Small Cap Value Report (13 Jan 2016) - HOME, SPD, SHOE, RGS, XAR, SGI

13th Jan '16 by Paul Scott

31 comments 27229 reads

Good morning!

I had a second wind yesterday, and added some new sections to yesterday's report in the evening, covering: Avesco (AVS), Best of the Best (BOTB), and McBride (MCB). So if you haven't seen those sections, then this link to yesterday's full report is a good place to start.

The main indices seem to be stabilising after the recent sharp sell-off, although everyone seems terribly nervous still. Although personally I am enjoying the buying opportunities, and see a correction as healthy. Even though the economic data is softer in the US, that doesn't automatically mean that we're heading into oblivion again.

With most of the retail sector having reported now, it seems as if things weren't as bad as feared, generally speaking. As always, it's all about execution, so good companies trade reasonably well, even in difficult conditions.

SBRY / HOME

(at the time of writing, I hold a long position in HOME)

J Sainsbury (LON:SBRY) seems motivated to push ahead with its possible bid for Home Retail (LON:HOME). Sainsbury has published this document on its website setting out the rationale for the deal. Having read this, I feel it's far too light on the numbers. It's all very well coming out with management buzzwords, and generalised waffle, but if I were a SBRY shareholder, I'd want some hard figures to justify the deal.

As a retailing man myself, I can entirely see the logic for the deal, it makes complete sense. Especially considering that Argos branches are already within some larger Sainsburys stores - so the trials have worked, thus proving up the concept of store combinations.

Plus SBRY knows Homebase inside-out, as it used to own it. Going forwards, retailing is all about multi-channel. So the winners will be not only the best at operating physical stores, but will also have the best IT and logistics, to satisfy customer demand in store, by home delivery, and click & collect. HOME adds expertise in some key elements of that which SBRY is currently lacking.

With cost synergies, and letting go of some of the Argos estate, and putting them into larger Sainsburys stores, it's entirely feasible that SBRY could drive profits at HOME up from c.£150-200m to perhaps £300m+. That would be a fantastic outcome for SBRY shareholders, given that the EV of the acquisition price…

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bobo

13th Jan '16

I iiked the idea of Argos becoming a sort of pick-up point at the station. I suspect sucking it into the Supermarket chain will destroy that opportunity and the first competition that Amazon was ever going to get will be gone. Homebase has been a dog for years and needs to be shot.

simoan

You had me right up to this point:

Finally Mr Market was valuing the business at 800p a share not so long back so on the basis that a good company at some stage will revisit its highs

Beware the perils of "anchoring"!! Basing any investment decision on a historic share price is dangerous and you make a good case for this in mentioning Tesco... it will be a very long time, if ever, that TSCO gets back to £4. Just saying...

All the best, Si

JDW72

Stanley Gibbons "tangible" book value....hmm.

I think this is based upon the stock/inventory that they hold and that as such it's value can't be certain.

Whilst they might think that the entire back catalogue of Good Housekeeping (or whatever it is they have in their warehouses) is worth a fortune, the fact that they haven't sold it suggests otherwise. The demand for a lot of the old tat that gets traded (stamps, back issues of Wisden etc.) comes from China and I think we're all aware of the reality of the economic situation there.

Also, talking to a few of the local charity shops near me (actually the root source of some of the stock that businesses like SGI trade), they are being inundated with donations, in some cases 4 - 5 times more than ever before and say that people are decluttering like mad (all very zeitgeist this move to a minimalist way of living) and there are all sorts of rare things turning up and finding their way into the market. More supply.....

A fundraising suggests to me that they can't shift the stuff at a price that they are happy with and would prefer to hold on to it in the hope that the demand picks up. In the meantime, they're running out of money.

I wouldn't touch it with a bargepole I'm afraid.

Brackendale

Hi JD72,

Thank you, that is interesting, particularly your point on the fundraising. And on a similar note to your point on supply, a second hand bookseller in London recently was lamenting that many older people are dying and their book collections being simply discarded by uninterested family.

It is amazing to me how quickly and drastically sentiment has changed for this stock. I wonder if sentiment could change in the opposite direction or not, for example if they having a storming second half.

I suppose the bear case is that Chinese demand has gone and the inventory has an unreliable value, whilst the bull case, a la Simon Thompson in IC, not everyone's favourite I know, is that the tangible book is much higher than what is on the balance sheet, because they are valued at cost.

I think I will put it into my "will be fascinating to watch" pile!

Thanks again for your reply

janebolacha

Paul,

HOME/SBRY:

Not having lived in Britain for quite some time, I'm rather puzzled why "click and collect" seems to be seen as something new and innovative and why this is seen as one of the key features and attractions of Argos.. It has been common for years now that online sites in other countries offer one the choice of mail or courier delivery or collection at one's own choice of any one of several points in your neighbourhood. Obviously, this would not apply to very heavy or bulky items, I appreciate that. For just about everything else, I can have deliveries made to my local "maison de la presse" in France or to the local computer shop in Spain and then simply collect them when it suits me. The concern about the dreaded "whilst you were out" card just doesn't apply. There must be something similar in Britain, surely? If not, it would cost very little to set up such a collection network.

SPD:

Iconix is reportedly the owner of the "Umbro" brand. That may well be part of its attraction for Mike Ashley:

http://www.insidermedia.com/insider/national/sports-direct-ups-stake-in-umbro-owner?utm_source=northeast_newsletter&utm_campaign=northeast_news_tracker&utm_medium=deals_article

SGI:

Their inventory valuation can really be anything they like since for much of their stock there'll be very little to compare it with. Its true value is only known once it's sold and they seem to be having trouble selling it which perhaps indicates it's not worth its carried value?

Valued at cost might very well be overvalued.

There are indexes for rare stamps and coins etc. but they are calculated by firms who sell stamps and coins as investments and unbelievably (literally) have shown remarkably consistent and impressive growth. Now, why would a firm selling a thing as an investment want to show that the value will never go down.....I wonder? I'm amazed they can get away with it to be honest.

It's not like a freehold property where you can look at the value of similar local land and come up with a sensible number. It's completely opaque. We simply don't know what they have in stock and hence can't value the company on a book value basis.

If this was all true a) clever rich people with deep pockets would be doing it (they're not) b) there would be loads of new companies starting up to get some of the action (they're not) c) SGI wouldn't be raising money

Rusty2

I quite agree. I think the main problem is Stanley Gibbons (LON:SGI) can't shift some of the big ticket items because of the situation in China, they may think a stamp is worth n million but until they sell it who knows. I have lost faith in the management I think they were ok in the old days before the internet took off. You know how much they spent on their website and it took 5 years. So of the recent acquisitions do not seem good value either, the disposals have been well below book cost.

Its not that new but it s become popular lately. Many internet based retailers are doing it, however if they only have a few shops then its difficult for them to compete with the likes of Argos who are in most towns. Interesting some ebay items you can now pick up free at your local Argos. Yes some you can pick up from your local shop but there is often a charge for this. Click and collect suits many people in uk who are in and out all day and dont want to wait in all day for a delivery.

ACounsell

Paul,

Re Xaar (LON:XAR). Share your concerns re focus on China and single product sector but the business has good IP and the potential for some of the products in its pipeline could be significant. Also this is probably the last major listed UK industrial ink jet business and must be on the acquisition target list of many overseas players (US, Japan, etc.)- no doubt they too are biding their time given the risks of the current product/sector focus. Linx Printing Technologies and more recently Domino Printing Sciences have been acquired by Danaher (NYQ:DHR) and Brother Industries (Japan) respectively . Maybe the market thinks Xaar will be next given today's share price reaction to a relatively muted trading update.

kalkanite

Re HOME

To put the value of this company into perspective, by liquidating the loan book and using the excess cash, HRG could afford to pay a special dividend of 85p and the company would still trade at about 90p a share after that.

Just think what value Sainsbury's could add to that by synergies and utilising its floor space to close down circa 175 stores. SBRY could pay £2 a share and still have a good deal.

I agree, the key thing in todays statement is the switch from China ceramics into other areas like packaging, so China has gone down but its been replaced elsewhere also the margins have increased to around 20%, no wonder the shares are up 10%.

jonny71

Sky news have just announced that Homebase is in advanced talks with Australian DIY chain called Wesfarmers for £350m - game on for big share rise tomorrow.

Heres the article re Homebase sale for £350m

http://news.sky.com/story/1622098/wesfarmers-in-talks-to-buy-homebase-for-350m

Mark Carter

I love the SGI translation, Paul.

Inventory write-offs are looking highly likely.

Tapping "Stanley Gibbons" into Google Trends makes for worrying viewing. The trend has been downward over the last decade. I suspect that's management's motivation to diversify into other things.

"the Board is considering a number of fundraising alternatives to reinforce the working capital position prior to the year ended 31 March 2016."

Presumably, whereupon, the whole carraige will turn into a pumpkin.

FREng

Something add is happening at Trakm8 Holdings (LON:TRAK) - an acquisition and an oversubscribed placing was announced, to complete by the end of December or, with the NOMAD's agreement, by the end of January. It hasn't yet completed and the share price has fallen well below the placing price.

If the acquisition has fallen through, then TRAK should be little worse off than it was a month ago. So what could be the reason for the slide in price?

Michael Billingham

I am a Telegraph reader and follow John Ficenec with interest, but not always with any degree of concordance.

He was not impressed with Boohoo's Christmas trading update in today's edition. Points of criticism included... 'a sharp fall in GM from 60.8% to 55.7%'...'cutting costs by reducing spend on marketing'...'increasing expenses by offering customers next day delivery'. His conclusion? ...Telegraph readers should avoid the share.

Fortunately, followers of this column have the benefit of the more erudite views of Paul when forming a view on the worth of a particular share.

99figaro

Re: Sainsbury/Argos

I seem to be in a minority of one but IMO the deal makes no strategic sense at all.

Obviously the retailing sites and internet knowledge are valuable to Sainsbury, however Argos's own management havent been able to turn it round and it will be a massive distraction for Sainsbury who face a much bigger business model pivot challenge if they are to ever seriously compete with Aldi/Lidl.

They should be concentrating on this much more than a desperate attempt to add unrelated product lines and tons of retail space (when most retail analysts dont think extra space is the answer).

Go in to any of the top UK supermarkets (I have) and be awed by the lack of competitive challenge to a typical LIDL. I bought 6 eggs at 4x the cost LIDL charge and couldnt taste any difference.

Its classic strategic inaction, i.e. after 50 years of ripping consumers off (UK supermarkets have made double the net profit % of US supermarkets at c.8%). This has led to a culture of not having to change for so long that they obviously now can't. Until they overcome this they should not undertake any other distractions (e.g. like HomeBase was last time they couldnt solve that either).

Cisk

99f, agree with you re: the lack of innovation in UK supermarkets.

I'm a regular visitor to California and the contrast with UK supermarkets couldn't be more pronounced. Bagging your own groceries? No way. Scanning your own shopping? You're kidding. Sky high prices? Rude customer service? (yes, even in my local waitrose they're as stroppy as hell)

The UK retail experience ( can't comment about Lidl or Aldi) is crap. I think the logistics logic for sainsbury is sound and HOME is undervalued, but I see it as a last ditch attempt by Sainsbury to divert attention away from their declining business and bring in new tech - after all Sainsbury don't even have contactless payment? I mean, what a joke! Their head of IT should be sacked - it's embarrassing.

Now to Sports Direct - never buy something just because it's cheap. Those suckered in to what they believe is a cheap share price are similar to the Sports Direct customers who believe the advertising about how much a product has been marked down and rush to buy it.

Quite simply it should be in private hands. With Ashley at the helm it's a barge pole of the longest length.

And Stanley Gibbons - it looks like the valuation is dependent on their inventory - who can guess what that's worth? I'm sure the potential customer base is dwindling by the day.

In terms of the auction business, you only need look at the devastation eBay has caused to the antique business to see that it's s declining part of the sector.

Proposed sale of Homebase confirmed, price 340m pounds, proposed cash return of 200m pounds to shareholders, info on updated financial position:

http://www.investegate.co.uk/home-retail-grp-plc--home-/rns/response-to-media-speculation/201601131822168105L/

14th Jan '16

That is only about 24p per share?

Small Cap Value Report (13 Jan 2016) - HOME, SPD, SHOE, RGS, XAR, SGI

SBRY / HOME

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Paul Scott

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