Small Cap Value Report (12 Mar 2014) - FCCN, CBUY, MWG, SOG

Wednesday, Mar 12 2014 by

Good morning!



French Connection (LON:FCCN)

I think it was Antony Bolton who said that his best calls were often stocks that at the time felt uncomfortable to buy. That's how it felt for me with French Connection, where hardly anyone could see my logic that it was a good each way bet at about 30p (they are now 60p!). The bulletproof Balance Sheet, loaded up with cash, and no debt, plus a large wholesale debtor book on top, was sufficiently strong that the company could absorb continued losses for years to come, providing they didn't get completely out of hand. Cash gives you time to turn a business around, and founder/CEO (who still holds 42% of the shares) has been making a lot of changes on various fronts to turn the group around.

Moreover, the group results mask what is in reality two successful businesses, the wholesale and brand licensing divisions, which together made a profit of £17.8m in 2013/14 (the year end was 31 Jan 2014). This was more than enough to cover the £11.3m group overheads, and would have left a profit of £6.5m. However, the problem part of the business is the Retail division, which has a long tail of heavily loss-making shops, on leases that cannot be disposed of in the short term. This made a thumping great loss of £11.6m in 2013/14, although that is usefully improved from the appalling £15.4m loss in 2012/13.

Over time though, the retail losses will melt away, as problem leases are handed back to the landlord at the time of expiry. Typically retail shop leases are fifteen years in duration, at the time of inception. So in FCCN's case, most of the problem leases will surely be in their second half now, so perhaps 5 years left to expiry? Taking a long term view then, from now on FCCN should be experiencing a tailwind of lease expiries of loss-making shops, which will boost profitability a certain amount each year. Nine loss-making shops were closed in 2013/14, and a further 3-5 more are due for closure this year.

My initial review of the results for year ended 31 Jan 2014 published this morning has not identified anything unexpected or untoward.  On 5 Feb 2014 the company said that the loss for 2013/14 would be reduced to…

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French Connection Group PLC designs and supplies branded fashion clothing and accessories for men and women. The Company operates retail stores and concessions in the United Kingdom, Europe, the United States and Canada and also operates e-commerce businesses in each of those territories. Its principal brand is French Connection, which designs, produces and distributes branded fashion clothing, accessories, such as toiletries and fragrances, shoes, watches, jewelry, eyewear, furniture and homeware through its distribution channels: retail stores, e-commerce, wholesale and licensing. Its other brands include, Great Plains and YMC. The Company operates in approximately 50 countries around the world. The Company's subsidiaries include French Connection Limited, French Connection UK Limited, French Connection (London) Limited, Contracts Limited, French Connection Group Inc., French Connection (Hong Kong) Limited, French Connection (Canada) Limited and YMC Limited. more »

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cloudBuy plc is a provider of an integrated software platform for e-procurement and e-commerce for the trading of goods and services between purchasers, such as public sector bodies and their suppliers, along with the analysis and coding of spend and product data. The Company's operating segments include Company Formation Services, Web and ecommerce services and Coding International Limited. It also provides services to new businesses, including incorporation, company secretary services and filing annual returns, using its software platform. Its solutions include e-commerce Marketplaces, e-commerce Websites, Purchasing Portals, SpendInsight and Company formations. SpendInsight service provides regular analysis of any company's historical spend data. It offers a range of Website packages from templated solutions to Intranets and global business-to-business (B2B) e-commerce sites. The cloudBuy platform enables rapid extension of its solutions and development of new applications. more »

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Modern Water plc is a United Kingdom-based holding company. The principal activities are to own, develop and supply technologies, products and services related to the provision of fresh water and treatment and disposal of waste water, specifically for the design, construction, testing, installation, commissioning and operation of desalination plants, water cooling systems and brine concentration plants; packaged seawater desalination systems; wastewater treatment systems, and water quality monitoring, environmental monitoring and soil testing. It operates through two segments: membranes and monitoring. The Membrane Division includes thermal desalination, membrane brine concentration, evaporative cooling systems, packaged seawater reverse osmosis (SWRO) desalination systems and wastewater treatment. Its Monitoring Division includes trace metal products, toxicity products and environmental products. more »

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

7 Comments on this Article show/hide all

trufflehunter 12th Mar '14 1 of 7

spot on Paul
I remain a happy holder too.

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Wilmo1979 12th Mar '14 2 of 7

Just wanted to say thanks Paul - I bought French Connection (LON:FCCN) @ 29p after one of your articles brought it to my attention. I agreed with you that the cash in the bank gave a great element of protection as long as the losses could be managed. Seems to be on the right path.

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Camtab 12th Mar '14 3 of 7

Is Debenhams capable of doing a similar thing? Well done on FCCN Paul.

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Paul Scott 12th Mar '14 4 of 7

In reply to post #82011

Hi Camtab,

Debenhams (LON:DEB) is the other way around from FCCN, i.e. it has net debt. So as trading deteriorates, the debt poses more of a risk. Although banks are likely to remain docile, especially with such a big name.

I can't help feeling that DEB might have another profit warning in it, as they alluded to a stock overhang in their last trading update - which can only be cleared by discounting it further.

Some stocks are lucky for me - where I can read the trading statement & the cycle very well. FCCN is one of those, where I've consistently bought near the bottom, and sold near the top.
DEB is an unlucky stock for me, which I've generally got wrong!
So listen to me on FCCN, and ignore me on DEB!!!

Regards, Paul.

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dfanelli 12th Mar '14 5 of 7

HI Paul,
why in FCCN balance sheet we can't read anything regarding their leases obligations? other retailers in the US capitalise their leases. Why it's not the case with FCCN?

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superrupededupe 12th Mar '14 6 of 7

Analyse the accounts and you will see that DEB is a very different situation to FCCN. The market had priced the latter as if it was going to go bust when it was obvious that the strength inherent in the working capital meant that it was very unlikely to do so.

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ChristopheBassons 13th Mar '14 7 of 7


Re StatPro (LON:SOG), working in the software industry, I don't share your view of the deferred income position, largely because it doesn't match day-to-day operational reality: there's no cash-consuming future product delivery; the support portion of the software licence fees, which has the potential to turn into a true liability, is normally tightly controlled or capped in some way. But that's an aside!

The point I wanted to make is that StatPro (LON:SOG) isn't a mature business, rather the shift to SAAS and new product offerings are opening up new business possibilities (Revolution - e.g. look at the growth figures for this side of the business, and note that half the existing clients only have 1 portfolio,i.e. they're dipping their toe in, compared to more sizeable clients who are doing much more business). Plus SAAS is lowering the cost base and shortening the sales cycle. This is taking longer than I expected, and in the meantime the extra required investment is resulting in flat profits. They're operating in a big market, the question in my mind is how far they can go with it and what the resultant revenues/operating margins will be. So, it looks like a mature business but there's a growth business lurking in there!


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 Are LON:FCCN's fundamentals sound as an investment? Find out More »

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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