Small Cap Value Report (12 Jan 2017 - Part 2) - SDM, STM, GYM, PMO, SGP

12th Jan '17 by Graham Neary

18 comments 16242 reads

Good morning everyone,

It's busy today in RNS-land. I intend to cover the stocks mentioned in the title above.

Paul's article can be found here, covering AO World (LON:AO.), JD Sports Fashion (LON:JD.), Debenhams (LON:DEB), Moss Bros (LON:MOSB), Mothercare (LON:MTC) and Robinson (LON:RBN).

Stadium (LON:SDM)

Share price: 84.5p (+3%)
No. shares: 38.2m
Market cap: £32m

Trading Update, Acquisition and Notice of Results

The bottom line is that trading for 2016 was "broadly in line with market expectations".

The order book has seen "significant" year-on-year growth, and net debt was £3.5 million.

There is also news of a small-ish acquisition (£0.75 million in cash). Sounds fine.

My opinion:

This update probably won't change anybody's mind on the attractiveness or otherwise of the company.

The higher-margin technology division is growing at a slightly faster rate than the rest of the business, bank debt is manageable, and profitability is on a decent trend. So plenty of reasons to take a look at it, along with a healthy Stockrank!

STM (LON:STM)

Share price: 43.5p (+14%)
No. shares: 59.4m
Market cap: £26m

Trading Update

Another "in-line" trading update (generally, I will cover trading updates more briefly than results statements, especially when they are in-line).

The Board is pleased to announce that the Group has traded in line with market expectations of profit before tax of £2.7 million for 2016 (2015 actual: £2.7 million).

Kudos to the company for quantifying market expectations in this announcement, rather than inviting readers to look it up somewhere else.

Some positive sounds that growth might ramp up in future years, after the flat result in 2017:

As was anticipated, the pricing initiative taken by the Board in the earlier part of the year has significantly increased the take-on of new business for its QROPS international pensions product with new policies for the second half of the year up by circa 50 per cent on the first half of the year and 27 per cent on the second half of…

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paulhunt999

12th Jan '17

I went to a Sharesociety seminar a year to two ago when Stadium were presenting. They explained how they were moving more of their business over to the more profitable wireless work. Something nagged my mind and although the prospects looked good I didn't invest. The shares were 125 then and are now 82. I suspect the more profitable work has not come through as quick as they hoped. Probably worth waiting for the full results before investing

Glaws2

SDM issued a profits warning last June - not long after the Sharesoc presentation. Today's in line statement is to the lower estimates they issued then.

SmallCappy

STM the catch is the market wants jam today. I hold a fair chunk. Currently well under the water. Patience will pay

Rusty2

STM (LON:STM) one catch is the wide spread av. 8% but can be more, it's also very illiquid, try selling at the wrong and good luck. Even buying can be hard and only small amounts. Very difficult company to value. I did hold but sold out last year, it's too uncertain for me. It was covered in one of Paul's interviews.

Dennis Ayling

Re SDM:
I think the jury was un-decided on whether Stadium's profit warning at the interims was due to the loss of 1 significant customer (as they stated) or the sign of deeper problems. There is little detail in the update but it is 'somewhat' re-assuring that things have not worsened although 'broadly in-line' may mean a 'slight miss'. The record revenue is a positive if it can flow through to profit, debt seems to be the same as at the interims. There is a worry that they may have increased spend on the new R&D centres.

Seems to be going in the right direction & hopefully not jam tomorrow. Also quite a decent Stockopedia rating.
Wil continue to hold for now.

D.

Dennis.

mikelevie

Ref Superdry in China, my wife's Chinese and she's got a lovely collection of Chinese T-shirts with random English words on them (I'm particularly fond of "NICE WIN!"). So all Superdry have to do is to swap the Asian script with daft English words and bingo! 14.9% LFL's are assured across Asia!

Sniggolb

I don't think Supergroup CEO Euan Sutherland is stupid. He will doubtless have realised that Japanese characters will not go down a storm in China in the same way that "The Roast Beef of England" ditty would not go well in Glasgow.

FREng

Re Premier Oil (LON:PMO) - what's your view on PMO1 Premier Oil 5% 11/12/2020 retail bonds?

aflash

No comments on Oil?
Graham, thank-you.
Analysis of the capital structure of PMO useful.
It avoided the technical jargon of the Oil sector.
No interference from rampers, derampers, insults and obscenities.
It invites comparaison with ENQ Enquest for the level of debt and North Sea operations although this is not a request. I am not interested any more.
When VOG, next makes an announcement, however, please have a look. It is a relatively stable business selling gas in Africa.

Ah, one comment on Oil.
I have held PMO1 over the last two years. My entry price was 77. Small profit and some interest payments. All sold now because I do not think it will get to par before maturity. I was concerned about the rank of retail investors. Some reassurance today. Might consider a repurchase below 70.

gus 1065

Hi Graham - thanks for taking the time to look at Premier Oil (LON:PMO) .

Oil seems to be viewed like yet another other black stuff, Marmite, that many on the Stocko boards seem to have a visceral aversion to, but I appreciate seeing some balanced commentary a few steps away from the hyperbole (both positive and negative) found on most bulletin boards.

I agree the company were in a very deep debt hole (of their own making) this time last year, but a combination of a higher oil prices and substantially lower industry capex and opex costs is starting to make the equity a viable, if still speculative, punt. Assuming the debt does get refinanced, the terms and extent of the warrants will be critical to the long term returns to current shareholders (of which I am one). Hopefully they'll be offered as a partial sweetener to debt holders rather than a full blown debt for equity swap but we'll only get clarity on this when the terms are finalised.

In the short term, I suspect there will be a "fear and greed" tug of war between bond holders trying to drive the share price down so they get more shares on the cheap and speculators taking the view that once the debt deal is secured the share price fly. I think we saw a fair bit of that today as the share price bounced in an 84-95p range.

Best,

Gus.

jonesj

Since my preferred method of exercise is to get on the bicycle, I have no sector expertise with Gyms. I do notice other people paying membership fees & not going, which has always been a complete mystery to me.

However, GYM has just enough growth for me to look closer.
Last year's figures (from above)
Revenue: +22.6%
Members + 19%

Number of Gyms +20% (calculated on the basis they opened 15 new ones to 89 at the year end).

So a marginal decrease in the number of members per gym ? Revenue doing slightly better.

Time to check the competition. Google maps shows 4 discount gyms in Milton Keynes
Pure Gym (who appear to be larger)
Xercise4less (fewer gyms). Next door ! (see below)
Kiss. This company only has 3 gyms, but claim to have funding to buy 12 freeholds from November 2015.

That's enough to make me cautious, even if the last one is no threat on a national scale. Of course there may be other such small groups in other towns.

I'm not sure how many gyms can opened before the market becomes saturated ? Time to talk to some gym users.

Richard Goodwin

14th Jan '17

Roll on 'chinglish' China is famous for it.

stockman01

Re Superdry Chinese expansion. Thinking whether Chinese think characters are cool is a misunderstanding of what motivates Chinese buyers imo. Western buyers are motivated by things being edgy and cool so the characters were hugely successful here. Chinese buyers though are motivated hugely by brand as it is a status symbol. That is why you'll see all the garish dregs you'd never buy but having Burbery or the like stamped on it snapped up in sales by Chinese buyers because style and trendiness is not as strong a motivating factor. For that reason I expect the success of Superdry in China will be driven by how strong it's brand recognition is there rather than whether it's design elements are common.

Bushranger

A lot of Chinese, probably still the majority, do not like the Japanese. So it will be interesting if a brand bearing Japanese symbols is accepted. Though a dislike of America didn't stop most countries still wanting their brands.

15th Jan '17

Many of the educated Chinese have a more positive view of Japan, so that might be the basis of a market.

However, if the Japanese characters are a barrier to sales in China, these could easily be dropped for the China market. The brand story could be heavily modified if necessary. I've just seen Thai MG showrooms plastered in Union Jacks, to help sell their Chinese made cars. Anything goes.

Incidentally, if they ever wanted to sell in Japan, I suspect the characters would have to be dropped or be replaced with something that made sense in that language.

Graham Neary

Hi gus / FREng / aflash

Thanks for the intelligent comments on oil,

This is clearly not a sector which I specialise in, but it can be interesting to take a look at from time to time.

I'm afraid the risk-reward on PMO1 doesn't make sense to me, but bear in mind I'm coming from the position that I see possibly zero long-term value in the equity - I could see the shares rallying very strongly with a strong oil price and with a good bank deal, but the balance sheet looks fundamentally compromised to me. If the stock market closed permanently and I was holding PMO shares, I doubt I'd ever get a meaningful dividend from it.

PMO1 is yielding c. 10% at the current price, it's not a bad deal and I think it will probably get repaid, but I'd want a higher yield than that to hold it for nearly 4 years, given the condition of the equity.

Graham

jonno

27th Feb '17

Regarding SDM, overall things appear to be heading in the right direction, the rating is appealing, order book is up, debt is moderate and there is a reasonable dividend, which the recent capital reduction and broker's forecasts seem to indicate is secure. On top of which the outlook in the trading up date is positive and for chartists the 50 day moving average is in an upward trend.

On the flip side there is an element of trusting that the recent profit warning was due to a one of glitch, the broadly in line statement and pension deficit of about £5m, which depending on bond yields could either be an impediment or have negligible impact. Also I have been know to get things wrong from time to time.

I hold SDM and am trying hard to avoid the dreaded confirmation bias so please feel free to comment if you think I have missed anything significant. However on balance I think that the risk reward situation is favourable.

All the best

Jonno

Small Cap Value Report (12 Jan 2017 - Part 2) - SDM, STM, GYM, PMO, SGP

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Graham Neary

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