Small Cap Value Report (14 Apr 2016) - NXR, MTC, LVD, MTEC, RNO, EPWN

Thursday, Apr 14 2016 by

Good morning!

In case you haven't seen it, I updated yesterday's report in the evening to look at results from Walker Greenbank (LON:WGB) - an interesting one, as the company was affected by flooding. The insurance payouts look to have comfortably covered all the costs, including business interruption.

I read a fascinating research note from Peel Hunt yesterday, on retailing. Their analysis on that sector in particular is utterly brilliant. Their argument is that there is no such thing as a retailing sector. There are actually diverse businesses at different stages of life. The established businesses are telling us that consumer confidence is weak, demand is low, etc. Yet the economic data says the opposite - consumers are enjoying good increases in disposable income in fact.

So why the disconnect? It's all down to competition - relatively new entrants are eating the lunch of the established players, if they don't keep up with a strong online offering, and constant innovation with products & services.

So you hardly ever see any retailer comment that their products weren't good enough, and that the competition are doing a better job than themselves! Instead they moan about demand being weak, Brexit causing uncertainty (please! How ridiculous), and of course that good old catch all - the weather hasn't been right.

It's all mostly nonsense. The best retailers will do well, regardless of the weather, the economy, or the competition. (e.g. results from Debenhams (LON:DEB) today (at the time of writing, I hold a long position in this share) weren't bad at all - despite them being old school they're just executing well, which is what's needed - "retail is detail").

With living wage set to eat into operating margins as a constant headwind over the next 4 years, it's vital that retailers manage to eke out positive sales momentum, and strong margins. Mind you, over the long-term, rents are likely to absorb some of the pain, but that's a slow process, due to the archaic 5-year upward-only rent review process.

I think there are some stand-out bargains in the sector right now. Being able to buy high quality businesses which generate tons of cash, on PERs of 10-12 is a rare opportunity, in my view. So I reckon the retail sector is a great place to go looking for bargains right now. Although as…

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Norcros Plc is a holding company for the Norcros Group. The Company's principal activities include development, manufacture and marketing of home consumer products in the United Kingdom and South Africa. The Company's segments include UK and South Africa. The Company has six United Kingdom businesses, including Triton Showers, Vado, Croydex, Abode, Johnson Tiles and Norcros Adhesives, and three businesses in South Africa, including Johnson Tiles South Africa, TAL and Tile Africa. The Company is focused on showers, taps, bathroom accessories, tiles and adhesives. In the United Kingdom, the Company offers a range of bathroom and kitchen products both for domestic and commercial applications. The Company offers mixer showers and accessories; tile and stone adhesives; taps, bathroom accessories and valves; bathroom furnishings; ceramic wall and floor tiles; kitchen sinks; tile adhesives, pourable floor coverings and tiling tools through its United Kingdom and South Africa business. more »

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Mothercare plc is a retailer for parents and young children. The principal activity of the Company is to operate as a specialist omni-channel retailer, franchisor and wholesaler of products for mothers-to-be, babies and children under the Mothercare and Early Learning Centre brands. The Company's operating segments include the UK business and the International business. The UK business segment includes the United Kingdom store and wholesale operations, catalogue and Web sales. The International business segment includes the Company's franchise and wholesale revenues outside the United Kingdom. Its clothing and footwear product includes ranges for babies, children and maternity wear; home and travel includes pushchairs, car seats, furniture, bedding, feeding and bathing equipment, and toys are mainly for babies. It operates in the United Kingdom through its stores and direct business, and across the world in over 60 countries through its international network. more »

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Lavendon Group plc is a United Kingdom-based company engaged in the rental of powered access equipment. The Company's segments are the UK, the Middle East, Germany, France, Belgium and Corporate. The Company's business includes Nationwide Platforms, Rapid, Gardemann, Lavendon France and dk rental. Nationwide Platforms is a powered access provider with a fleet of over 10,350 machines operating from a network of over 30 depots. Rapid is engaged in the rental of powered access equipment in the Gulf region. Gardemann is engaged in rental of truck mounted powered access equipment in Germany. Lavendon France is a provider of powered access equipment in France. dk rental is engaged in the rental of powered access equipment in Belgium. The Company operates a fleet of approximately 21,000 machines through a network of over 70 active depots. The Company manages a fleet of over 21,000 access platform units. more »

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49 Comments on this Article show/hide all

Paul Scott 14th Apr '16 30 of 49

In reply to post #127763

Hi Michael,

I assume that STM (LON:STM) has probably been dropping on sentiment connected with the whole offshore, tax haven stuff going on at the moment?

QROPs are not really related to that particularly, but people sell first & ask questions later.

Overall, even though I hold some STM, it's not one that I have any real conviction on, and I won't be increasing my existing small position in it. Something doesn't feel right about it.

Regards, Paul.

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BlueFrew 15th Apr '16 31 of 49

In reply to post #127778

I'm a holder of Next. Retailers like to blame the weather for underperformance. Fine, but when the weather was good for retailers, what happened? Every other retailer said it was their genius that caused bumper profits. Next said the weather was incredibly helpful and next year's comparables would be difficult. They still managed to beat them, while others fell by the wayside.

Honesty and transparency works in good times and bad.

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Paul Scott 15th Apr '16 32 of 49

Interesting comments, thanks.

Another thing to consider with Next (LON:NXT) is that the company had a rather, in my view, manipulative policy of managing up the share price with share buybacks, and publishing a range of prices they would buy at.

OK, it's hindsight, but that policy was likely to take the shares to an over-valuation, and then when it broke, it's a bit like a currency devaluation, once the central bank can't stop the tide any more - a big gap down.

That's fine for me - I don't care what shenanigans went on in the past, I just look at the shares now, and think - hmmm that's good enough value to tempt me to buy.

I'd much rather buy them now at £55 than at £80 a few months ago when everyone was complacent.

Regards, Paul.

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tiswas 15th Apr '16 33 of 49

In reply to post #127802

I quite liked the look of STM as I thought they were purely in the business of administration. Then I looked at the annual report and in note 9 they have their own life assurance business where they are writing £130M odd of premiums and mention assets of £160m odd and the corresponding liabilities.

I would have a stab at valuing the company based on the admin side but I would not have a clue where to start with these sorts of numbers and whether they are in a healthy position or otherwise so I have walked away.

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herbie47 15th Apr '16 34 of 49

In reply to post #127781

Another one to consider is Ted Baker (LON:TED), shares are down about 30% from peak, profits were good, up 20% and forecasts are quite positive, its similar to Next (LON:NXT), quality, well managed. Its on my radar now.

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Michael Billingham 15th Apr '16 35 of 49

Thank you, Paul (your note 30 re STM).

What an interesting, no sorry challenging, game we play each day. We DYOR in depth as is necessary, come up with ticks in all the right places and still get shot down with a contrary market sentiment which we neither understand, nor often agree with.

I suppose this is why we continue to sit in front of our screen each day looking forward to your SCVR.

I shall persevere with STM and hope to see a turn for the better - at least for a while.

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cig 15th Apr '16 36 of 49

In reply to post #127796

Could it be that pension freedoms make (some? most?) QROPS obsolete? Also more people might find that the career/reputational risk of offshore arrangements are not worth the often meagre benefits. The push towards stricter compliance may increase their costs (if so, will they be able to pass them to existing customers?).

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markusm 15th Apr '16 37 of 49

In reply to post #127850

Incorrect posting

Shareholdings were different

CF Miton UK Smaller Companies and Miton UK Microcap Trust

Forgive the error.

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infoshares43 15th Apr '16 38 of 49

Hi Paul, can you please comment on GYM group since IPO stocks have performed well but, their revenue recognition policy seem to be aggressive please write comment if possible thanks.

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laurie 15th Apr '16 39 of 49


As I understand it….

QROPS are the only choice some people have when it comes to pension arrangements. They are meant to satisfy the legal requirements of different regulatory systems, which is important for dual nationals, anyone earning in a foreign country and anyone moving permanently to a country with conflicting transfer and taxation arrangements. QROPS were launched as a result of human rights legislation in 2006. The increasing demands of cross border compliance are one of the drivers of STM’s business.
An example: A dual US/UK national living in Britain
Pension providers in the US will not usually open a pension account for a person not living in the US because new regulations require that the provider knows their customer. This is considered too difficult from a regulatory perspective. US citizens living all over the world have found their pensions closed and cashed, with the tax liability this creates immediately payable, unless the scheme is transferable elsewhere.
There are very few onshore banks and almost no onshore brokerages in the UK that will accept US citizens as customers, because of the new FATCA compliance regulations. Onshore pensions providers are not set up for these new and changing matters of compliance.

STM is seeing a huge growth in desperate folk who have suddenly found themselves on the wrong side of changing compliance regimes. It is the reason why STM can charge so much for setting up and administering pension schemes. It is undoubtedly a growth area as more regulations are put in place around the world, although the US is probably driving the increase in STM’s business.
The moral concern relating to the charging of out sized fees for this line of work needs to be tempered by an appreciation for the amount of work needed to harmonize the needs of differing regulatory systems and pure gratefulness that a legal way to hold a pension is provided by for those who find themselves in an awkward position.
As far as the sustainability of profits is concerned, this depends on the ability of various countries to respect the laws and regulations of other countries, and the human rights of individuals.
There are, as always, company specific risks.

I have a modest holding in STM.

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oliver_m_j 15th Apr '16 40 of 49

In reply to post #127844


Did you read the letter from the chairman of the remuneration committee (hinted at in the RNS)?
A Value Creation Plan (VCP) is being proposed - this is `new' news (as opposed to general offshore tax haven newsflow, which has been around for a week or two) so perhaps this prompted the selling?
The performance threshold is 60p, which is lower than the price has been this year, though higher than the 30.5p in March 2015 (cited in the chairman's letter)

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Michael Billingham 15th Apr '16 41 of 49

STM.....a big thank you to my various corresponders....much to think about....all very interesting.


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paraic84 15th Apr '16 42 of 49

In reply to post #127856

What's your view? I took a quick look and it seemed very expensive to me. I like their business though.

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paraic84 15th Apr '16 43 of 49

Worth remembering that Epwin (LON:EPWN) is the main supplier to Entu (UK) (LON:ENTU) so potentially some read-across there (Entu (UK) (LON:ENTU) remains very cheap imo).

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herbie47 15th Apr '16 44 of 49

In reply to post #127889

I used to hold Entu (UK) (LON:ENTU), yes they look cheap but they have had some problems and profit warnings. I got out because I did not trust the management, just as well because the shares have fallen 43% since I sold. Also Entu (UK) (LON:ENTU) is different from Epwin (LON:EPWN) which I do hold, Entu (UK) (LON:ENTU) is made up of a lot of businesses that were in liquidation or loss making, they bought a large loss maker last year I believe, so the question is can they turn these companies around?

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cig 15th Apr '16 45 of 49

In reply to post #127877

That's what the QROPS sellers want people to believe. In practice (I'm in the target demographic) you often have a range of better options (stay put, transfer onshore-to-onshore, and now cash out early). In addition to outsized costs, the punter is also pretty vulnerable with offshore schemes where there's low regulation within the offshore locations, and nobody who cares if your money is lost/stolen. Maybe there are some customers of STM for whom a QROPS is indeed the best solution, but I'd bet most of their customers would be better off without them.

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drvodkaquickstep 15th Apr '16 46 of 49

In reply to post #127928

I lived overseas for a good number of years and as I have mentioned before on a previous post, DeVere (who 'sell' the QROPS on behalf of STM (LON:STM) as I understand it) had an awful reputation to the point where the company I worked for (a big international blue chip) banned them from calling and hassling staff although that was more related to them peddling savings plans. Whether DeVere have cleaned up their act in the last few years I don't know but that along is the reason I am staying well clear.

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infoshares43 17th Apr '16 47 of 49

In reply to post #127886

They mention number of members 376000 and no of gyms are 74 if you divide that number that means roughly around 5000 member per gym enough to fill and music concert then if you multiply 376 to 16 pounds a month times 12 give me around 72 million and their revenue is around 60 million this year see to me like every one joined gym paying money on time and not cancelling their membership ever. I could be wrong but if you have any justification please tell me.

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infoshares43 17th Apr '16 48 of 49

In reply to post #128015

One more thing16 pounds a month is their monthly fee with no contract and as promotion in my area they are giving it for 12 pounds a month.

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Fangorn 18th Apr '16 49 of 49

In reply to post #127949

Ah yes, DeVere partners - they had a really bad reputation for a reason. I speak from personally experience of their "services" in Hong Kong.

Atrocious. Putting you into a completely unsuitable product despite specifically saying what you wanted - grace period came and went before I was able to see what they'd put me into. And when I complained I was told it was the equivalent of what I asked for. When clearly it wasn't as having "Cash units" in a Fund, certificated, with withdrawal restrictions, isn't anywhere close to having cash in the bank - available without notice or restriction.

They also failed to mention that their commission was charged on basis on "introductory capital amount" and wouldn't change with the value of the fund. ie If you were going to take withdrawals(and I specified I would be as I was leaving Hong Kong within 6months) then your annual fee would still be same no matter how much your fund reduced in value. You also couldnt close the fund within 7 years of opening, without a 20% penalty, despite my saying I'd be looking to buy a house within 6 months of leaving.

Atrociously dishonest advice.

Wont touch anything from DeVere ever again.

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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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