Small Cap Value Report (13 Jan 2017) - CWD, LVD, DEB, MAB, DLNM

13th Jan '17 by Graham Neary

23 comments 16457 reads

Good morning,

Paul is taking a well-deserved break today. So I'll be covering today's trading updates solo!

Last night, Paul added a few more sections to his report, which now includes all of the following (click here to read):

AO World (LON:AO.)
JD Sports Fashion (LON:JD.)
Moss Bros (LON:MOSB)
Mothercare (LON:MTC)
Robinson (LON:RBN)

(Yesterday's Part 2, covering Premier Oil (LON:PMO), SuperGroup (LON:SGP), GYM (LON:GYM), Stadium (LON:SDM) and STM (LON:STM), is here.)

Onward!

Countrywide (LON:CWD)

Share price: 176p (+3.5%)

No. shares: 216m
Market cap: £381m

Trading Statement

In line with the range of expectations for 2016:

Total group income for the year was circa £737m (2015: £734m) with income for Q4 of £179m (2015: £196m).

EBITDA for 2016 is expected to be in line with the current range of market expectations.

As anticipated, the underlying level of market transactions in Q4 continued to run below 2015 and we continue to expect full year 2016 market volumes to reflect a drop of circa 6% on 2015 levels.

Countrywide notes that Lettings provided an offset to weaker Sales volumes (which sounds rather similar to Foxtons (LON:FOXT) ).

Elsewhere in the statement:

The roll-out of our digital proposition remains on track and we continue to see performance in line with our expectations

For an example of the online sales effort, see the Frank Innes website. The fixed fee is a little bit lower than the Purplebricks ex-London price. Perhaps these hybrids can stand their ground?

There is not much success priced in here. The PE ratio (7.5x) and Dividend Yield (6.9%) make it a contrarian play.

Countrywide has a superb Value Rank, but shockingly poor Momentum:

Share price momentum:

My opinion

I think a cheap rating makes sense here: Macro cyclicality plus online competition plus lack of barriers to entry. But maybe the rating…

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Paul Scott

13th Jan '17

Hi Graham,

Thanks for covering today, I went back to bed for a couple of hours after reading the RNS, and reading my morning emails!

Countrywide (LON:CWD) - bear in mind this has an awful balance sheet, with negative NTAV, and far too much debt.
Combine that with a challenged sector, facing online disruption, and a headwind from the Govt proposal to ban tenant letting fees, as I think this one could go horribly wrong. I think it would make a nice short actually. Certainly a bargepole job as a long.

Lavendon (LON:LVD) - I think the James Montier Unholy Trinity system has misfired here (assuming it's any good to start with, which I don't know, as have never looked at it). One of the attractions of Lavendon is actually that it's strongly financed, with a reasonable level of debt relative to its asset base. It's vastly better financed than HSS, for example (where I hold a short position).

I'm looking forward to your update on Debenhams (LON:DEB) !

Best wishes, Paul.

andrea34

Many thanks Graham :-) Have a lovely weekend.

Herbie, I wonder if the issue is that lfl store sales were actually negative? Shares are down 6% today at the mo...

SmallCappy

Good TU from XPP today. Tends to fly under most peoples radar but good solid performer. Might be worth a look?

Trigger14

Ironically the James Montier trinity of risk screen is actually currently the top performing 'guru' screen over three years.

tabhair

That Mothercare (LON:MTC) trading update was laughable. Only revenue figures were given, no mention whatsoever of profit before tax, EBITDA, or even made-up adjusted EBITDA. What they don't say should tell you all you need to know about the business.

Honestly, I think it has no future. When you consider that the business struggled even before the internet took off, how can it survive in today's climate? Cash flow bleed is just horrible, operating margins hover around zero, yet the company has to continually put money into capex in order to keep stores updated.

Hi SmallCappy,

Yes I also noticed the good update from XP Power (LON:XPP).

It's a very nice company, with excellent Quality scores, and a reasonable PER of about 15.

The balance sheet is good, and it pays a 4.2% dividend.

It's based overseas (Singapore), but has a good track record, and is fully listed, not AIM - important because AIM attracts so many dodgy overseas companies.

Overall, it looks a good share - quality at reasonable price.

Regards, Paul.

Thanks Paul

very kind of you to come back to me

as I have said before SCVR is a superb service

very best wishes
Cappy

Graham Neary

Hi herbie, I've covered Dunelm now.

Hi Paul - the thing about that screen (and most screens) is that it can't distinguish between different industries. This means it can sometimes throw out a good company (Lavendon) in a theoretically "bad" industry (low margins, high asset growth, high debt). So even a company which hasn't done anything wrong, can still end up in that screen. But I think the fact that it shows up in the screen does perhaps give a clue as to why it's rare to see companies in the equipment rental space achieve high valuations.

herbie47

Hi Graham, excellent, good work, at first glance the fall looked overdone but I'm not so sure now. I note debt has increased to £103m. I see Jefferies downgrades to Underperform on target price of 650p today which probably accounts for the further falls. One to watch from the sidelines I think.

doug2500

Hi Paul (or Graham)

Have you had any further thoughts on Focusrite (LON:TUNE) as mentioned a couple of days ago?

I like them too, with the exception of two things:
Capitalising most R & D spend, which would be a significant proportion of profits if subtracted as costs.
Such a high proportion of sales being products launched in the last 12 months. They quote this as a good thing but it worries me if they need to keep on the treadmill of innovation to keep sales up. It's too easy for this to go wrong.

Anyone care to assuage my worries?

Hi doug2500,

I went through Focusrite (LON:TUNE) 's accounts properly about a month ago here.

Then a brief update 3 days ago here.

There's not really anything to add to those reports, which are self-explanatory.

Overall, I'm neutral on it at the current price.

Regards, Paul.

Thanks Paul.

Sorry, I misinterpreted your comments a couple of days ago, I thought you were going to dig a bit more but on reading them again you're quite right - they're fairly self explanatory.

Thanks for all you do for us smaller investors.

Graham Ford

Thanks for the report on DEB. I'm interested in the contrast between Graham's view, it's hard to see enough growth opportunity from the off-line sales because on-line is too small relatively, and Paul's take on them that on-line is growing nicely and on-line is bigger than BOO and the new CEO is an online expert being ex-Amazon.

Is it possible to elaborate a bit more to reach a consensus on whether the outlook for the online business is enough to overcome doubts about the larger traditional business?

Hi Graham Ford,

Re Debenhams (LON:DEB) - I've read several broker notes in the last couple of days, and they're all taking the same tack (similar to our Graham above) in pointing out the various negatives of the conventional business.

My view is more forward-looking, and arguably optimistic! I'm going out on a limb, by anticipating the new ex-Amazon CEO possibly making big changes. I reckon he's likely to greatly increase the emphasis for online sales. Also I suspect the dividend could be cut, or passed altogether, to free up cash for much higher capex, to bring the best stores up to a really high standard.

I think Dept stores need to become sparkling, up-market destinations, where people want to go, shop, eat, and hang out, in a stylish & aspirational setting. That costs a lot of money to create! Not dreary places where you just have wide range of stuff to buy, which Dept stores tend to become if they're starved of capex.

Anyway, I might be better off waiting to see what the new strategy is, but I've dived in & taken quite a big position.

Regards, Paul.

14th Jan '17

Hi Trigger14,

I've looked into this - Trinity of Risk screen is here.

This is actually a short-selling strategy. So it's designed to under-perform the market. Therefore the fact that a portfolio modelled on it is actually shooting up, demonstrates that (at the moment anyway) it's working out very badly indeed!

This might be a good strategy to deploy in a bear market, but it would be taking its followers on the road to financial ruin if followed right now!

Since Brexit that must be the best (worst) performing screen? Up 93%. His other shorting screen James Montier 'Unholy Trinity' Screen is performing fairly well.

hayashi22

2nd Feb '17

Anyone got any views on the Lavendon situation? Is this done and dusted or maybe a third party might come along. Money on the table is 270p but the time value of money might suggest the share price could be a bit lower. I have a few of these.

gus 1065

7th Jul '17

Reasonably good year end trading update from Dunelm (LON:DNLM) posted this morning. Shares have been on a bit of a downward trend so far this year.

https://www.investegate.co.uk/dunelm-group-plc--dnlm-/rns/year-end-trading-update/201707070700033839K/

Margins still under pressure but LFL sales up coupled with decent online growth coming from Worldstores acquisition being bedded in. They claim to be taking market share from the competition. Given their sector (mid to large ticket home goods) and the generally lack lustre UK retail landscape they appear to be doing reasonably well. Nice clear presentation of the figures and commentary and specific narrow range earnings estimate (£109-111m).

Gus.

Small Cap Value Report (13 Jan 2017) - CWD, LVD, DEB, MAB, DLNM

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Graham Neary

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