Small Cap Value Report (13 Jul 2016) - EMR, PLND, BDEV, JDW, SDY, STM

Wednesday, Jul 13 2016 by

Good morning!

I'm running a bit late today, so will keep updating this article until mid-afternoon.

Empresaria (LON:EMR)

Then at 4pm today, I'm recording an audiocast with the CEO/FD of small cap recruitment group, Empresaria (LON:EMR) . So if you have any questions you'd like me to ask, this is your last chance - please submit questions using this form.

It will be interesting to hear how they see Brexit affecting the UK employment market. Although EMR has a surprisingly wide geographic spread of business, with subsidiaries around the world. I am increasingly coming round to the view that it's a good thing to find investments where there's a broad geographic spread of business - it insulates against unexpected bad news in any one country or region.

Mello Beckenham

Last call for tonight's meeting in Beckenham. David's struggling a bit, so I'll be attending to help bulk up the numbers. These are such enjoyable evenings, very friendly, and everyone with an interest in shares is very welcome. Sign up link here. The Peroni is absolutely excellent too - due to short pipes, regularly cleaned, apparently.

Poundland (LON:PLND)

A recommended cash bid, of 220p + 2p final divi. The buyer being Steinhoff, who have been sniffing around several large UK retailers recently.

Well done to shareholders who held on for the bid. I sold mine too early unfortunately.

Barratt Developments (LON:BDEV)

Another large UK housebuilder reports bumper profits.

The outlook comments are more important right now.

EU Referendum comments - too early to say, but strong market fundamentals;

...Following the EU referendum, it is too early to say what the impact of the uncertainty facing the UK economy will be. The sector continues to receive focused government support, mortgage availability is good and there remains an undersupply of new homes. With a strong balance sheet and forward order book, and industry leading quality and customer service, we remain confident in the positive fundamentals of both the housing sector and our business."

Sounds alright. Although note the London comment;

...some increased uncertainty in the higher value London market...

and some further Brexit comments;

Following the EU referendum, we are mindful of the greater uncertainty now facing the UK economy. Consequently, the immediate outlook for our industry is less clear and it is too early to draw any…

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Empresaria Group plc is a United Kingdom-based international specialist staffing company. The Company's principal activity is the provision of staffing and recruitment services. The Company is organized across three regions: UK, Continental Europe and Rest of the World and operates across seven key sectors. The Company targets a balanced and diversified spread of operations across its regions and sectors. The Company also targets professional and specialist job levels where its brands can offer value added services to clients. The Company has three main service lines, temporary recruitment, permanent recruitment and offshore recruitment services. The Company’s offshore recruitment services represents a range of different recruitment services and provides training services in South East Asia. The Company's brands include Alternattiva, Ball and Hoolahan, Become, FastTrack and Greycoat. It has operations in 21 countries. more »

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Barratt Developments PLC is a holding company. The Company is principally engaged in acquiring and developing land, planning, designing and constructing residential property developments and selling the homes, which it builds throughout Britain. The Company operates in two segments: Housebuilding and Commercial developments. Its housebuilding segment operates through approximately six regions and approximately 30 operating divisions delivering over 17,319 homes. Its Commercial developments are delivered by Wilson Bowden developments. It purchases land in targeted locations and designs homes for its customers using standard house designs. Its brands include Barratt Homes, David Wilson Homes and Barratt London. Its Barratt Homes brand focuses on making homes. Its Barratt London brand portfolio offers apartments and penthouses in Westminster to riverside communities in Fulham. Its David Wilson Homes brand offers home design and specification, and focuses on developing family homes. more »

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

25 Comments on this Article show/hide all

grumpy5 13th Jul '16 6 of 25

Wish there were more CEOs like Tim Martin - would make the job of investing much more fun!

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grumpy5 13th Jul '16 8 of 25

In reply to post #142544

He seems bang on the button ;-)

Ideally one would want comments a bit more directly relevant to the company concerned!

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PJ0077 13th Jul '16 9 of 25

In reply to post #142532

Howard Marks (Oaktree) on investing:

"hours of boredom punctuated by moments of terror.”

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Ramridge 13th Jul '16 10 of 25

I also looked at STM (LON:STM) after listening to the audiocast with Edward Roskill last year, and decided against taking a position.
To put it simplistically, the scheme revolves around allowing expats to transfer their pension pot from the UK to an overseas country, provided they meet certain UK taxation and pension rules and regulations. The advantages claimed are that you can benefit from local laws such as lower taxes on withdrawals, greater freedom to invest, etc. The two main countries where this money is directed appear to be Malta and Gibraltar.
The concern I have is about protection of the retirement funds. In the UK there are lots of safequards to protect your retirement fund such as the PPF, FCA and banking regulations. Even with such safeguards, there are worrying number of scandals surrounding rogue advisers and skimming of funds by unscrupulous operators.
My question is this. Would you feel at least as safe in entrusting your pension pot to an overseas country with less sophisticated financial services regulations? Well, I know my answer, especially if that happens to be my only source of income.
From an investment viewpoint, IMO changes in regulations and reputational risk are just two reasons for staying away.

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simoan 13th Jul '16 11 of 25

In reply to post #142532

Wish there were more CEOs like Tim Martin - would make the job of investing much more fun!

Fun maybe but it would put me off investing in J D Wetherspoon (LON:JDW). Any CEO who thinks his political stance on a subject as big as Brexit has somehow been vindicated by less than three weeks of trading is clearly a few sarnies short of a picnic. I don't like his pubs either, pile it high and sell it cheap beer. If you are desperate to have a fight in Cambridge go and stand outside the Regal around midnight and one will find you - terrible hell hole of a place.

All the best, Si ...long Marston's (LON:MARS)

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Emperor 13th Jul '16 12 of 25

In reply to post #142523

50% utilisation looks pretty poor when compared with Ashtead - Either Sunbelt or, more appropriately, A Plant in the UK. At or close to 70%.

Revenue growth running at 19%, EPS growth strong too.

Have a look at the last results presentation - June dated. These guys are clearly US focused as that is where the bigger opportunity and where exchange rates should work favourably this year.

These boys look like amateurs in comparison. I know it is a different scale to Paul's usual reviews but best comparison as far as I can see.

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chriso 13th Jul '16 13 of 25

In reply to post #142559

Re: JDW comments, indeed, the prediction for the economy are long term, not 28 days later...

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ls2g08 13th Jul '16 14 of 25

Hi Paul, regarding STM (LON:STM)
Having worked in the expat advisory sector at one stage (huge mistake!), anything linked to De Vere would be an instant barge pole stock for me.
They are an awful company for clients; (selling eye watering high fee products with massive upfront commissions and as the advisers get no ongoing fee, they tend to give the client little to no ongoing advice).
Employees have a very tough time also, they recruit people with no experience en-masse in hotels near airports then air drop them into places like Moscow, Shanghai, etc. Have a look on Glass-door for some sorry tales. They are essentially all self employed and are charged a desk fee. For many it is not what they expected at all and return back to the UK much worse off.
Some of their offices, notably the Tokyo office operate illegally;
Here is an example of the experience of a “client” :
All in all pretty dubious, I would be wary of miss selling scandals etc.

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Laughton 13th Jul '16 15 of 25

In reply to post #142559

Any CEO who thinks his political stance on a subject as big as Brexit has somehow been vindicated by less than three weeks of trading is clearly a few sarnies short of a picnic.

I don't think you can have it both ways - on the one hand investors are saying companies should be able to give almost minute by minute updates on trading and now you're saying three weeks isn't enough. There were plenty on the other side of the argument claiming the dramatic stock market fall on the two days following the result was proof positive that all their claims were proven.

Anyway, I didn't read it that way - I can't say I'm a fan of Mr Martin but he seems fairly reserved - "trade strengthened slightly in recent weeks" and, in particular "Caution should be exercised in extrapolating current levels of sales growth for future years."

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herbie47 13th Jul '16 16 of 25

One problem with STM (LON:STM) is the spread is often around 10% and that's on a good day.

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Thunderball 13th Jul '16 17 of 25

Re Housebuilders in particular, the markets seemed to have dealt a overly and very severe downgrading and I am convinced that this is a particular anomaly and there is good value here, and not necessarily for the brave. I do not blame the CEO's for "wishy washy" statements at this stage as markets could as easily stall as continue upward until we have a little more water under the bridge.

There is so much structural uncertainty that short term sentiment is bound to be cautious without some interims from the main players, but the medium and definitely long term fundamentals appear to be sound.

My only concern is that touched upon in the Barratt statement, that IF the City sees thousands of jobs moving to mainland Europe, values of upper end new properties [in London] will suffer despite the national shortfall of production meeting demand, as after all top-end is where the cream is. But this could be countered somewhat by any inflow of oversea's property investor's if the pound remains cheap vs international currency's, as London will remain a top international property hotspot and therefore something of an anomolyluring significant overseas investor money. If I was lucky enough to have substantial resources to be concerned about, London property continues to look a solid medium to long term bet at the moment vs equities, bonds and gold (as do Berkeley Group etc shares at -30%). 

Notable is the pre-referendum doom-mongering by the Chancellor has been quickly dismissed post-referendum, and if anything a rate cut is more likely than a rise, as will a medium term low interest environment. Lets hope this steadies the ship and confidence returns. Do not underestimate the importance of property ownership, its fundamental substantial undersupply, and the UK's affection and obsession with it to prevail.

As long as the post-referendum hangover doesn't continue, AND if we get some positive interim statements on trading, I think we will see sentiment change quickly.

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paraic84 13th Jul '16 18 of 25

Lavendon (LON:LVD) is trading on an expected current year P/E of 6.4 - remember its revenue grew by 10% in Q1 of this year so the signs are positive so far and it will probably further benefit from currency movements in Q2. On the flip side a third of its revenue comes from France, Germany and Belgium so its price might remain depressed while we negotiate our exit from the EU.

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timarr 13th Jul '16 19 of 25

As regards housebuilders, we know that the market is supply constrained so as long as the banks are able and willing to lend - and the BoE has already taken steps to ensure liquidity - then people will carry on buying as long as they can afford to do so. Brexit doesn't appear to have shaken confidence in the short term.

In the longer term the critical thing is employment. Most Brits have very little in the way of savings so if they lose their jobs then mortgage and rent arrears will rapidly mount, properties will flood onto the market, confidence will drain away and the market will stall. So buying housebuilders now is a play on how the economy works out over the next six months or so. The current rash of trading statements aren't really relevant to that.

On the Wetherspoon's update I note that the argument appears to be that Brexit is good for the country and if it turns out not to be then it's the fault of the people who said it wouldn't be good for the country for saying it wouldn't be good. Given the vice like grip on logic that this implies I'm continuing to avoid. I do however hold Fuller Smith & Turner (LON:FSTA), Greene King (LON:GNK) and Young & Co's Brewery (LON:YNGN), all of which offer handy shareholder perks, so if all else fails I can at least drown my sorrows.


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simoan 13th Jul '16 20 of 25

In reply to post #142586

I don't think you can have it both ways - on the one hand investors are saying companies should be able to give almost minute by minute updates on trading and now you're saying three weeks isn't enough.

I think you've got me mixed up with someone that wants it both ways, and I'm not sure where I've said that. IMHO three weeks trading of a business is statistically meaningless and that any resulting effects from Brexit will be played out over several months, not days.

However, house builders have a fairly easy measure of the level of customer interest over quite a short time period, unless they are silly enough not to measure the footfall in their sales offices and viewings of finished properties. It doesn't take much to collate this information on an almost daily basis and make it available to the company management. As for pubs, how would you know the cause of any effect, particularly during a three week period when there's been a major football tournament on?

All the best, Si

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simoan 13th Jul '16 21 of 25

In reply to post #142598

On the Wetherspoon's update I note that the argument appears to be that Brexit is good for the country and if it turns out not to be then it's the fault of the people who said it wouldn't be good for the country for saying it wouldn't be good. Given the vice like grip on logic that this implies I'm continuing to avoid.

Agreed. And of course there are other good reasons for not holding J D Wetherspoon (LON:JDW) - they're not growing earnings per share, margins are reducing with the living age about to kick in, still on a PER of ~15, think buying back their shares is a good idea, yields only 1.7% even though the divi is covered about 4x. Shame some of Mr.Martins shareholders aren't as vocal as he is.

All in all, the investment case is as unappealing as the pubs themselves :-)

All the best, Si

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Laughton 13th Jul '16 22 of 25

In reply to post #142604

I quite agree that three weeks trading is statistically meaningless and, in a way doesn't Mr Martin also agree when he says "Caution should be exercised in extrapolating current levels of sales growth for future years"?

But why should that be different for pubs as opposed to housebuilders?

If any housebuilder were to say that viewings had been down over the past two weeks who's to say that had nothing to do with the football, the tennis, the motor racing or the weather (that's usually a good fallback) rather than concerns over (possibly) leaving the EU.

Best, Mark

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smallcapman 13th Jul '16 23 of 25

margins are reducing with the living age about to kick in..

Good  God, have the government brought in mandatory euthanasia?


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Paul Scott 14th Jul '16 24 of 25

In reply to post #142559

Hi Simoan,

I know what you mean about Wetherspoons pubs. I tend to regard them as useful places to catch, and retain undesirable members of the human species, and keep them well away from me. Thus making my evening elsewhere considerably more pleasant.

It's not snobbery, it's just common sense.

That said, I've had a few fun evenings in Wetherspoons with some of my more common groups of friends. I recall a great night with my mate Gosport Julie, in the local 'spoons. Singing & dancing with her & the other lesbians. If anyone gave me a dirty look, Gosport Julie would deck 'em LOL!

OK, I'm exaggerating, but only a little LOL!

Regards, Paul.

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herbie47 15th Jul '16 25 of 25

Re STM (LON:STM) I see Miton have just sold 1m shares they still have over 10m.

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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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