by no means insubstantial and are certainly material to the future of Majestic. Expect a few more hiccups along the way, but I think Naked will get there in the end.

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Paul Scott 12th Jan '17 59 of 60

In reply to post #166398

Thanks Peter, for your well-argued comments on Majestic Wine (LON:WINE) . I always like to hear sensible & reasoned arguments which are contrary to my own view. You've not convinced me, but interesting points nonetheless!!


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pasumika 14th Jan '17 60 of 60

In reply to post #166398

Interesting points Peter however, my biggest concern with Naked Wines, and therefore Majestic Wine (LON:WINE) as a whole is that I struggle to see how they are going to expand UK sales without essentially losing their USP of being a champion of small 'artisan' producers. Seeing as the potential of Naked Wines appears to be where most of the toppy rating in this group comes from, it's a big no-no for me.

By definition, the producers they are working with won't be able to expand their capacities without to some degree losing this selling point. I think that this point is already the case - Naked currently (and as far as I can remember) has a waiting list.

It's not for me, and whilst I think Majestic has a reasonable enough business that does seem to have improved under Gormley's leadership, I think it's highly overvalued and at some point the drop in Sterling will have to impact on margins. Seeing as the last update indicated some pressures on margins already, I would be very wary of a potential profit warning at some point.

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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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