Small Cap Value Report (11 Oct 2016) - NXR, ENTU, BDI, CHRT, PHO

Tuesday, Oct 11 2016 by

Good morning!

I added a few more sections to yesterday's report last night, so to recap on that, please follow this link. In particular, a very interesting turn of events has occurred at Richoux (RIC), which I reported on.

Sterling remains the pressing issue of the moment. At the time of writing it's dropping further, and we're down to £1 = $1.228, or £1 = E1.105 .

There's a good article here, with Lord King welcoming the weaker pound. Economist Vicky Pryce emphasises the inflationary pressures that will be caused by weaker sterling. It's certainly going to make UK industry much more competitive, which is surely exactly what we need when facing all the uncertainty from Brexit?

My main worry is for margins at importers (e.g. retailers). They have no choice but to substantially raise prices next year, but consumers are going to push back against that. We don't know how it will all pan out, but I reckon margins are bound to be hit hard at retailers next year. That will really sort out the wheat from the chaff. Companies like Next (LON:NXT) are likely to sail through relatively unscathed, in my view. Whereas the poorer quality (in terms of operating profit margin) retailers on low margins already could be seriously harmed. I wouldn't touch any low margin retailer at the moment, as performance could seriously deteriorate next year, maybe even into losses. Then the apparently low PER will go out of the window.

So broker forecasts should be treated with great caution right now, or even ignored completely. When circumstances change significantly, a formulaic approach to investing, relying on broker forecasts, can go disastrously wrong. It needs a human being to reasonableness-test things at times like this, to dodge the banana skins as much as possible.

Small caps feel strange to me at the moment - lots of sudden, erratic price movements. It feels as if the market is trying to work out which stocks deserve the big gains that we've seen since July, and which ones have been taken too high on speculative froth.

On the flipside, I'm also seeing signs of life in some really bombed-out small caps. Companies which disappointed have been slammed so hard of late, that I think people are out bargain hunting now perhaps, amongst the wreckage? There could be some nice trades to be done…

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Norcros Plc is a holding company for the Norcros Group. The Company's principal activities include development, manufacture and marketing of home consumer products in the United Kingdom and South Africa. The Company's segments include UK and South Africa. The Company has six United Kingdom businesses, including Triton Showers, Vado, Croydex, Abode, Johnson Tiles and Norcros Adhesives, and three businesses in South Africa, including Johnson Tiles South Africa, TAL and Tile Africa. The Company is focused on showers, taps, bathroom accessories, tiles and adhesives. In the United Kingdom, the Company offers a range of bathroom and kitchen products both for domestic and commercial applications. The Company offers mixer showers and accessories; tile and stone adhesives; taps, bathroom accessories and valves; bathroom furnishings; ceramic wall and floor tiles; kitchen sinks; tile adhesives, pourable floor coverings and tiling tools through its United Kingdom and South Africa business. more »

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Entu (UK) PLC is engaged in the sale of replacement windows, double glazing, entrance doors, patio doors and exterior improvement products within the United Kingdom. The Company's segments include Home Improvements, Energy Saving & Insulation, and the Repair and Renewal Service Agreements (RRSA). The Home Improvement segment products, doors, windows, conservatories and roofline, are sold through separate brands. The Energy Saving & Insulation segment products include solar photovoltaic installations, air-to-air heat pumps, voltage regulators, remote heating controls and boilers, as well as cavity wall insulation, external wall insulation and loft insulation. The Company's brands include Astley Facades, ZEST, Zenith, Weatherseal, Penicuik, Europlas, St Andrews, St Helens, Eco Piggy and Job Worth Doing. Astley offer external wall insulations and render systems, lightweight external wall framing, composite and timber cladding, as well as specialist terracotta and aluminum rain screens. more »

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

53 Comments on this Article show/hide all

Graham Fraser 11th Oct '16 34 of 53

Hello Paul,
Regarding Peel Hotels. Surely it would not qualify for IHT Relief as it would count as a property company ?

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purpleski 11th Oct '16 35 of 53

In reply to post #153899

I would agree as you would guess. When you say:

"My solution is to steer clear of domestic earnings and net importers and instead, focus on overseas (especially $) earnings. I have never really filtered for this before but there are a surprisingly large number of them,"

Can you filter for this on Stockopedia or Sharepad or is it just a question of leg work as it were.


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purpleski 11th Oct '16 36 of 53

In reply to post #153917

Hi Paul

Thanks but do you not worry about the fact that we import so much (not least oil and food) and more that we export and the various negative impacts that will have on the wider economy, and therefore the profitability of UK companies?

Short term I am sure it will be positive (London shops and hotels have gone mental with tourists sine June I understand), I think it was under the Wilson devaluation in the 70's but look at the late 70's early 80's to see what can happen.

Oh well we will see, but meanwhile I am starting to trim some holdings.


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DarwenLad 11th Oct '16 37 of 53

I think the market's scepticism about Norcros has more to do with the ability of the rather highly paid management to execute their ambitious growth strategy than worries about the pension deficit. The lack of UK revenue growth is a real concern given that the short/medium term outlook for the UK economy is less rosy than it was six months ago. Hard to see how Norcros can meet its target of doubling revenues 2015- 2018 to circa £420m without more acquisitions and the current lowly share rating is going to make this very difficult. Interestingly, Martin Payne, Norcros's finance director jumped ship a year ago and resurfaced at Polypipe, a construction materials group which still seems to be able to generate healthy revenue growth in the UK

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xcity 11th Oct '16 38 of 53

WRT Public and Private sector pensions
The main problems in the private sector include the recession and oversupply of labour since the recession (keeping pay down) and increasingly low interest rates (reducing annuities); exacerbated by the Osborne caps.They also include the switch to defined contributions schemes which employers (taking advantage of TU weakness) have used as a way of reducing their pension contributions. The public sector has followed a different path, where the pensions have been limited by a switch to average rather than final pay and very high contribution rates (approaching 25% of salary, taking employer and employee contributions together).

WRT exchange rates
These have been a permanent problem for the UK because of the size of capital inflows (or the reverse) often overwhelming the natural balance that would exist if flows were purely for trade. Before the referendum, £ was too high (and was going even higher in the early hours after the polls closed); the balance of trade/payments was therefore poor and deteriorating and exporters were struggling. It seems quite likely to swing to being too low (if it hasn't got there yet). A hangover from the £'s history as a reserve currency and the perceived political stability. The $ is often too high, but it doesn't matter that much to the US because international trade is a relatively small % of their economy and no currency is more stable or more tradeable. For the UK the important thing is to for the currency to support the development of industries with potential for the future rather than keeping old inefficient industries going for longer; more stability would be helpful for this, otherwise there is always the temptation to take it easy when you have a currency advantage and then a currency disadvantage is fatal.

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alpha2 11th Oct '16 39 of 53

Hi Paul,
Following on from your comments about the restaurant and hotel business, I thought you might be interested in some comments I heard today from a pal who runs a small private asian restaurant chain. C12 units.It has exposure in Central London and the provinces.

His first concern was rising costs of raw materials, most ingredients originate in Asia.

Second, a longer term worry about disillusion with the UK by his mostly European staff. At a guess I would say from my own experience in this sector his non uk staff percentage would be around 80% with more than half of those coming from Europe. He had anecdotal evidence of more people planning to move home and others not coming. Traditionally any gap has always been filled by an influx from a new source but if the UK does manage to get hold of its border control effectively I would expect it to be highly inflationary in terms of wages.

Thirdly and most significant for London operators (in particular the likes of Richoux) or others with exposure to high quality London central or suburban locations, ie all the fast casual dining chains the rates revaluation. He used an example of a unit he has relinquished. 1000 sq ft in an achingly trendy but secondary edge of the city location. Took an assignment of the lease in 2011 with 4 years to run at rent of £42k pa, rates of £20k pa. Hoped to renew and was expecting a new lease at £70k. It was settled recently with a different trader at £130k pa. Rates under the new re-valuation will be North of £50k.

More tourists do not seem likely to be enough to offset all these issues.

If one extrapolates this level of rate and rental increase to the Richoux London estate, it will indeed take a magician to find a great deal of growth. It may be different for the out of town units. There seem to be so many headwinds at this stage that it feels like a barge pole job even at the valuation pre the new appointment.

If anyone can come up with a new idea/brand to roll out and take advantage of a reasonable estate of properties then it is Jonathan Kaye but one imagines there might be better times to consider involvement after the present head winds have subsided.

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JohnEustace 11th Oct '16 40 of 53

In reply to post #154022

I think they qualify as a trading company because they operate their hotels.
If they owned the buildings and then rented them out to an operator then they would be a property company.

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purpleski 11th Oct '16 41 of 53

In reply to post #153956

Yes that is absolutely true but it assumes that we have the skills to enable us to do so (Hinkley point Chinese and French knowhow) but also we have little natural resources apart from our well educated but expensive (relatively) labour force. So say a car is 30% plant and machinery, 30% steel, 10% plastic, 10% rubber and 20% labour, (these figures are made up I have no idea of the real breakdown) then 50% of the costs increase as our currency weakens.

I really dislike the idea of a company (country) relying on weakening exchange rates as way to grow, I would rather see innovation and productivity increases.

Of course this is very much my opinion and I am not an economist!

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crazycoops 11th Oct '16 42 of 53

In reply to post #154025

Legwork I'm afraid, although it's normally communicated in the results announcement, more so recently with companies explaining the impact or non-impact of Brexit. Sometimes a little more digging is required though.

Blog: Share Knowledge
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Graham Fraser 11th Oct '16 43 of 53

In reply to post #154046

Thanks John,presumably they own and operate the hotels,and all its assets are property,so I am slightly surprised if it is IHT able.

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Wimbledonsprinter 11th Oct '16 44 of 53

I share the general concern expressed by many here about the outlook for UK retailers (of imported goods, especially clothes retailers). But it is always interesting to think what is already in the price. N Brown (LON:BWNG) (market cap too big I would imagine to be covered in this blog and a multi-tear restructuring story) today announced results that asar as I could see could only be described as "no worse than feared", saw its shares rally 16% today.

On #NXR, South Africa has its own political turmoil, as evidenced by today's tumble in the rand on the apparent court summons for the internationally respected Finance Minister.

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Beginner 11th Oct '16 45 of 53

One aspect of Norcros (LON:NXR) that has not been raised, is it's attitude to it's aquisitions. Vado and Croydex seem to me, as one who occaisionally fits out bathrooms, to have both gone the same way. They were pretty much top line companies, producing quality products, and presumably taking a high margin. However under Norcros (LON:NXR) the quality seems to have declined. Abode will probably follow the same path. Norcros (LON:NXR) seem to suck the quality out of their acquisitions, which I do not see as a good aspect. I used to hold, but sold a long time ago. Even at this price I think it may still be overpriced.

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purpleski 11th Oct '16 46 of 53

In reply to post #154058

Thx crazycoops. I thought you might say that!:-).

I am a bit busy at the moment for legwork so am going to use cash as my hedge mainly unless I fall upon one here or somewhere else.

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JohnEustace 11th Oct '16 47 of 53

In reply to post #154061

The LSE guidance is "Investments in shares and securities in trading companies may qualify for IHT business property relief at either 50 per cent or 100 per cent. The 50 per cent relief is available for controlling interests in quoted trading companies. However, investments in unquoted trading companies (including those on AIM) attract 100 per cent relief, which can encourage investment through tax planning opportunities. Restrictions apply where the company owns ‘excepted’ assets not used for the purposes of the trade."

I think they are a trading company but I am neither a lawyer nor an accountant so don't rely on my opinion and do take proper advice etc! I know that the experts all say it's not clear or simple and HMRC avoid committing themselves.

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Graham Fraser 12th Oct '16 48 of 53

Thanks,John for your reply. I think you are right. Though I have avoided all property related companies in the past. Of course stockbrokers tend not to be very helpful when you ask them....for obvious reasons they want you to plonk it in their IHT fund at x% p.a. !

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JohnEustace 12th Oct '16 49 of 53

In reply to post #154076

You get a nice pie chart in SharePad showing the activity breakdown by region so it's easy to check on an individual company but I haven't seen a way to screen for foreign earnings. It would be very useful.

You can open a list like the FTSE 350 or AIM 100, or the results of a screen or filter that you have run on other criteria to narrow the field and then quickly scroll through the constituents looking at that activity breakdown

(BTW I have switched from ShareScope to SharePad and overall am happy with the switch)

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purpleski 12th Oct '16 50 of 53

In reply to post #154097

Thanks John. BTW I don't get Sharepad. I have subscribed and to be honest I have not had the time to really get to grips with it but what does it do that Stockopedia doesn't and where would you start in terms of learning about what Sharepad can do?


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JohnEustace 12th Oct '16 51 of 53

There's a lot of commonality in the data feeds and basic functionality. The main differences for me are the charting capability in Share Pad and the stock rankings in Stockopedia. I have my own chart setup in SharePad that is a bit unconventional but works for me. I know Stockopedia are looking at beefing up their charting functionality. I tend to do my research in SharePad and then cross check in Stockopedia but that's probably a function of my having used ShareScope before I discovered Stockopedia.

I think the easiest place to get started with SharePad is their YouTube tutorial videos e.g.

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smatthews1 12th Oct '16 52 of 53

Hi Paul,

Tourism and the hotel sector in a area which i have tried to study recently, for what its worth, after taking a holiday in the uk this year it seems certain areas are experiencing increased levels of tourism. This has to be one of the upside of the weak sterling?

Particularly Chinese, they seem to be everywhere! one hotel group grabbed my attention was PPHE Hotel (LON:PPH) hotels. doesn't really qualify as a small cap but looked liked it has decent exposure to the uk. Some of these hotels are quite unique and could provide more of an attraction from the norm.

Revenue was around E302m which has increased of around 100m in the last 5 years so already looks like it has the wind in its sails. E203m of that was from the uk, the rest was from Holland, Germany, Croatia and Hungary.

PBT E38.8m

Modest dividend of 3.5%, coverded 3.5 times.

operating margin around 28%

PE 7.7

Debt is huge at 548m as well as the interest payments totally 26m pa. So this puts me off, but the recent re rating of property, values them around 1.1bn. (NAV of aound 364m)

1300 rooms are expected to be added of the next 2.5 years which is around 15% more than what they have now, it certainly doesn't shout massive growth, but could be decent exposure to an increased demand in tourism.

Ill be interested to hear if there is anyone else exploring this sector and if they have come across anything similar?



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lupit0 25th Oct '16 53 of 53

Re the effect of FX on Norcros (LON:NXR):

Reading through the 2016 annual report, it looks like the effects will be minimal up to Mar 2017 (perhaps a tad longer if they kept a continuous hedging policy over the 3 months leading to Brexit).

However the impact after that will be substantive. On a back of an envelope calculation (and based on annual report disclosures) there is a £3-3.5mm potential impact on profit per 5pct weakening in gbp and rand vs the average 2016 FY fx rate (which was 1.51 for gbpusd). Depending on your assumptions for each currency, this could easily knock off 50 to 75 pct of recurring profits off the table given the current FX environment. Unless of course price hikes are translated to clients - but is this really a possibility given the weak prospects for the construction cycle?

So on that alone (and not even considering the pension fund deficit) the market re-rating seems justified. 2017 profits may hold, but 2018 onwards look dismal.

Note: I don't own any shares, I came to the above conclusions in doing my basic research as I was attracted to the apparent cheapness of the stock. At the risk of letting a good opportunity go, I am happy to wait for a sub-100p price before going in.

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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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