Small Cap Value Report (10 Jul 2015) - FCCN, RENE, ZTF, KBT

Friday, Jul 10 2015 by
36

Good morning!

Thank you for all the responses to our first ever SCVR reader survey yesterday - it was an interesting exercise, so I'll do more of these in future. So {drum roll} here are the results (based on the first 100 responses):

Question 1 : Has the market crash in China affected your confidence in UK shares?

Yes, a lotYes, a littleNo
0%17%83%

So it looks as if SCVR readers have largely ignored the market gyrations in China's stock market. I think this makes sense - it has very little read across to the UK market, except for the resources sector, as one reader commented.

As alluded to in the fantastic picture above, which the Economist put out on Twitter today, and one reader here commented, "China is not a true market, on the way up & down".

Several readers here commented that they see the Chinese stock market as a domestic market, so regard its gyrations as being self-contained.

Note also since the Chinese Govt banned major shareholders from selling, there has been a spectacular rally in the last two days. This is very much the Chinese way - if a free market gives the wrong result, then rig the market until it does what you want it to do!


Question 2 : Is the Eurozone crisis re Greece affecting your confidence in UK shares?

Yes, a lotYes, a littleNo
5%52%43%

So clearly the Eurozone's problems are seen as much more of a risk to UK shares than problems in China. A significant level of concern is recorded by our readers here.

This poll is almost immediately out of date, as it looks as if overnight the Greek Govt has capitulated, and now seems ready to accept bail out reform terms from the Eurozone.

Reader comments seemed unconcerned about the impact on UK shares of Greece falling out of the Euro, but more worried about contagion (Spain, Italy, etc), and derivatives.

Several readers commented that it has dragged on so long, it's baked into prices already. Some readers also felt the UK was insulated from Eurozone problems to a large extent.


Question 3 : What is your view of the 2015 Budget - in terms of its overall impact on the country?

Strongly positiveMildly positiveNeutralMildly negativeStrongly negative
23%57%13%5%2%

Clearly our readers have given an overwhelmingly positive (80%) reaction to the Budget, which is interesting as it was a strange mixture of traditional right-wing,…

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French Connection Group PLC designs and supplies branded fashion clothing and accessories for men and women. The Company operates retail stores and concessions in the United Kingdom, Europe, the United States and Canada and also operates e-commerce businesses in each of those territories. Its principal brand is French Connection, which designs, produces and distributes branded fashion clothing, accessories, such as toiletries and fragrances, shoes, watches, jewelry, eyewear, furniture and homeware through its distribution channels: retail stores, e-commerce, wholesale and licensing. Its other brands include, Great Plains and YMC. The Company operates in approximately 50 countries around the world. The Company's subsidiaries include French Connection Limited, French Connection UK Limited, French Connection (London) Limited, Contracts Limited, French Connection Group Inc., French Connection (Hong Kong) Limited, French Connection (Canada) Limited and YMC Limited. more »

LSE Price
42p
Change
-0.9%
Mkt Cap (£m)
40.6
P/E (fwd)
29.7
Yield (fwd)
n/a

ReNeuron Group plc is a clinical-stage company. The Company, through its subsidiaries, is engaged in researching and developing cell-based therapies. The Company's products are allogeneic. Its CTX stem cell therapy is used for the treatment of patients left disabled by the effects of a stroke. Its human retinal progenitor cells (hRPC) stem cell candidate is used for the treatment of retinitis pigmentosa (RP). Its second CTX stem cell candidate is for the treatment of critical limb ischaemia. The Company's exosomes nanomedicine platform focuses on generating early pre-clinical data in cancer. Its ReNcell Products include ReNcellVM and ReNcellCX cell lines. It is engaged in Phase II clinical trial of CTX cells for stroke disability. It is engaged in Phase I clinical trial of CTX cells for Critical Limb Ischaemia. It is engaged in Phase I clinical trial of hRPC stem cell candidate. The Company has completed pre-clinical trials CTX-derived exosomes. more »

LSE Price
305p
Change
7.0%
Mkt Cap (£m)
97.0
P/E (fwd)
n/a
Yield (fwd)
n/a

Zotefoams plc is a United Kingdom-based cellular material technology company. The Company is engaged in the manufacture and sale of cross-linked block foams. The Company's segments include Polyolefins, High-Performance Products (HPP) and MuCell Extrusion LLC (MEL). Polyolefins foams are made from olefinic homopolymer and copolymer resin. HPP foams include ZOTEK F foams and T-Tubes insulation, made from polyvinylidene fluoride (PVDF) fluoropolymer. Other products include foams made from polyamide (nylon) and PEBA. MEL licenses microcellular foam technology and sells related machinery. The Company offers a range of categories of products, such as AZOTE, including PLASTAZOTE, EVAZOTE and SUPAZOTE; ZOTEK, including ZOTEK F, ZOTEK N and ZOTEK PEBA, and T-FIT. Its products are used in a range of markets, including sports and leisure, packaging, transport, medical, Industrial, building and medical other construction, and other. more »

LSE Price
650p
Change
1.6%
Mkt Cap (£m)
314
P/E (fwd)
28.4
Yield (fwd)
1.0



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


23 Comments on this Article show/hide all

Paul Scott 10th Jul '15 4 of 23
2

In reply to post #102766

Hi Ram,

Yes I would buy French Connection (LON:FCCN) on the dips. They have stemmed the losses very well from previous years, and the Bal Sheet remains strong. So it stacks up still, for me. Although it's not one I would want to go all-in with, as the outcome is quite uncertain, and it's tying up money that could be used for other things, so I can see the bull & bear cases on it.

Other people may not agree though, and the last trading update was poor, so it's not a stock for most people.

Regards, Paul.

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janebolacha 10th Jul '15 5 of 23
10

In reply to post #102769

Paul, it's the banks that were propped up to save the system, that's what sticks in people's throats. They ought to have been nationalised without compensation as part of the saving of the system. The banks have not learned their lesson, you can be sure of that, and there will no doubt be more disasters caused directly by the banks in the future. The point made by SevenPillars is valid and there's a greater point still, that supposedly under capitalism bankruptcy is the price of failure but it just didn't happen because the cost of their failure was shunted on to the taxpayer. We in the West ought to be wary of feeling we have the right to lecture anyone.

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jimbobjames2002 10th Jul '15 6 of 23
2

Fascinating article as always Paul. Didn't see your readers poll before so I haven't voted but it does make for interesting analysis. Just wonder if there's a question to ask regarding the US as well as Grexit and China? I keep hearing quite bullish sentiment from some commentators over the US economy, but you don't have to be a chart expert to know the S&P 500 chart looks pretty dodgy and has looked increasingly so for the last 6 months. Do other readers think if the Grexit problem subsides we'll see a boost in the US or is this the beginning of a bearish trend/correction? After all trends in the US are more likely to be a bigger factor for UK stocks than Greece IMO.

Thanks

James

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SevenPillars 10th Jul '15 7 of 23
6

In reply to post #102769

Paul,

You must remember this?

The FSA was held by some observers to be weak and inactive in allowing irresponsible banking to precipitate the credit crunch which commenced in 2007, and which has involved the shrinking of the UK housing market, increasing unemployment (especially in the financial and building sectors), the public acquisition of Northern Rock in mid-February 2008, and the takeover of HBOS by Lloyds TSB. On 18 September 2008, the FSA announced a ban on short selling to reduce volatility in difficult markets lasting until 16 January 2009.

https://en.wikipedia.org/wiki/Financial_Services_Authority

A rally in banking shares lifted stock markets in the UK and the rest of Europe on Friday after several European countries introduced short-selling bans.

A row between national regulators erupted after France, Italy, Spain and Belgium imposed bans on the short-selling of financial stocks for 15 days after a week of turmoil in European financial markets. Britain, the Netherlands and Austria refused to follow suit, while Germany is pushing for a Europe-wide ban on naked short-selling of stocks, government bonds and credit default swaps.

http://www.theguardian.com/business/2011/aug/12/short-selling-uk-banks

The Securities and Exchange Commission issued a temporary ban on short sales of 799 financial stocks on Friday, a move against traders who have sought to profit from the financial crisis by betting against bank shares.

http://www.nytimes.com/2008/09/20/business/20sec.html?pagewanted=all&_r=0

China had to learn from someone. They are all playing a similar game of protection.

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Ramridge 10th Jul '15 8 of 23
3

The Chinese government's interventions in the Chinese stock market is strange to us who speak of a free economy. But it may well be that China is evolving into a new form of capitalism that will turn out superior to ours. A kind of big brother capitalism that might avoid the excesses that we suffer in the western economies. We do not have grounds to show our superiority in this respect. Just a thought

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Fegger 10th Jul '15 9 of 23
2

Paul I do appreciate you putting your share analysis in a wider perspective as it is important. And I feel it is also important to tell things how it really is within Uk companies, stock exchanges and the finance industry surrounding them as there is so much complacency especially about issues such as lack of ethics ,corruption, insider dealing and high levels of pay that self interest constantly prevails upon to leave unchanged. There is such a circle of self interested gain among these institutions. Eventually if not dealt with trust will go and the exchanges may collapse along with all our share investments. It is really important to call as you (and other contributors here) do people within companies for how they treat their workers and any excess that takes place. I think you have called 2 shocking examples recently of the proposed share scheme at Vislink. And also the cut taken on the Open Offer at Torotrak at which has been less discussed. I think the greed shown by Charles Stanley and N and I SInger is also extraordinary. If a company is struggling to refinance and to stay afloat you would expect any company working with them to take less rather than more . I think Charles Stanley and N and I Singer are a disgrace. How can £1.3million be a justifiable fee for one deal raising £13.8 million. How many hours work did that take and how much was charged per hour. Disgusting! #greedybastards

In this connection I went to an excellent talk by the economist Stewart Lansley at the Conway Hall Ethical Society a couple of weeks ago on the impact of rising inequality leading to a Divided Britain. He has worked on this subject for a long time including a series called Breadline Britain and some well regarded surveys of low pay going back to the 1980s. He outlined that currently about 22% of UK workers were on low wages of minimum wage or less - up from 20% only a year ago. There is obviously no general consensus among all economists but he felt that the impact of this is to increasingly hold back economic growth. He gave some examples of how growth has been held back including percentages but I regrettably didnt take detailed notes. He also showed that over the same period the rich were getting much richer. His conclusion was that if not checked in time there will be a political response by the lower paid -not specified!. He also said that the trickle down theories are discredited and it does'nt happen! I havent read his books but would be worthwhile judging on his talk. The Tories obviously have now tinkered with this but I dont actually see much difference from the trends he identified happening as the amount of tax credits lost by many low waged workers will IMHO leave most in the same position as before.

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underscored 10th Jul '15 10 of 23

In reply to post #102790

Short sellers got the blame in 1929 too.

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Camtab 10th Jul '15 11 of 23
2

Very interesting discussion this morning. Simply put the West has no legs to stand on at all when it comes to manipulating markets. Institutions are made up of people and as long as people see an opportunity in OUR City to make a personal fortune how are they going to "learn the lesson". The lessons that have been learnt in the City is along the lines of what they can get away with rather than remorse or ethical. The removal of the CEO of Barclays was a clear declaration and of course they will deny it but in the end large bonus caps all and a CEO with the job of improving the moral stance of the business is no good to them.

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Joeydisco 10th Jul '15 12 of 23

Hi Paul,

Are French Connection (LON:FCCN) definitely intending to rid themselves of all unprofitable retail leases/?

Thanks

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ericb 10th Jul '15 13 of 23
4

In reply to post #102790

SevenPillars - surely you can see the difference between banning SHORT sellers and banning SELLING ANY SHARES !!
You make a ridiculous comparison !
Of course the bank shares would rally if short selling was banned - other sellers would stop bailing out in the face of shorting pressure from big money, and others who had bailed out would start buying again.
That is completely different from not allowing anyone to sell AT ALL.
Hilarious !!!

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rick 10th Jul '15 14 of 23
2

Regarding French Connection

“To lose one Finance Director may be regarded as a misfortune; to lose two looks like carelessness.”

? to (mis)quote Oscar Wilde

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SevenPillars 10th Jul '15 15 of 23
4

In reply to post #102815

Of course I can tell the difference. It's the principle of authorities intervening in what are supposed to be free markets, as I said they play a protection game once things turn a little nasty. China has simply taken it a stage further given the free-fall nature of the current panic selling. They hope for the same end result, that once the ban is lifted the panic will be over and things will have moved on. It seemed to work with the short selling ban in Western markets. Anyway, there is a certain democracy called Greece where no one can trade at all right now, stock market closed for the last two weeks. So China isn't exactly the worst example right now of intervention when the market turns sour.

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Paul Scott 10th Jul '15 16 of 23
2

In reply to post #102812

Hi JoeyDisco,

You asked;

"Are French Connection (LON:FCCN) definitely intending to rid themselves of all unprofitable retail leases/?"

Of course! All retailers ditch heavily loss-making shops, if they can.  They might hang on to a slightly loss-making shop, and try to turn it around, but bottom line, if a shop is losing money hand over fist (which a lot of FCCN shops must be, as the overall figures for their retail division are so dire), then the retailer cannot wait to hand back the shop to the landlord, once the lease expires.

There will of course be a negotiation between landlord and tenant before the lease ends, whereby the retailer will say at what level of (reduced) rent they would sign a new lease. Quite often for secondary pitches, the landlord will compromise, and agree a lower rent, in order to keep the site occupied.

Also, retailers don't want to throw away all the sunk costs that they've spent on previously fitting out the shop, and don't want to lay off staff, etc. But bottom line, if a shop loses money, then a retailer will want to either turn it around, or hand back the shop to the landlord on lease expiry (or using a break clause, if there is one in the lease).

A third option is to assign the lease to another retailers, which if the rent is excessive, can be very costly - e.g. you might have to give another company (say) a rent-free period of a year or two, to persuade them to take on a lease. Also, the landlord can block a lease assignment if the assignee is a weak covenant - i.e. if their finances are weaker than the existing tenant, then the landlord won't agree to an assignment.

Unfortunately, the current system of rents fixed for 5-year periods, with upward-only rent reviews, on usually 15 year leases, is a system which often causes weaker retailers to go bust in hard times.

A fourth option for a struggling retailer is to do a pre-pack Administration, or a CVA arrangement. JJB Sports did (I think) at least two CVAs to offload loss-making shops, but in my experience these routes are usually just staving off the inevitable - keeping alive a retail format/brand which is past its own sell by date.

Interesting area though. FCCN are actually harmed by their own financial strength - so they can't offload poorly performing shops, because the landlords know they have plenty of cash, and are not likely to go bust, so are happy to keep FCCN as a tenant, and don't care that the shop is loss-making for FCCN. All the landlord wants is his rent each quarter!

Regards, Paul.

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Joeydisco 10th Jul '15 17 of 23
1

Thanks for your detailed response Paul.

I read your SCVR every day :)

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SingSing 10th Jul '15 18 of 23
1

Thanks Paul as always. Superb coverage and honest analysis.

The surveys are however useless.

You get like minded people giving you their opinion, which in the best of cases are all biased and quite frankly irrelevant.
People read your (excellent) reports and probably have similar views to you... So a survey will only confirm what you think, not what the overall investor base believes. Good idea, but without value, to be honest.



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Paul Scott 10th Jul '15 19 of 23
2

In reply to post #102826

Hi SingSing,

You're entitled to your opinion of course, but personally I found it useful to survey readers and find out that there was a lot more concern about Greece than I had realised amongst people who are interested in the same sort of shares as me.

Also, it was interesting to hear that there was very little concern about China - which is the opposite of the opinions of 3 investors with whom I had lunch yesterday, who were very concerned about China.

So, a useful exercise for me, sorry you didn't find it useful!

I like the interaction with readers too, so I'll do more surveys in future I think, on relevant & interesting topics.

Regards, Paul.

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underscored 10th Jul '15 20 of 23

In reply to post #102827

Hi Paul,

Do you think this maybe related to the Chinese stock market issues, or just coincidence. http://www.ft.com/cms/s/0/8e85675c-2648-11e5-bd83-71cb60e8f08c.html#axzz3fW5xWocZ
Could this impact UK small caps?

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fred6060 11th Jul '15 21 of 23
1

A company which encourages mindless morons to walk about with FCUK spread across their chests would never have my support. Maybe it is just my age.

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Random_Ranger 13th Jul '15 22 of 23
3

Just a quick comment on ReNeuron (LON:RENE). I agree; a large fundraising for a loss making share makes a lot of sense as it de-risks it in a large way. However; in reality this partly reflects a different risk appetite of UK institutions vs US. Until two years ago, ReNeuron (LON:RENE) was doing fundraises in dribs and drabs (£5m here, £m there). The board and brokers would have preferred a much larger raise but it required Invesco/Woodford and the Welsh government taking a stake before it could raise a sensible amount. They had wanted to raise much larger chunks of money previously, but couldn't get investor buy-in.

Before this institutions who don't really understand the science (same applies to tech) took part in placing (as far as I can see) to have skin in the game because they don't want to admit they missed out if it become a ten bagger. This means the people with deep pockets only put a toe into the water. What these sectors require IMHO are investors that really learn about the space and sector and can take a view on whether a medicine will work or if a technology, a) works and b) is ahead of the curve compared to what is being developed in Silicon Valley. Once you feel comfortable about the opportunity, only then can you throw millions of pounds at a company and say "go build and conquer". Until that happens, our companies will always be reliant on the odd handout from investors to keep the wolves at bay, which means it is hard for them to invest in the large way required to really make a success of technology or get through all the compliance and regulatory hurdles for a new medicine. I guess a question could be, should these shares be on the market until they get that large backer? But once they are quoted, unfortunately this is the way some of them have to survive.

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Munday 3rd Aug '15 23 of 23

Market twitchy, eminent rise in rates,trouble in Europe. Big problem with illegal Immigrants, I think I will sit this one out until the big drop.

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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 Stockopedia.com on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »

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