Small Cap Value Report (12 Jan 2017 - Part 1) - AO., JD., MOSB, MTC, RBN

12th Jan '17 by Paul Scott

57 comments 24028 reads

Good morning!

Graham is also writing today, his report is gradually taking shape here.

I'm aiming to report today on;

AO World - only modest growth, and cautious outlook. Not good enough, I'm bearish.
JD Sports - a barn-storming trading update!
Debenhams - perhaps better than expected Xmas performance? (sorry, I ran out of time, so didn't cover this one in the end)
Moss Bros - in line trading update. Looks pricey to me.
Mothercare - in line trading update. Potential turnaround?
Robinson - mild profit warning, but upbeat outlook. Property angle too.

You might have noticed that I've strayed into several mid & large cap stocks in the list above. I always agonise over what to report on at this time of year. The retail sector is my sector specialism, due to having been an FD for 8 years for a ladieswear chain. So naturally I'm drawn to RNSs from retailers.

However, you can get reporting & analysis on larger caps from numerous other sources. So there's little value added from me just replicating here what others report on. Hence I'll just cover retailers which particularly interest me, for whatever reason.

Other retailers which also reported today, include: Tesco, Marks & Spencer, Asos (excellent international growth), ABF (Primark), and Dunelm. I'm not going to report on them here.

Graham intends reporting today on;

STM - in line update, and optimistic outlook.
Stadium - broadly in line.
Gym Group - self-funding roll-out of low cost gyms.
Premier Oil - trading update. Oil? Oil!! {{shudders}}
SuperGroup - interim results.

So let's hope we can successfully get through all of that lot.

IG small caps wrap

I have a quarterly chat on video with Jeremy Naylor at IG, about my favourite small caps.

We recorded the latest edition yesterday afternoon, the link is here - it's about 15 minutes long.

Regulars here will recognise all the stocks as my favourites. As always, they're not buy or sell recommendations - that's for you to decide! They're just my favourite current stock ideas, some of which will work, and some won't.

Growth vs Value?

Generally, most Christmas trading updates for retailers are coming through fairly well. So it looks as if the first one to report, Next (LON:NXT) probably had more company-specific issues for its lacklustre performance. Mind you, Next's figures weren't actually that bad at all. Everyone's talking about it as if it had a disastrous Xmas, but…

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Trigger14

12th Jan '17

Similar to my fantasy portfolio here http://www.stockopedia.com/fantasy-funds/trigger14s-fund-4996/

You will see my rules have been somewhat aspirational in the past - aim of writing them down was to become more disciplined now I have a clearer hypothesis about what might work well as a strategy.

FREng

Paid warranties and other insurance are just a bet – at fixed odds which the bookie knows better than you do because they have the data.

jonesj

Paid warranties offered by the likes of Currys are the most profitable part of their business, therefore the worst value for the consumer.
On that basis, I NEVER take these warranties.

Additionally, the consumer protection laws require goods to last a reasonable length of time, so an assertive customer should be able to get products fixed by the supplier out of warranty.

Considering all that, extended warranties sound like a good business to be in, although what are the chances of the suppliers being unfairly done for mis-selling in the future ?

Beginner

Hi Paul
It is interesting to see what you say about the spread at Robinson (LON:RBN) . I have a small holding in Belvoir Lettings (LON:BLV) (Belvoir Lettings) , and was thinking of selling it on today. I was offered a price of 70p. Huh, thought I, maybe it is actually worth adding instead of selling if they have dropped that much. I could buy the same quantity at 111.8! Is that a record?

(The spread at Robinson (LON:RBN) often narrows, presumably when people want rid. The same applies at Revolution Bars (LON:RBG) .)

rhomboid1

Thx for covering Robinson (LON:RBN) , I'm ok with seeing this one out, my view is I'm getting a decent packaging business, with a mixed record, for a P/EV of c. 7, it'll also pay good( & maybe special) dividends at a generous level. At just over 1% of portfolio that's fine by me.

Paul Scott

Hi alpha2,

Can you clarify what you think is reasonable? I have been looking at CAKE who seem to me to meet most of the criteria but according to the Stockopedia notes on PEG, their's looks high at 1.39.

I treat retail roll-outs like CAKE slightly differently.

PEG only looks at the coming year. Whereas I look say 5-10 years forwards, and try to imagine what size the business will be then. With CAKE, I see a business that has scope to grow considerably, and could be say 3 times its current size in 5 years.

Therefore, I reckon the shares could be 3+ times the current price (which implies about £10 per share) in 5 years.

That may sound ridiculously simplistic, but it's exactly how a good retail roll out works. They just open more branches each year, and profit rises rapidly. It's the easiest type of investment to make - you just buy & hold, doing nothing.

The danger is that the format goes stale of course. I don't think that is likely to happen with CAKE, as management is so strong.

The biggest mistake is to sell too early. Luke Johnson did that with Pizza Express, losing out of massive potential upside. So he won't make the same mistake again here.

This is just a buy & forget share, in my view. (I hold)

Regards, Paul.

Aislabie

I do not now have a holding in Robinson RBN but have observed it over the years and it has become a regular feature to fall back on the value of property they still have as a way to save their value. It is a company that has done some good things in its packaging business, but it is tough to hold onto margins when so much is consumer related and going through the supermarkets.
It is interesting to speculate that if they had sold the packaging business and gone into property development it is almost certain that the shareholders would have had wildly improved results.

alpha2

Thanks Paul, nothing worse than stale CAKE!

smatthews1

Hi Paul

Do you have any rule of thumb for operating margin? or a minimum?

I personally like to see a minimum of 10%, this can be a big ask for a growth stock, so i will occasionally bend the rules if there other advantages.

seems quite important at times like this, with currency fluctuation and rising import costs, helps them absorb any risings costs if they had to.

thanks
Sean.

Rob McBride

13th Jan '17

I'm a big fan of checklists, but I have never put together one specifically for growth stocks so this is highly useful. A couple of checks I'd add to it are:
- Liquidity of the share: a combination of the EMS (at least £3k) and spread (ideally <= 5%)
- Intangibles: a quick check to ensure bottom line isn't being boosted by some dubious capitalisation of intangibles.

andrea34

Does anyone have any views on DEB? Was hoping for a write up as it has previously been covered.I know it's not high growth, but they seem to be making progress, pay a good divi, and have a per of about 8

TMFMayn

"The biggest mistake is to sell too early. Luke Johnson did that with Pizza Express, losing out of massive potential upside. So he won't make the same mistake again here."

I followed PIZ for several years and my recollection is quite the opposite.

I recall Mr Johnson selling his shares at £8 or so in 1997/8 when he was trumpeting the chain's international expansion and the rating was very warm. He left PIZ in 1999 to set up Belgo, which was a bit of a disaster (as his appearance on a TV business documentary can confirm).

By 2003/4 I think, PIZ had hit profit trouble, the international expansion had never really got going, and the shares I am sure went below £3 and the P/E down to 7. In fact, Mr Johnson even launched a (failed) bid for the chain at about that time, which eventually was sold for something like £4 a share. A buy and forget share it was not.

Hi TMFMayn,

Interesting. Maybe the article I read was a sanitised version of events then!
I can't remember where I read it, but basically the article said that Luke Johnson banked a decent profit on Pizza Express, but that it subsequently changed hands privately for many multiples of what Johnson sold out for.

I think it was referring to people buying & selling the chain privately, more recently, not when it was a listed company.

Anyway, bottom line, Pizza Express started off small, and ended up huge & very valuable. That's the key point I'm making.

Regards, Paul.

Damian Cannon

Whatever Luke Johnson did with Pizza Express he sounds like an interesting guy - I had no idea that he was involved in so many different organisations: http://www.cityam.com/214000/unfinished-business

With him on board I'm certainly happy with the management of Patisserie Valerie.

peterthegreat

My impression of Luke Johnson is that he is a bold investor who is well known for his spectacular successes which have made him rich. However, he has also had some disastrous investments so it's always worthwhile doing as much due diligence as possible yourself. I guess he is a bit like a personal venture capitalist, with the huge successes more than making up for the failures. I must admit, some of his investments are a bit too speculative for my liking, but if I had access to his due diligence and contacts, I admit I might not regard them as so speculative!

johnrosier

Luke Johnson:
I have just bought a position in Elegant Hotels (LON:EHG). Not because Luke Johnson bought a 12% stake in the last couple of months but because I think I understand why he did.
Share price 80p; book value somewhere north of 160p, growth opportunities, decent balance sheet, good cash flow and an 8.7% prospective dividend yield, which I believe is safe due to cash flow and balance sheet. Results coming soon.
I also hold Patisserie Holdings (LON:CAKE), bought in July at 286p and Revolution Bars (LON:RBG) (in which he is not involved) bought in October at 160p.

Velo

14th Jan '17

I'm fortunate to be one of those making a pretty penny with my holding in JD Sports Fashion (LON:JD.) at the mo'.

I'm somewhat bemused to be doing so well with it as I'm primarily a divi man - but it's in my riskier ISA which panders to my dark side, whereas the high yielding divi's are all in my 'safe' SIPP acc.

Was thinking of cashing it in, so comforted by Paul's opinion of there being a case for buying at this level. Might split the difference and top slice - half maybe?

Hi John,

Re Elegant Hotels (LON:EHG) - I reviewed it here in Oct 2016, and quite liked it. Although there are some significant negatives with this share;

70% of its revenues come from UK tourists, which means business is likely to decline, due to sterling weakness vs dollar
Zika virus is an issue
Cautious 2017 outlook statement in Oct 2016

The other issue is that it seems to me their properties look under-invested (i.e. inadequate capex & maintenance). I got that impression from trawling through the TripAdvisor comments on all their properties. If you do that, it soon becomes apparent that there's a recurring theme - tired decor & furnishings, slightly dated, niggly maintenance issues, etc. Given that these are mostly very expensive places to stay, that's just not good enough.

Scrimping on maintenance capex today is lost sales tomorrow. Hotels can quickly go downhill, and get a bad reputation if that situation is allowed to persist.

For this reason, I don't think the big dividend yield is a good thing at all. I would find this stock much more attractive if the divis were curtailed, or pulled altogether, in favour of focusing cashflow on upgrading the facilities & modernising the hotels.

It's certainly an interesting company though, and remains on my watch list. Luke Johnson's involvement is certainly a positive too. I'm holding back on buying until it becomes clearer how trading is going in 2017. If British tourists stay away, then the operationally geared impact could be shocking.

Richard Goodwin

I suspect another relevant question would be "is the market big enough for two aggressive competitors?" Ie the US burger market proved big enough for McDonald's, Burger King, Wendy's etc which were all roll outs in their day.
The problem is that as a layman it is v hard to measure (quantify) competitive advantage. Also it is often behind the scenes such as having better trained staff or better organised cake manufacturing and higher product availability.

Hi Coracleman,

I very much like your idea of a set of criteria for growth stocks. A list of stocks fulfilling those criteria would be most welcome. Thanks.

I'm sure it would lol! But I'm not going to do all the work for you! If you like the approach, how about you come up with some stock ideas that fit the criteria, and let us know?! ;-)

Regards, Paul. (only meant light-heartedly, please don't take offence)

Small Cap Value Report (12 Jan 2017 - Part 1) - AO., JD., MOSB, MTC, RBN

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Paul Scott

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