Small Cap Value Report (12 Jan 2016) - SPD, KBC, BOO, AVS, BOTB, MCB

12th Jan '16 by Paul Scott

24 comments 32305 reads

Good morning!

I'm overwhelmed with the volume of results & trading updates today, so will do my best, but this report will probably take the rest of the day to write! So I might have to cut some corners, to cover all the companies reporting today.

Reports of the death of retailers seem premature, with surprisingly upbeat statements from both Debenhams (LON:DEB) (I hold a long position in DEB) and WM Morrison Supermarkets (LON:MRW) today. It's interesting to note that, in both cases, the market did not correctly anticipate that recent trading would be alright - the pessimists were wrong. This seems a pattern at the moment - i.e. that price movements on the chart really are not proving good indicators of company performance at all, and many glaring anomalies have appeared - creating buying opportunities. I'm drawn like a moth to the dim lights of companies surrounded by investor gloom, as selectively you can find lovely bargains, if you avoid the value traps (not always successfully done, by any means, but I'm getting better!)

I've been filling my boots c.400p this morning with Sports Direct (SPD) shares - the dramatic sell-off seems greatly overdone, perhaps because tracker funds might be selling ahead of it dropping out of the FTSE 100? This has combined with a mild profit warning, and numerous press articles attacking the company's pay & working conditions, and general corporate governance issues relating to Mike Ashley's tenuous grasp of (and/or disdain for) the requirements of being a publicly listed company. Him owning 59.4% of the business creates a lot of problems. All of which is great from my point of view, as I'm only interested in it being a fantastic business, that is now very cheap in my view. As always, this is just my personal opinion, I'm not giving recommendations, just chewing the cud on things that look interesting to me. DYOR is the whole ethos of this site remember.

KBC Advanced Technologies (LON:KBC)

185p cash takeover - this looks a done deal, with 42.6% acceptances already secured from Institutional shareholders. Well done to KBC shareholders, this is an attractive exit price (a 49.2% premium to last night's closing price), and all in cash too.

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QuaysideCapital

12th Jan '16

Hi Paul,

Thank you for the sound analysis day after day - it's a great help to the continual learning process. Quick question, any intention to take a look @ Ilika (LON:IKA) today? I notice they've put out thir half year today and I know it's in your list of blue sky shares you keep tabs on. Would be interested to know your thoughts.

Cheers
RT

Paul Scott

Hi RT,

I'm trying to avoid blue sky shares, as my track record on them is so dismal - I get sucked into a good story, and end up losing my shirt on the shares!

For this reason, I try not to write about them any more here, as I don't want to inadvertently lead people up the garden path, if I get excited about a story stock again.

So I won't be covering Ilika again here, unless & until the company can demonstrate real commercial progress - i.e. proper, sustainable turnover, and profits.

Regards, Paul.

steviej

KBC Advanced Technologies (LON:KBC) shareholders, you lucky blighters. Also a 30% premium to its price at any point in last 10 years and a 20+ P/E. Nice deal, I'd be taking if I had any.

qimotte

Hi Paul,

I note that Boo used margins to build volume, but I wonder if the RoW margins, i.e. Aust. NZ and some Asian markets, were more an issue of Sterling's strength up to Black Monday. Nothing was said in the update regarding exchange rates. However, the pound has been notably weak over the last month vis-a-vis USD which could be used to boost margins for remainder of the year and surprise on earnings in March.

janebolacha

Paul, UK-quoted oil services stocks could well be looking very attractive now to US groups prepared to take a medium-term view and/or where there are synergies with their own businesses. Yes, there may well be yet one more leg down in oil prices but with NYMEX and Brent at just over $30, how much lower is there really to go? Add in the (to me) precarious position of Saudi Arabia, politically and socially, the tensions between that country and Iran, the still growing unrest caused by ISIL throughout the Middle East, adverse developments in any of which (imagine the main Saudi pipelines in their eastern provinces bordering Iran being blown up) could send oil prices racing upward, then throw in the present strength of the US$ against sterling, it's perhaps exactly the right convergence of events for the stronger to start eating up the weaker. So KBC going, no real surprise. I'd also now expect both Petrofac and Hunting, perhaps also Pressure Technologies to be on some US shopping lists.

Rusty2

CER is constant exchange rates, on CER sales inc. 49% as opposed to 45% (overall).

My concern with oil prices is not going lower which seems unlikely but how long are they going to stay low, with a slow down in China and maybe elsewhere then demand does not seem to be going up, USA relies more on fracking now anyway. KBC is profitable and has no debt. Petrofac and Hunting now seem to be making a loss and carry quite a bit a debt. Of course you could be right but it looks a bit risky to me.

jonny71

Paul, Argos do same day home delivery.....

Fishcake

I'm probably missing something very basic here, but where has the cash gone with BOO ? At 31Aug they had 60.3 million in cash, and have spent (I think) 1.7 million on a warehouse. However, in the four months since the interims they've had a 73 million turnover at a margin of 50+ % - shouldn't that have added in excess of 35 million to the cash figure ? However they announce that they have 58.7 million.....

Ken Lowes

I appreciate that everyone has an opinion and it depends upon your own point of view as to which one is believed. Yesterday's article on the property bubble and todays report on the RBS market analysis in the Telegraph Business section came to mind as I was reading all of the above. At one time the cycle was blue chip then mid market followed by small company and finally junk with the cycle going in reverse for the bear. Did I read a mention of some confusing signs in the Aim market which Paul wrote about a couple of weeks ago? Anyway it would be interesting to hear everyone's / anyone's view of RBS telling the clients to head for the hills. My view " I am already there". But I was born bearish.
Ken

Cisk

Maybe inventories are higher?

In principle yes, but for a company that prides itself on trying small samples first I doubt it - that would be a scary amount of inventory ! I also vaguely remember mention of them getting paid before they actually have to pay for the items...

Gostevie

Paul,

If you and Tom Winnifrith made a single bottle Prosecco last three hours, I'm a Chinaman and you might like to invest in my sportswear company! :-)

Bought some SPD this afternoon at c.413p. I think it's a good buy.

All the best,

Steve

rmillaree

Fishcake
"- shouldn't that have added in excess of 35 million to the cash figure ?"

Absolutely not thats just a silly number.

Lets start by looking at the broker forecasts for the year - they expect (and we expect presumably) that the company will make 15 milion profit for the whole year pre-tax
Take 20% off for tax - say £3 mill

and that leaves £12 mill for a 12 month period
This was a 4 month period so 4/12 of 12 = 4 million expected cashflow in a normal period
say a couple of mill for capital expenditure above depn charge
add in investment in stock that will be needed to cover turnover increases that could easily be a couple of mill.
They may if selling by third parties more also have an increasing trade debtor balance as they will likely be paid in arrears of sales date ??

So the nil positive cashflow is within a few mill of what i would expect - £35 mill is just a silly number. The finals when released will have the chapter and verse.

Unfortunately expansion always comes at a cost but if they are breaking even cashflow wise with 60 mill in the bank whilst expanding at a large LFL rate thats a good job done.

I am no expert but 19 mill invnetories per last accounts compared to 90 mill sales = one very tight ship in my books that i think would compare favourably with the likes of ASOS (just guessing)

The main danger is if there are funnies capitalised or exceptionals outside of broker forecasts when the final ye figures come in but i see nothing unduly wrong with the lack of positive cashflow at present. Job well done spending cash as necessary creating new/additional sales and future room for efficiency gains - you need to start off with over specc'd warehouse /website etc etc etc and grow into that. Amazon got where they are by re-investing all cash in expanding.

Bezhe

In reply to Fishcake's query on £BOO's cash position: The reference was to "gross margin" which is sales revenue less cost of sales but before overheads. The overheads, including marketing costs, are deducted from gross margin to arrive at operating profit. Hence, the retained profit (and resulting cash increase) for the period will have been much lower than 43% of sales. In addition, as Cisk has suggested, higher inventories and other movements on working capital can also depress the cash position.

(I'm sure that all of this will be included in the book that people are constantly asking Paul to write!)

imranawan

Hi Paul

In terms of the sale of Fountain Studios how much cash will Avesco receive. According to the Sale of Freehold property RNS they expect to receive a net profit after tax of £6m and cash of £13m, but according to the Post balance sheet note (9) in the FY accounts profit is expected to be £7m.

Best wishes,
Imran.

DarwenLad

The FT's Lex column likes the look of Boo. The following links to a video discussion where the head of Lex is asked which internet stock he would choose if he had to pick one of Boohoo, AO World and Just Eat. He tipped Boohoo. Not that Lex has a fantastic record when it comes to share tipping but the fact that it even bothered to discuss the pros and cons of Boohoo will not have gone unnoticed by the heavy hitters in the investment community.

http://www.ft.com/cms/s/0/330c5138-b900-11e5-b151-8e15c9a029fb.html#axzz3x4AUWxHD

13th Jan '16

Thanks to rmillaree and Bezhe for taking the time to correct my beginners mistakes !

cig

14th Jan '16

Can't believe anyone here would play Best of Best, the odds must be at best 30p in the pound (if all the cost of revenue is used to pay for the prizes) with the pseudo easy game and kickbacks a simple trick to make everyone think they're geniuses. Reminds me of the old sat TV shows where you have to phone in a premium line to find the missing letter in FO_L for a minuscule chance of winning some trinkets. There are lotteries with much better odds around for folks who want a bit of randomness!

cig,

I play the BOTB game each week just for fun. It's tons better than the alternatives of just picking some boring numbers at random and watching them come out of a tombola!

I like the fact that BOTB does actually involve skill - you have to correctly anticipate where the panel of experts decide the ball was. Be as cynical as you like, but people playing the game enjoy it, and that's what it's all about!

Regards, Paul.

P.S. Plus, I bought enough shares in the company so that if it does what I think it could do, in the long term, I am more likely to be able to buy a supercar from my shares, than from the competition lol!

Small Cap Value Report (12 Jan 2016) - SPD, KBC, BOO, AVS, BOTB, MCB

KBC Advanced Technologies (LON:KBC)

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Paul Scott

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