Small Cap Value Report (10 Mar 2014) - AGA, GBO, FLYB, GOAL, PEN, ESCH, FFY

Monday, Mar 10 2014 by

Good morning! Apologies for any inconvenience caused by my taking an unscheduled duvet day on Friday, the first of the year I might add. As luck would have it, there were hardly any results or trading statements anyway. I had a quick look at results from AGA Rangemaster (LON:AGA) over the weekend, but the ludicrous size of their pension fund (over £800m assets & liabilities) rules that one out. There are too many moving parts with pension funds to just blithely assume that the deficits will disappear once the economy recovers. That might happen (from increased equity markets and normalised interest rates), but nobody can guarantee that. Aga is the worst pension situation I've seen relative to the size and limited profitability of the sponsoring company. The deficit is still set to consume all the company's profits from about 2016 onwards, with overpayments of £ 10m p.a. required, so one could argue that the equity has little to no value.

Also, Aga is the latest company to confirm "Scott's Rule" - which is that if a company states prominently in the CEO or Chairman's narrative to the results that it has a strong Balance Sheet, then it almost certainly will actually have a weak Balance Sheet (once you adjust out intangibles and properly account for the pension deficit).

As Globo (LON:GBO) shareholders are starting to realise, the Balance Sheet is where the bodies are buried at companies which engage in aggressive accounting techniques. Therefore ignore those warning signs at your peril. Whatever the outcome there, following the loss of their new auditor after the year end, I'm happy that by warning my readers about the potential risks, over the last year, I've performed a public service. Although it is worrying how determined bulls can be trying to silence critics. Well they won't get very far with me - if the figures don't look right to me, I'll shout it from the rooftops, so that everyone is made aware of the potential risks. That's my job.





Flybe (LON:FLYB)

I particularly like turnaround situations, as providing you do your homework properly, they can present attractively priced entry points into companies that have disappointed in the past, but are now coming good.


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Flybe Group PLC is a United Kingdom-based company. The Company is a shell company.

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33 Comments on this Article show/hide all

maillotàpoisrouges 10th Mar '14 14 of 33

thought u didnt like low margin businesses? You have changed your tune with Camb and now Fyffes!

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Paul Scott 10th Mar '14 15 of 33

In reply to post #81939

Clive - badoom, tish!!! Very amusing!!! :-)


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Paul Scott 10th Mar '14 16 of 33

In reply to post #81941

Hi hedley,

Fair point. Generally I don't like low margin businesses, true enough.
However, it's a bit different where a low margin business faces steady & predictable demand, as with Fyffes. A lot of it might well be on long term supply contracts, I don't know?

Also with CAMB, as with most car dealerships, the new car sales are very low margin, but once you strip them out, the rest of the business does alright. Selling a new car is really the first step in creating a relationship with the customer, who will then bring it back for servicing - which is where car dealers make their money. Providing you look after the customer well, then

The other key thing to think about with low margin businesses, is the bad debt risk. Selling a lot for very little profit, and then suffering a bad debt, can be catastrophic.

The low margin businesses I now nearly always avoid are things in infrastructure, building, etc. Accidents waiting to happen. Or anything where low margins meet lumpy, unpredictable contracts. Also where customers have overly dominant position - e.g. milk supply companies were always warning on profit a few years ago, as supermarkets screwed them.

I think it's just a question of thinking about the risks of all companies' business models. High margins generally are good though, although that of course will then attract competitors, so may not be sustainable.

Regards, Paul.

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Stegrego 10th Mar '14 17 of 33


Would you care to expand on your comment that 'Globo is a total con'?

Most of your comments appear to be little more than supposition. Please dont let facts get in the way of a good story though.

Can I also ask which charity is going to benefit from the half of your profits on the Globo (LON:GBO) short and for an approx amount of circa?



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swooped 10th Mar '14 18 of 33


You say "To appoint an auditor without buttoning up the audit scope & fee into a fixed price deal, is simply not doing his job properly. "

Perhaps you are finding it hard to read Paul, I think the CFO has made it quite clear. re-read the article and take it in before replying;

"I were running a company where there had been serious question marks over the reliability of its accounts"

There were no serious question mark over the reliability of the accounts, this has been made up by the shorters as the explanation for replacing the auditors, wow it seems you are now replying to fantasy without fact. amazing that you have such a following here!

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Paul Scott 10th Mar '14 19 of 33

In reply to post #81945


I'll comment on my comments here about Globo, here.
Any comments on other sites will be commented on there.

Hope that clarifies.

Advfn is the Wild West of the bulletin board world, where I fight fire with fire.
Stockopedia is the place for intelligent discussion, so I'm not going to get into any playground nonsense with anyone here.


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swooped 10th Mar '14 This post is under review

Intelligent discussion...really! Or is the reason you make no comment due to the simple fact that you are wrong and have no argument based in fact.

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billytk 10th Mar '14 21 of 33

Hi Paul. I thought you were long on Pennant International (LON:PEN). Did you sell up after the the IC tip out of interest? I've commented here before that I almost bought in just before it was tipped but the liquidity at the time bothered me. Ie. instant 2-3% down from just purchasing and only a handful of traders a day. I would have been happy with the 20-30% put on by the tip and got out myself.

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Paul Scott 10th Mar '14 22 of 33

In reply to post #81949

Hi Billy,

I've just checked back through my contract notes, and yes I did sell my small position in Pennant International (LON:PEN) at just over 98p about a month ago. I think the stock was tipped somewhere (IC or Shares mag), and went up about 20-25% instantly. My view is that spikes like that make good selling opportunities, and my price target on the stock was about 100p, so it just got there more quickly than I expected.

They very kindly did the same favour to me around the same time, causing a huge spike in the price of Arden, which again I gratefully sold into.

These 20-30% spikes on tips really bother me, as that's another sign of an overheating market. Still, why look a gift horse in the mouth if a journalist helpfully tips one of my long term holdings, then I just weigh up whether or not to bank the profit, or to maybe sell half and keep the rest. It depends how much more upside (if any) there is in the stock? I do like Pennant, but as I mentioned in the original article, feel that it's probably priced about right at 91p currently.

Regards, Paul.

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Katewarren 10th Mar '14 23 of 33

Just a bit of fun.........written after a previous report from Paul on Globo which stimulated a heated debate .......and before Paul's recent short position. Apologies to Jam7, Lightning Tiger and Monty9 in case you have already sold.

Another quick comment on Globo !
But,... it stimulates good debate and you see,
A whole host of us are just waiting
For what transpires and what will be.

So will Jam 7 be in heaven
With Lightningtiger and Monty9 ?
Will it be a 20 bagger ?
Could be something mighty fine.

Paul dusted down his barge pole
"This one's not for me,
An AIM Share, not based in Blighty"
Doesn't meet his criteria you see.

Well, I got squeezed on Asian Citrus,
And bombed on Bumi too
So now you know on those points above,
I just have to follow Paul's view.

But good luck to you Globo investors
Take some profits........perhaps you must,
In case the wind, it changes
And Globo bites the dust !


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GavinT 10th Mar '14 24 of 33

Hi Stretego and swooped,

As an ex-auditor who worked on AIM listed companies, I have to agree with what Paul is saying.

BDO as the group auditor has responsibility over Globo's financial statements as a whole, including the Greek subsidiary. One of the first things they do as newly appointed auditor will be to review prior year's audit working papers. For one reason or the other, they are not confident as group auditor to rely on Grant Thornton Greece's work and hence insisted they do the work themselves.

From experience, the competition for listed clients is fierce among audit firms hence something must have been serious enough for BDO to insist on additional audit work and hence antagonising Globo's management with the increased fees. If I were to be an investor (which I'm not) I would be quite worried about what happened.

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MrM 10th Mar '14 25 of 33

Thanks to kalkanite, VB and Paul for the reasoned comments on the issues with Globo.
It's very useful for someone who isn't an accountant to have an insiders view of what is happening with the auditor changes at GBO. From my own research this is one I wouldn't touch, but I've met shareholders who are very happy with their operations.
That makes the market.

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Stegrego 10th Mar '14 26 of 33


So to be clear, you will tell the ADVFN board what charity and amount etc? Im sure you mentioned that on here as well.

Also, re the total con remark?

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swooped 10th Mar '14 This post is under review

He won't say anything over there, he like the security on this board as most just follow his lead without questioning his motives

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jonesj 10th Mar '14 28 of 33

The rule that prohibits writers from commenting on stocks which they are shorting seems strange and unnecessary.
As long as the writer declares all his positions every time he comments on a company, the reader can take that into account.
Secondly, why would the rules differ for long ans short holdings? Both are equally legitimate in a free market.

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GrindertraderUK 10th Mar '14 29 of 33

In reply to post #81948

and using detailed account calculations on GBO, can you explain why there is no question marks rather than discredit Paul's view with insults.

if you read the history of Pauls comment on GBo there is some merit to his arguments, and thus swooped I see no detailed counter argument to which can be properly debated from you

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swooped 10th Mar '14 This post is under review

Ah so I see a few have reported me, how quaint, don't worry guys I shall not be using this board, after less than a day and one informative post direct from the company CFO what do I find, most that make comment before even reading the post in its entirety, other posting support for Paul Scott link fawning sycophants. Paul Scott himself who won't make an argument due to the fact that the CFO had more than answered his concerns however as they didn't fit with his suspicious nature (or was it just that it scuppered his short, oh no it was the regulation that caused him to close it, hmm!) he didn't want to continue the discussion, blah blah blah, ridiculous.....I'll leave you to it.......don't bother about reporting this one, I'll not be back. I like to take my fact from the company itself.

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GrindertraderUK 10th Mar '14 31 of 33

In reply to post #81960

I agree. Maybe management can change this view to allow Paul to continue to contribute in his fair and professional manner

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Redrumtum 11th Mar '14 32 of 33

In reply to post #81960

Totally agree. Perhaps Stockopedia could comment here and explain why this rule is in place. The only downside I can see is we often get an over-emotional reaction from holders (as evidenced above). So, to holders of Globo/Ocado et al, using reasoned debate, convince me to part with my cash :-)

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fek47 27th Apr '14 33 of 33

In reply to post #81951

Interestingly Arden Partners (LON:ARDN) and Pennant International (LON:PEN) have both come up on a personalised 'Quality Shares' screen that I'm developing. Both seem to have drifted back to their "normal" price levels now that the IC-induced froth has drifted away - both are possible small buys for me next week.

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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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