Small Cap Value Report (12 Dec) - MOSB, ZYT, CMX, RGS

Good morning! Ed held another Webinar on Stockopedia yesterday, and it was I think the busiest yet, with about 250 people registering. I listened in, and as usual it was chock full of useful information - and for those who missed it, the video of the webinar is now live. Well worth a listen - e.g. it flagged up a useful feature on Stockopedia that I hadn't even noticed was there - "run a checklist", which I shall experiment with later.

The US market had a noticeable pullback last night, for the first time in a while. This is what we need - a bit of fear coming back into the market, and taking the top off the most frothy valuations, which are in abundance. That is the way a healthy market should work, otherwise bull markets just soar out of control, and we end up with a market crash.

So we are forecast to open down about 30 points here in the UK, with the FTSE 100 Future indicating 6,486 at the moment. Why do I mention that? Just because it sets the background for what we can expect at the open.

 

 

 

 

It's fairly quiet for news today. Moss Bros (LON:MOSB) has issued an IMS covering the period 28 Jul to 7 Dec 2013, so that's the bulk of its H2, as the year-end date is on or around 26 Jan 2014. They have been trading surprisingly well for a while now, at least in terms of sales performance anyway. That trend continues, with an impressive H2 performance so far, with the key LFL ("like-for-like", i.e. eliminating the impact of new stores & closed stores) sales being up 5.3% against last year - that really is impressive, in an economy that's growing at nothing like that rate.

LFL sales for the 45 weeks of the year to date are up 2.2%, so this points towards an improving sales trend in H2 so far. Gross margin is 70 basis points down on the equivalent period in H2 last year, which will negate just under a quarter of the sales gain, in profit terms, by my rough calculations:

 

 

 

 

 

 

 

 

(NB. These are not the actual numbers, but just start with a base point of 100, in order to show the overall impact of a combination of sales & margin changes)

 

So all I've done with this table is to combine the effect of a 5.3% increase in LFL sales in H2, with a 70 bps fall in gross margin %, to see what the combined impact on gross profit is. The answer is that 5.3% growth in sales turns into +4.0% growth in gross profit. So the conclusion is that the growth in sales far outweighs the negative impact of a decline in gross profit margin percentage here, which is a good thing.

It's rough & ready, but a quick calculation like that is very useful in my experience.

 

Other things that jump out at me from the IMS, are that e-commerce sales are up a remarkable 194% in the 45 weeks to 7 Dec 2013, although growth at that rate implies the starting figure was small. Note that e-commerce sales are international too, with sites in Eire, Sweden, and Denmark already launched, with Australia following early next year.

Moss Bros has a very strong Balance Sheet, and expects to end the year with net cash of £26.0m, which is material to the market cap of £69m at 70p per share.

Although the company doesn't look that great when you look at it on a PER basis. They say that trading is in line with market expectations, which is for 2.3p EPS this year, and 3.0p next year. So that's a PER of 30.2, falling to 23.2 - not exactly a bargain basement valuation! It's also worth noting that historically Moss Bros has only eked out a wafer thin overall profit margin - e.g. only £2.4m on sales of £104.6m last year. That's not great by any stretch.

Therefore, even though the IMS reads very well, I think it's important to recognise that the market price is probably fully up with events, and I don't see value here at the current price. That said, they have a unique market position in the hire market, and with international and e-commerce expansion possibilities, perhaps some people will be prepared to chase the valuation even higher? Personally I'm not - it's fully valued in my opinion. Good to see a traditional High Street name weathering the storm of the last five years though.

MOSB shares have done well over the last two years:

 

 

 

 

For anyone who hasn't seen it, and might be interested, I published a report on my meeting with management of Zytronic (LON:ZYT) on Tue 10 Dec. It was their latest results presentation. Overall I think it's a good company, paying an attractive yield, and seems to be recovering well from a glitch in trading earlier this year. The shares may not look obviously cheap, but when you adjust out their net cash, and factor in the likelihood that broker forecasts are now too pessimistic, then there's decent upside in my opinion. Only an opinion as always, never a recommendation, as our whole ethos here is DYOR (do your own research), which is what Stockopedia is there for - as a toolkit to help people make their own decisions.

 

 

 

 

Final results for the year ended 30 Jun 2013 for Catalyst Media (LON:CMX) have been issued. This is a strange situation, where the company only exists as a vehicle to hold a 20.5% shareholding in another company, called Satellite Information Services (SIS). So it's really a question of valuing SIS, and then calculating what the value of CMX's holding is, then applying a discount to reflect the fact that it's held indirectly.

The PER and dividend yield appear to be very attractive, but there is a big question mark over whether the earnings & dividends are sustainable, as SIS lost an important contract with the BBC, which finishes in Mar 2014. That has created uncertainty over cashflow & dividend payments by SIS, which in turn creates uncertainty for CMX.

Their shareholding in CMX has been written down by £6.6m to £28m, and CMX also has £623k of its own cash, although it's probably best to ignore that since it has (unnecessary) running costs of £150k p.a.

I suppose the best way of looking at it, is that CMX provides a back-door Listing for SIS shares.

For me this one falls into the "too difficult to value" category, and perhaps there isn't enough margin of safety given the uncertainty over the future of SIS, so I've never taken it any further.

 

 

 

 

Regenersis (LON:RGS) announce an extension of their bank facilities with HSBC from £23m to £39m, to finance its continued growth. This company is certainly on a roll, up 133% this year. There's been a double benefit - both from good growth in earnings, and the market has re-rated the shares onto a higher PER too.

However, in my opinion the company should have taken advantage of the buoyant share price to strengthen its Balance Sheet, instead of taking on more debt. The most recent figures show net assets of £39.4m, but once you strip out the £45.0m of intangibles, net tangible assets are actually negative to the tune of £5.6m. Not a great position to be in, if something were to go wrong in future.

I think it would have been better to do a Placing to raise say £15m in fresh cash, which would only dilute existing holders by about 10%, and in current market conditions could probably have been done at full market price. That would have moved the Balance Sheet into a positive tangible net asset position, and kept the Bank debt minimal.

Generally I'm not keen on companies that grow rapidly on an inadequate capital base, it's too risky if/when something goes wrong. The profit margins at RGS are quite slim too - especially after you take into account items which are stripped out & shown separately, such as acquisition costs, share-based payments, financing costs, etc. So a £39m debt facility looks a bit on the high side to me. Why take risks when you don't have to?

 

 

 

There's nothing much else to report today, so I'll wrap it up there.

Regards, Paul.

(Of the companies mentioned today, Paul has no long or short positions.

A small caps fund to which Paul provides research, has a long position in ZYT)