Small Cap Value Report (11 Jan 2016) - BRY, PHD, BOTB, GVC, ALY

11th Jan '16 by Paul Scott

20 comments 25576 reads

Good morning!

China fell again overnight, but the US futures seem to be firming up, at least for now anyway. Doing a lot of reading over the weekend, it seems to me that the US markets are pricing-in a soft patch in the US economy, and possible spillover from the Chinese economy also slowing. Therefore, unless the forward-looking economic data improves, then this time "buying the dip" would possibly be the wrong thing to do.

Combine that with main US Index charts which look very much like they have topped out, and are now in a bear market. So my conclusion is that this is probably a time to be relatively cautious - it's not a good time to be using gearing, and probably sensible to get rid of low conviction positions, to raise cash for better bargains that might appear if people start throwing out the babies with the bathwater.

Although as most of my positions are reasonably priced things that I have confidence in, my long term portfolio remains unchanged.

CEO Interviews

I've just published the transcript of my interview with the CEO of Brady (LON:BRY) (I hold a long position in this share) on my website here. Reading it again, I think the CEO gave reasonable answers to my questions, and took the criticism (of the profit warning) on the chin. It's good to find a CEO who is prepared to face the music after a disappointment, and doesn't just want to talk to investors in the good times. That particular interview was done because the company approached me, and asked for a "right to reply", following my sharply critical comments in these reports.

People seem to like these interviews, so I'm doing more. Later this week there are 2 new interviews lined up, so please submit your questions using the links below (as that collates the questions into one place). Please don't put questions in the comments section below this article, as they just get lost.

Proactis Holdings (LON:PHD) interview, morning of 14 Jan 2016 - an interesting & growing group, specialising in cost control software. Your questions here please.

Best Of Best (LON:BOTB) interview, afternoon of 15 Jan 2016 - long-established supercar competition company - originally in airports, but now increasingly via internet - …

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jonny71

11th Jan '16

Hi Paul, I agree with you analysis on Home, everyone has focused on the retail side of the business and forgotten about the logistics, including UK same day delivery. I believe Homebase will be sold and a suitor is already lined up, making the deal easier as it's cash in the bank for the new owner.

FREng

Paul

Laura Ashley Holdings (LON:ALY) has just rushed out an RNS about its Australia partner entering administration. Exposure of £1.2m, "no effect on the rest of the business".

Ramridge

Hi Paul -
my formula for a good night's sleep when it comes to investing, is as follows:
- I have around 70% of my portfolio in solid FTSE100 shares which are really long term holdings, a la Warren Buffett. They provide steady growth with steady dividends. For these I really couldn't care less about market corrections. The only thing I watch out for is a potential market crash, which to me means a potential 40%+ drop.

- the other 30% is for trading/ investing from a few days to a few months. Relatively quick turns in short cycles is fine by me. Again I react to market gyrations/ corrections purely by way of lengthening or shortening my (time & money) exposure within this short timeframe.

So with respect to long term, in my view 2016 presents very low probability of a major crash (not dismissing it entirely...). And for the short term trading or investing, I don't worry too much about Euro/ China/ oil/ US/ emerging markets/ debt bubble, etc.

Regards, Ram

Carcosa

News reports suggest that Laura Ashley Australia (LAA) will continue to trade; that it is possible that some individual stores will close whilst the others may remain open as a going concern. It would also appear that the sole director of LAA got into severe difficulties with another business that was somehow linked with LAA.

The exposure that Laura Ashley Holdings (LON:ALY) plc has stated would therefore seem to be an unlikely worse case scenario... Will just have to wait and see on that.

http://www.stuff.co.nz/business/industries/75709665/home-and-fashion-brand-laura-ashley-australia-in-administration

Rusty2

Paul, if you have a chance Telit Communications (LON:TCM) trading update was out today. Also Cambria Automobiles (LON:CAMB) have been buying and selling dealerships, market seems to like it but the disposable looks cheap to me.

The Telit Communications (LON:TCM) update seems positive and detailed, though they quote "adjusted EBITDA" which is a useless number. They are in a strong sector at present, providing telecoms products to connected vehicles, machine-to-machine communications and the "internet of things". They forecast double digit growth in 2016. I have just bought 10K.

hayashi22

Herbie -think you need to look at your post again. Take it you mean disposal? Do you mean the disposal is low ball on price and therefore not good for Cambria or t'other way round? They seem to have a good track record on buying/selling these various dealerships.

Adrian John Bonwitt

Hi Paul, agree with your analysis re HOME, but other sunday newspapers were keen to point out that a deal would have to be at at least 200 p per share. There are people at SBRY who know HOME and Argos in particular inside out, so they know if it will work or not. I can't see them calling it a day at the first strike.

If you are a food retailer and you want to grow, how else do you do it? You need to move with the times as well, so click and collect and good distrubution is what you need. But you are then up against Amazon, so it has got to be good.

I think there are two concerns, firstly do both sets of customers fit ie Argos and Sainsburys? I shop at Sainsbury's and Argos, so for me it works but then again I will go into Aldi and Lidl from time to time.

Second, any takeover and integration will take management time and so may divert them from the core business of food sales.

I would prefer Argos as a bolt on as opposed to a clothes retailer, like M and S has.

JohnEustace

I agree with that and would also emphasise the strength of the Argos buying team. As customers we focus on our buying experience, but the sourcing of the products in the first place is vital, especially when it comes to own label.

No-one mentions Habitat which Home Retail also own - I assume they would also be sold off?

Jack Brumby

Interesting comments on HOME and SBRY Paul, and congratulations on the gains! One of my concerns is that macro conditions persist in food retail, as the price gap to discounters is still c20% or so I believe. And while Sainsbury's is fighting that battle, Amazon could use its scale to erode margins in HOME's market (AMZN is also increasingly in the food retail market with its nascent Pantry service).

That said, now the dust is settling the move looks to make much more sense. While the Amazon threat will never go away, Argos stores these days are clearly changing for the better (having been in one at the weekend and seeing the improvements over a period of months). The acquisition would be immediately balance sheet-enhancing for SBRY (which is becoming more and more of a concern for the group these days). Also 40% of Argos' leases expire in the next four years, so it stands to improve property prospects, balance sheet, and logistics.

Sainsbury's is also set to open another ten sites in its JV with Netto, so a few years down the line the group could have a discount JV, an expanded non-food offer, greater logistics and delivery systems, a strengthened balance sheet, and greater store flexibility. The group said it is optimistic that 2016 could be the turnaround year, but Asda and Waitrose are less optimistic and anticipate further margin erosion. At present, I'm minded to believe the latter but food retail is nothing if not surprising these days.

We'll all know a lot more by the end of this week, what with SBRY, MRW, TSCO, and BOK all releasing updates and Kantar and Nielsen releasing grocery market data.

One concern is that Sainsbury's has a job on its hands convincing its own shareholders, as much as Home Retail's (in fact possibly more so, as HOME's biggest shareholders, Old Mutual, Toscafund, and Schroders, are keen to restart talks). QIA is a 25.1% shareholder in SBRY and has reservations.

Cheers

bobo

Laura Ash Ownership and management good reasons to avoid it.

MichaelFBS

What a truly brilliant post and analysis of Home Retail (LON:HOME) (I dont't/didn't hold). Thank you. If Home Retail (LON:HOME) shareholders read your posts they may hold out a for higher price!!

Velo

"...as am not up to speed on the numbers for this company. ( GVC Holdings (LON:GVC) ) Any meaningful analysis would need to look into the acquisition of bwin.party in detail....and paid juicy dividends on top. There used to be a huge dividend yield here, but this is now showing as down to 3.1%. "

Fair enough Paul, but the 3.1% divi yield you refer to I assume must be referring to Bwin - as GVC's divi yield has generally been circa 7%/ 8%/ 9% for years. (Indeed GVC's PE and yield% have been virtually interchangeable in that time with both being high single digits.

(GVC's divi is suspended for 2016 in order to digest the Bwin acquisition).

Yes sorry I typing as rushing out, yes I meant the disposal looks cheap, £1.3m for £0.5m profit pa and £20m revenue.

Roger Lawson

Paul, I would like to agree with you re Sainsbury and Home Retail, but then we would both be wrong. As a Sainsbury shareholder (of short standing), the last thiing I would want them to do is to take on a business that is of poor quality and will require very substantial restructuring at this point in time. It could be a massive management diversion and the fact that it looks cheap on a balance sheet basis does not convince me. The best quote I saw on this topic was this: "Its list of deal benefits appears to have flowed from the pen of an investment banker who has not been in Argos for a while or ever”….Tony Shiret of Haitong Research. As regards the benefit of their loan book, well financing that has been a drain on their cash flow of late. Are they a retailer or a finance company? They should have made their mind up on that. Retailers don't need to run finance businesses.

There are alternatives to "click and collect" to those who can't stay in for deliveries (and I don't mean Amazon drones). It has always seemed to me that click and collect was an intermediate stop-gap offering to try and counter on-line only retailers, but it could be a dying mode. The integration of Sainsbury and Argos looks a real nightmare even if they got shot of Homebase et al - different customer profiles, different stores, etc, etc. Now if this was an "asset stripping" job (come back from the dead please Jim Slater), then it might make sense, but....

Ignoring my initial witticism, I will remain open minded until I see the full justification from Sainsbury's management, but just getting Home Retail on the cheap will not be sufficient. I think a lot of Sainsbury's shareholders will take a lot of convincing.

Fangorn

Comment out on GVC earlier today...

"Jim Armitage: GVC’s full market listing should also mean full disclosure"

A few under hand tactics if true it has to be said.

http://www.standard.co.uk/business/jim-armitage-gvc-s-full-market-listing-should-also-mean-full-disclosure-a3153581.html?

Re. Sainsbury bid for Argos. I must say I am skeptical of the strategic rationale put forward by Sainsbury for their proposed bid. More so after listening to Lex of FT.com in the following video clip.

http://www.ft.com/cms/s/0/1181aab0-b3b3-11e5-8358-9a82b43f6b2f.html#axzz3wxXgVQh4

My knowledge of GVC Holdings (LON:GVC) management (and to a very much lesser extent the industry) makes them uninvestable to me and they are on my bargepole list.

Wow! Pretty strong stuff Purpleski
- By 'my knowledge' is that knowledge known only to you, or knowledge already in the public domain?

xcity

I know nothing about the management that's not in the public domain; although they are clearly good at looking after themselves, shareholders have always done well too. The info in the Standard article is already well known, he's been attempting to undermine the bwin deal from the start, presumably because it brought his discussions to an end.I'd be more impressed with his legal case if there were less badmouthing to the press. I can't imagine it being easy to get the better of Alexander in negotiations and I certainly wouldn't be doing anything major for him without a watertight contract.

Small Cap Value Report (11 Jan 2016) - BRY, PHD, BOTB, GVC, ALY

CEO Interviews

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Paul Scott

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