Small Cap Value Report (13 Nov 2015) - DX., SGI, CGS

Friday, Nov 13 2015 by

Good morning!

I was just thinking how it was unusual not to see any profit warnings today, as they seem to be coming thick and fast on most days - which makes me nervous, given the high valuations a lot of small caps are currently rated at.

Then out pops a profit warning at 10:51 today;

DX (Group) (LON:DX.)

Share price: 42.25p (down 50% - but moving fast)
No. shares: 200.5m
Market cap: £84.7m

(at the time of writing this section I did not hold any shares in DX.. However, when they dropped further in price, I bought some - as explained below)

Profit warning - this is a courier firm, which floated in Feb 2014. It has looked an attractive value share for a while, with a PER and divi yield both around 7. However, things are cheap for a reason, and in this case I've kept away from it because the operating margin looked suspiciously high, given that it operates in a highly competitive sector. High margins don't usually last long, as competitors chip away at them.

So what's gone wrong? The company says that trading patterns in H1 have deteriorated. In this case, its financial year end is 30 June, so H1 is Jul-Dec inclusive.

In particular, the DX Exchange operation is experiencing a higher than expected level of volume erosion and there have been increased cost base pressures, mainly arising from driver resourcing issues (where there is an industry wide shortage). In addition, the new business pipeline in our parcels operation, while healthy, is converting more slowly. This means that while revenues for the first four months are 5.3% down against the prior period, the Board now expects that profits will be significantly below current market forecasts. The balance sheet remains robust, with low levels of net debt (30 June 2015: £1.8m). The Board anticipates the dividend payout for the full year to amount to 2.5p per share.

So to summarise;

  • Volumes declining at DX Exchange faster than expected
  • Higher cost of employing lorry/van drivers (due to industry shortage)
  • Parcels - new business pipeline converting more slowly
  • Revenues down 5.3% Jul-Oct 2015
  • Profits significantly below market forecasts
  • Dividend being slashed from 6.1p expected, to 2.5p

That's pretty bad, which the market has reflected by halving the value of the shares in the last 20 minutes. Dividend seekers in particular will be gutted by the slashing of the divis - it just goes…

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DX (Group) plc is engaged in the provision of parcels, mail and logistics services in the United Kingdom and Ireland. The Company's segments include parcels and freight, mail and packets, and logistics. The parcels and freight segment offers services, such as DX 1-Man, engaged in the delivery of irregular dimension and weight items; DX Courier, which provides next day parcel services, and DX 2-Man, which offers a business to consumer home delivery solution for heavier and bulkier items. The mail and packets segment comprises services DX Exchange, a business to business (B2B) mail service providing its customers with collection and delivery times; DX Secure, which provides security, and DX Mail, a mail service offering downstream access for smaller volume users. The logistics segment includes the provision of customer-liveried vehicles and uniformed personnel, such as fleet management solutions and integration with customer's business operations. more »

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The Stanley Gibbons Group plc is engaged in trading in collectibles; dealing in antiques and works of art, auctioneering; the development and operation of collectible Websites, philatelic publishing, mail order, retailing, and the manufacture of philatelic accessories. The Company's segments include Investments, Philatelic, Publishing and Coins & Medals. The Company's Flexible Trading Portfolio (FTP) allows users to invest in rare tangible assets. It allows users to discuss their options and objectives with one of its Investment Portfolio Managers. more »

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Castings P.L.C. is an iron casting and machining company. The Company caters to both domestic and export markets. Its segments include Foundry operations and Machining. The Company has over three trading operations, including Castings (Brownhills), William Lee Limited and CNC Speedwell Limited. Castings (Brownhills) supplies spheroidal graphite (SG) iron castings to a range of manufacturing industries from its mechanized foundries. William Lee Limited supplies SG iron castings from its foundries in Dronfield, Derbyshire. CNC Speedwell Limited is a machining operation primarily focused on the prismatic machining of iron and aluminum castings from its sites in Brownhills and Fradley. It produces ductile iron castings, SG iron castings, austempered ductile iron (ADI) castings, Simo castings and nickel (Ni)-resist castings up to approximately 40 kilograms in weight using over four Disamatic molding machines and approximately three horizontal Green Sand molding machines. more »

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

71 Comments on this Article show/hide all

MGinvestor 13th Nov '15 1 of 71


was waiting for your comment for DX (Group) (LON:DX.) - "Stockopedia computers like it though its at 99!" Goes to show manual intervention is needed

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brucepackard 13th Nov '15 2 of 71

Thanks Paul. I had a look at this one after your audioboom with David Stredder December last year. You both thought that it would face structural decline. Yes, if all there was to value investing was picking stocks with high dividends and/or high margins, then it would be easy!
Many of the others stocks you talked about on that Podcast have had a much better 12 Months

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jetstar 13th Nov '15 3 of 71

Hi Paul

my notes from an earlier posting (21/9) of yours:

PS 21/9 a PER of 7.4 and divi yield of 7.4% are very attractive, especially as these results show profits were fairly resilient, and the outlook sounds reasonable. So I'm quite tempted to have a dabble here (81)

Did you dabble?

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underscored 13th Nov '15 4 of 71


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james1n 13th Nov '15 5 of 71


You mentioned on 9th October that you had taken a position in Home Retail (LON:HOME) based on the newly launched same day delivery service and analysis that the shares looked potentially cheap. The shareprice is now a third lower. Do you consider the shares over-sold now or that this price is a buying opportunity based on pre-seasonal nerves in the market on account of the lack of sales visibility?


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James RH 13th Nov '15 6 of 71

Why do these companies pop out profit warning trading updates during market hours? I feel sorry for anyone who bought in prior to 10.50am and then watched in horror as their holdings plummeted just minutes later.

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simoan 13th Nov '15 7 of 71


Good luck with your trade! Hopefully you'll be every bit as lucky as the person that sold 250,000 a whole 7 minutes before the announcement was released. And it's Friday the 13th... so clearly they didn't walk under any ladders or cross a black cat this morning :-)


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Heisenberg 13th Nov '15 8 of 71

In reply to post #111429

Indeed! DX was of course an IPO last year by yet another private equity owner. 100p IPO price.

The private equity owners (Arle Capital) seemed to have seen this coming at some point and bailed out totally on the IPO - aggressive IPO structure in terms of the effective sell down (new money to pay off shareholder loans, mezz loans etc to Arle) . Case of buyer beware as Arle had no skin left in the game at that point.

From the Admission Document:

"DX’s existing private equity and institutional shareholders have indicated their desire to exit their investment in the Company

The Company is proposing to raise £185 million by way of a conditional placing by the Company with investors of the Placing Shares at the Placing Price. The Placing Shares will represent approximately 92.26 per cent. of the Enlarged Ordinary Share Capital at Admission. Under the Vendor Placing, the Selling Shareholder has agreed to sell 15,525,300 Vendor Placing Shares at the Placing Price and these shall be placed with investors by Zeus Capital.

The estimated net proceeds of the Placing are approximately £177.25 million and will be used by the Company to repay senior and shareholder debt.

The estimated net proceeds of the Vendor Placing are approximately £15 million, none of which will be payable to the Company."

Company has also not helped itself by not putting this out at 7am - they knew it was coming so should have worked through the night if necessary to have a final version ready to go out first thing.

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Paul Scott 13th Nov '15 9 of 71

In reply to post #111432

Hi james1n,

Home Retail (LON:HOME) has been my biggest loss this year to date. I've taken a nasty hit on it. I bought a few at around the 150p level, but loaded up much more heavily at 130p, and 110p, so with it now at 98p, it's been a painful loss.

There again, my reason for buying (upside from same day delivery), and the bulletproof balance sheet, where if you treat consumer debt owed to HOME as cash, results in an Enterprise Value of about nil!

So rock solid Bal Sheet underpinnings, but wobbly current trading. So it's definitely one I am sticking with, albeit having timed my entry extremely badly! Such is life.

I'm bracing myself for another profit warning with HOME, as clearly the market thinks that's coming. It's more a medium term thing for me, based on a unique balance sheet that could easily attract a takeover bid, since you could finance a bid for the whole company just by securitising its own consumer credit book, and putting in say £200m of bank loans.

The city forgets about its balance sheet strength every now and then, thus providing good potential upside.

Regards, Paul.

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andrewdb 13th Nov '15 10 of 71

My OH has occasional dealings with DX as she does some work for the Parliamentary and Health Service Ombudsman and the docs (usually a couple of large cardboard boxes) are confidential.

They are pretty useless. - they don't deliver or collect in a timeframe, don't have a web thing that says where the driver is, not responsive on the phone, in fact just did not turn up at all on the arranged day.

As PS said, this is probably a fat margin govt contract, but it will end.

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imranawan 13th Nov '15 11 of 71

In reply to post #111432

Hi James

I have a long position and bought in after the interims were published. In hindsight a little too soon, as the price has continued to fall. My rationale for buying in, was the relatively good balance sheet, and their debtor book which they own - so this largely underpins the current valuation. As you say this could be a buying opportunity if they can execute well over Black Friday and the Xmas period.

Just my two cents worth, and Paul may well give you his thoughts.


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 Are LON:DX.'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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