Small Cap Value Report (15 Apr 2014) - VCP, CSG, PUB, MANX

Tuesday, Apr 15 2014 by

Good morning!



Victoria (LON:VCP)

I'm kicking myself for not buying any of these shares. Looking back at my previous notes here, on 31 Jul 2013 I noted the company's rather poor results for 2012/13, and had some concerns about the level of debt. However on 6 Nov 2013 I reported on the big reduction in net debt, and also the attractions of the asset and dividend backing, and came close to buying some shares but unfortunately didn't. They were 245p at the time.

That was a pity because Victoria shares are now 355p to buy, and are decidedly illiquid, so it's difficult to buy (or sell) in any size - there are only three Market Makers here, and two of them are only up in 500 shares (i.e. £1,775), which is hopeless.

There is a positive trading update issued this morning, with the key part saying;


The Board are pleased to announce that the Group's profits before tax and exceptional items are likely to be ahead of market expectations for the full year to 29 March 2014, as a result of continued improvements in like-for-like group profitability and including the impact of the acquisition of the Globesign group.


Somehow I'd missed this acquisition of Globesign Ltd (maker of "Westex" carpets) in Nov 2013, so have been looking back at the RNSs and it was a major deal (for the size of company), being for £16m initial cash consideration, plus further deferred consideration of £8m based on performance targets being met (being that Globesign has to achieve an average of £4.2m EBITDA over three years). So the acquisition will dramatically improve profitability by the looks of it. Globesign made £3.7m profit in the year ended 2 Mar 2013.

I couldn't see how the acquisition was funded (there were no shares issued), so have just rung the company's advisers, who told me it was financed by debt - from existng facilities, plus a new £12m acquisition facility provided by Barclays, which is repayable by quarterly instalments. That must make the group quite highly geared now, although a property sale & leaseback (on apparently rather unattractive terms) was announced in Mar 2014 to raise £5.8m (in return for an initial rental yield of 8.5% + annual RPI uplifts…

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Victoria PLC is a designer, manufacturer and distributor of flooring products. The Company's principal activities are the manufacture, distribution and sale of floorcoverings. Its segments include UK and Australia. It manufactures wool and synthetic broadloom carpets, carpet tiles, underlay and flooring accessories. In addition, it markets and distributes a range of luxury vinyl tile (LVT) and hardwood flooring products produced by third-party manufacturers. Its product offering in the United Kingdom ranges from both crafted, woven Wilton carpets to Tufted carpets in a myriad of fashion colors and styles. Its stock range offerings cover saxonies, tonals, velvets, twists and natural loop pile styles for residential use. The Company supplies its products to the mid to high end residential market and contract sector both in the United Kingdom and overseas. Its subsidiary, Munster Carpets Limited, is engaged in the manufacture and distribution of floorcoverings for the contract market. more »

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Punch Taverns Limited, Formerly Punch Taverns plc, is a United Kingdom-based pub company. The Company is engaged in the operation of public houses under the leased and tenanted model, which involves the granting of leases to tenants operating the pub as their own business, paying rent to the Company, and purchasing beer and other drinks from the Company. The Company's segments include Core and Mercury. It has a portfolio of approximately 2,580 pubs in the Core division and over 690 pubs in the Mercury division. The Company also operates public houses under the retail operating model. The Company has approximately 110 pubs trading under retail contracts. The Company's pub categories include Community Pubs, High Street Pubs and Destination Pubs. Its pubs include Arkwrights, Black Horse, Coach and Horses, Bulls Head, Cedar Inn, Cross Keys, Castle Inn, Saracens Head, Stanley Arms, Travellers Inn, Travellers Rest, Bronte and Blacksmiths Arms, among others. more »

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

16 Comments on this Article show/hide all

Cockerhoop 15th Apr '14 1 of 16


Regards debt, there was also a sale & leaseback of some Australian assets at the end of 2013 (at the time of the Westex acquisition).

Also Geoff Wilding has to return at least £3 to shareholders by April 2015 to benefit from the incentive scheme he and the company entered into last year. His share increases for amounts over £3.50 so he is highly motivated to get things done quickly.

To me it appears a Private Equity style makeover is going on.

I hold these.

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hayashi22 15th Apr '14 2 of 16

Trifast may be worth a look-very positive update today. Modest rating.

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Delpher 15th Apr '14 3 of 16

Hi Paul
Apropos TRI - "Well done to holders here, I missed this opportunity. Although it's so difficult to know in advance which companies will execute well, and which ones won't." Your posting of the 12th. November was spot on when the PER and SP were much the same. On reflection do you now see any growth potential?

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fek47 15th Apr '14 4 of 16

Hi Paul

In relation to Sweett (LON:CSG) , why do you think that the possible bribery by the former employee makes the company uninvestable? Sweett are far from alone in getting caught out by improprieties perpetrated by employees in far flung parts of the world - GlaxoSmithKline (LON:GSK) and Rolls-Royce Holdings (LON:RR.) being just two examples of mega-caps that have been recently affected by similar allegations. Dooes that make these (and numerous other companies) uninvestable as well?

On a separate note, love the bargepole picture on Punch Taverns (LON:PUB) - will we see this image cropping up as a regular feature from now on?!

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DLG12 15th Apr '14 6 of 16

Hi Paul just wondering if you had any thoughts on Debenhams Debenhams (LON:DEB) this morning? I am assuming that the profit situation is not as bad as anticipated.

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Laughton 15th Apr '14 7 of 16

Re TRI - seem to be at least 3 brokers following Trifast and two of them have updated target prices today.

Nplus1Brewin - from 89p to 100p
FinnCap from 91p to 95p

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ridavies 15th Apr '14 8 of 16

Hi, Paul.  Manx Telecom does not have a monopoly.  There is another player, Sure (A Cable & Wireless subsidiary).  Also, there is not significant government regulation here in the Isle of Man to my knowledge.

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ridavies 15th Apr '14 9 of 16

Hi Paul. Manx Telecom does not have an Isle Of Man monopoly - Cable and Wireless has a presence. Also, any regulation here is light handed, as far as I am aware.

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PFhunting 15th Apr '14 10 of 16

In reply to post #82699

I think the difference with CSG compared to Glaxo and RR is that any penalties levied upon it if found guilty will likely destroy the company due to its size unlike with the mega caps.

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fek47 15th Apr '14 11 of 16

In reply to post #82707

I think that's an unlikely outcome, as it assumes that any penalty which might be imposed (and I stress might) on Sweett (LON:CSG) will be disproportionate to the size of the business and the severity of the offence.

Surely as with other businesses that have found to be doing things wrong (for example HomeServe (LON:HSV) although I appreciate that was a different type of issue) the penalty that might be imposed will be enough to hurt, but not intended to destroy the company. Surely it cannot be government policy to put a company out of business for a one-off mistake, with the inevitable staff redundancies and pain for the company's which that would entail?

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PFhunting 15th Apr '14 12 of 16

In reply to post #82708

Except that in this aren't CSG being investigated by US government not UK who probably do not have those concerns? I have no position in CSG and no axe to grind am just offering opinion

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jonesj 15th Apr '14 13 of 16

Hi Paul,
I'd just picked up on Manx Telecom a few days ago. Am slightly interested in this.
Considering you're miles ahead of me on accounting matters, I would like to know what you really think about the debts.
Liabilities - £178 million
Assets, excluding goodwill = £94 million

Cash flow from operations = £28 million
Cost of financing = £12.8million, or £10.8 million if we exclude dividends which seem to be lumped in with borrowings, in line with the unfortunate practice prevalent im many companies these days.....

Shall ask my IoM colleague in the office about their telecom market......

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marben100 15th Apr '14 14 of 16

In reply to post #82705

Hi ridavies,

I took a look at Manx Telecom recently and decided to invest. However, before deciding to do so, I did take a good look at the AIM Admission Document. p13 of the document says this:

The Group enjoys a leading market position in this sector and the Directors believe that the Group serves almost all of the existing available residential and business customers in the Isle of Man. The Group is the only operator of a fixed line copper network providing local access on the Island. There are currently no local loop unbundling or cable television providers in the Isle of Man. Due to a lack of current alternative infrastructure, the Group expects the Communications Commission to introduce, regulated access products, like wholesale line rental, during 2014.

Also on p28:

The Group holds leading market shares in a number of sectors in which it operates and has been notified by the Communications Commission as holding ‘‘significant market power’’ in eight of the 12 relevant markets reviewed by the Communications Commission in the Isle of Man. In particular, the Group holds a significant market share in the fixed voice sector and is therefore obliged to comply with certain obligations imposed on it by the Communications Commission including price controls (e.g. not to unreasonably bundle or to cause a margin or price squeeze), the obligation to produce separated accounts and the obligation to negotiate in good faith and on a non-discriminatory basis. The Group is also obliged to meet any reasonable request from other licensed operators to access its network and to negotiate in good faith in relation to non-discrimination, limitations on withdrawal of access, increased transparency and notification obligations. Recent discussions with the Communications Commission indicate that there are number of other regulatory risk areas. In particular, although no wholesale product has been mandated by the Communications Commission in this respect, it is likely that determinations made by the Communications Commission relating to wholesale line rental and carrier pre-selection will be implemented in the near future. This would allow other licensed operators to enter the fixed voice market by using the Group’s fixed line network. Any such regulatory changes and/or further determinations which impose obligations on the Group could reduce the Group’s market share and adversely affects its financial performance.

In addition, following Admission, there will be an increased level of information available to the public in relation to Manx Telecom’s financial position. This transparency could increase the risk that the Communications Commission may intervene and require new competitors to enter the market.

So, I think Paul is right to highlight the regulatory risk. However, to mitigate this risk the group is diversifying by building its offer of off-island services and aggressively expanding data centre capacity and intending to offer cloud-based services to business. This seems like a sensible move to me and should raise profits. Couple this with the fact that the management team brought in by Hg Capital (and still in place) appears to have done an excellent job turning a loss making business around, and I decided to invest. Nevertheless, I am proceeding with caution and my position is quite small. I will see how this business develops before adding to my position. I would also do so if there were a share price fall that I felt was unwarranted.



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marben100 15th Apr '14 15 of 16

In reply to post #82714

Hi jonesjeff,

As Paul (and today's results) has pointed out, Manx's debt position is radically different post-IPO, when it received a cash injection from the IPO of £82.5m (p118 of the AD). Net debt on admission to AIM stood at £65m, a figure which seems reasonable to me, in relation to an operating cashflow of £28.1m & an FCF of £12.1m, which is after some exceptionally high CAPEX to build out new data centre capacity (that build out expense will continue in 2014, but should reduce thereafter, once the new data centre is completed).



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ridavies 16th Apr '14 16 of 16

In reply to post #82716

Hi Mark. Thanks for that. A well thought out and considered view. Far better than mine, and I agree with all of your conclusions.. I simply wanted to indicate from local knowledge about the non-monopoly situation and also what I believe to be relatively light regulatory approach and focus compared to the UK.

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 Are LON:VCP'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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