Small Cap Value Report (15 Sep 2016) - NXT, CRAW, FRP, IND

Thursday, Sep 15 2016 by

Good morning!

There are some interesting announcements from large retailers today. It's worth checking these, to see how overall market conditions are faring.

Next (LON:NXT)

Share price: 5040p (down 3.3% today)
No. shares: 147.3m
Market cap: £7,423.9m

Every time I look at results from Next (LON:NXT) it reminds me just what a high quality business this is. The profit margin is spectacular. What this means, is that even when trading deteriorates, the business remains very strongly profitable. This is an important point to grasp, because at the opposite end of the spectrum people often buy poor quality retailers because they are on a low PER. However, profits can quickly turn into losses for low margin, poor quality retailers, in a downturn. Whereas a super-high margin business like Next can sail through a downturn with the bulk of its profits intact, because its operating margin is so high at around 20%. Even if it were to drop to 16%, you would still have a very profitable company.

Next describes current trading as "challenging and volatile". It is adding lots of new space, and with such good ROCE and short payback times, this makes a lot of sense. Continued share buybacks drive up EPS, even when profit is flat, or slightly down.

There are a number of headwinds though;

  • Struggling to recruit new customers for its credit offering.
  • As with all retailers, the cumulative impact of Living Wage is likely to hurt.
  • Rapidly growing online competition is relentlessly chipping away at the market share of traditional retailers.
  • Weaker sterling means cost prices rising next year.

For these reasons I'm reluctant to buy shares in Next, although on a PER of about 10-11, it's very tempting. The trouble is, it's difficult to see much future upside on profits. So as a mature business whose profits may have arguably peaked, perhaps the price is right?

Generally, I'm keeping away from opening any new positions in conventional retailers. I think online is gathering momentum at such a rate, that it's starting to seriously disrupt the sector. Companies like Boohoo.Com (LON:BOO) can dramatically undercut the High Street on pricing. A younger generation is increasingly happy buying frequently & cheaply online, which presents massive problems for conventional retailers.

Crawshaw (LON:CRAW)

Share price: 44.5p (down 39.5% today)
No. shares: 78.9m

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NEXT plc is a United Kingdom-based retailer offering clothing, footwear, accessories and home products. The Company's segments include NEXT Retail, a chain of over 500 stores in the United Kingdom and Eire; NEXT Directory, an online and catalogue shopping business with over four million active customers and international Websites serving approximately 70 countries; NEXT International Retail, with approximately 200 mainly franchised stores; NEXT Sourcing, which designs and sources NEXT branded products; Lipsy, which designs and sells Lipsy branded younger women's fashion products, and Property Management, which holds properties and property leases which are sub-let to other segments and external parties. Lipsy also sells directly through its own stores and Website, to wholesale customers and to franchise partners. The Company's franchise partners operate approximately 180 stores in over 30 countries. more »

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Crawshaw Group Plc is a United Kingdom-based company, which operates a chain of meat-focused retail food stores. The Company has approximately 40 stores, which are located across Yorkshire, Lincolnshire Nottinghamshire, Derbyshire and the North West. The Company's product range is categorized into approximately two distinct areas, such as Traditional raw meat, and Hot and cold cooked food. Under the Traditional raw meat category, it offers various products sold either loose in a serve over counter for the traditional experience or as multi buy packs on supermarket style multi deck counters, which have all been cut and packaged in store. Under the Hot and cold cooked food category, it offers freshly prepared roast chickens, gammon and pork joints, hot roast sandwiches, shop cooked curries and casseroles, chicken and chips, as well as other traditional deli products. Its stores include Arndale Centre in Arndale; The Arcades in Ashton Under Lyne, and Fresh Meat Factory Shop in Astley. more »

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Fairpoint Group plc is a United Kingdom-based company, which provides consumer professional services, including legal services, claims management services and debt solutions. The Company has four segments: claims management, legal services, individual voluntary arrangements (IVA) and debt management plans (DMP). The IVA segment consists of the subsidiary company, Debt Free Direct Limited, which is an IVA that consists of a managed payment plan providing both interest and capital forgiveness. DMP services segment consists of the Company's subsidiary, Lawrence Charlton Limited, which provides DMP for consumers. Claims management segment provides a range of claims management services, including reclaiming payment protection insurance (PPI). The legal services segment provides a range of consumer-focused legal services with lines, such as family law, complex personal injury, personal legal services, and a legal processing center focused on both personal injury and conveyancing work. more »

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

52 Comments on this Article show/hide all

stevebreith 15th Sep '16 33 of 52

Since when has Next been a " small cap ", trading at 5040 per share and turnover of 7.5 billion. surely there has to be other companies worthy of your scrutiny.

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Paul Scott 15th Sep '16 34 of 52

In reply to post #150539


I find Next (LON:NXT) is a useful bellwether for the retailing sector generally - since it's by far the best operator, in my opinion. Also its trading updates are amazingly detailed, and include lots of useful guidance which has read-across for other retailers (e.g. its comments about exchange rates recently have been useful).

You may have noticed that at the beginning of each report, I often comment on something macro-related, and occasionally something interesting from large caps. Then the rest of the report is on small caps.

Basically, if something is topical & interesting, then I'll write something about it. If that doesn't meet with your approval, then you can just move on to the next section.


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purpleski 15th Sep '16 35 of 52

In reply to post #150471

Thanks John for your thoughts on Crawshaw (LON:CRAW) and of course yours as well Paul. I bought these with a 3 to 5 year (or even longer view) and I am going to stick firm and indeed have topped up twice today. Once at the open (order placed over night) at 48p and once this afternoon at 44.45p.

It takes time to build a business and mistakes get learned from along the way. As you say it depends on the roll out and whether that continues.

Additionally Rose has skin in the game (a 7% holding) so he will not want to see it fail. It would be nice to see Noel Collett do some buying at this level as he appears to have no interest at the moment.

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Heisenberg 15th Sep '16 36 of 52

In reply to post #150471

Why would you invest in something that requires you to forecast out to 2024 in order to justify potential returns - this is a small, niche butchers chain. Valuation always looked stretched here and still looks the case now

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Paul Scott 15th Sep '16 37 of 52

In reply to post #150551

Hi Purpleski,

I've found that it is usually a mistake to immediately average down on an existing holding after a profit warning. Although we always deny it, the psychological factors driving such a decision tend to be;

- anchoring to the previous share price, and not allowing for the fact that things have changed for the worse, and

- a subconscious desire to support the share price, and willing other people to do the same (groupthink on bulletin boards, where people strenuously support the company despite the bad news).

Having said that, as a non-holder of Crawshaw (LON:CRAW) at the beginning of the day, I gradually warmed to the idea of picking up a few by the end of the day. If the LFL drop is indeed 5%, as rumoured, then that's fixable. It doesn't necessarily mean that the wheels have come off.

The mistake they made in today's RNS is to imply that the High Street new store openings are not very viable any more. I don't think they meant to say that, but the emphasis on factory outlet centres gave that impression.

So I suspect that management will be busy on the phones & in meetings, reassuring big shareholders that everything is going to be fine. If the big shareholders buy that explanation, and the next set of numbers aren't too bad, then I could see sentiment gradually recover for this share over the autumn.

Regards, Paul.

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purpleski 15th Sep '16 38 of 52

In reply to post #150503

Re Crawshaw (LON:CRAW) yes I personally would buy my meat from a independent butcher and can't remember when I last bought meat from a supermarket, I don't trust where it comes from. My town here in Herefordshire (Bromyard pop 7,500 and not a wealthy demographic by any means) supports 4 butchers plus the Co-op selling meat.

For all the butchers it is not just the meat but the added value products (pies etc) that people go for and if you are going for a good quality pie you might as well buy your meat as well. I speak BTW as a vegetarian but I buy for my son and wife!!!

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johnrosier 15th Sep '16 39 of 52

In reply to post #150554

After a day like today I can see your point!

However, I don't think you need to look out to 2024 to justify buying it. That was just an illustration of what it could be worth then. It might of course be worth less or if the potential store opening programme is extended past 200 odd stores then more.

Clearly it has hit a bump on the road and hopefully only a bump. I have confidence in the management which was why I was happy to add today. Obviously I would rather have gone in to today with a smaller holding but I didn't!

Website: JohnsInvestmentChronicle
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tic_tac_toe 15th Sep '16 40 of 52

In reply to post #150563

"yes I personally would buy my meat from a independent butcher and can't remember when I last bought meat from a supermarket, I don't trust where it comes from."

I think supermarkets probably have the most traceable supply chain, imo..

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purpleski 15th Sep '16 41 of 52

In reply to post #150560

Hi Paul

Thanks you so much for taking the time to reply personally about Crawshaw (LON:CRAW) . Your points are really helpful and I will add them to my investing checklist.  You have made these points before and they are very valid and I was aware of them when I made the purchase this afternoon which I may regret. But felt with a fall like this I could only do one of two things exit or top up. I felt doing nothing was not an option (this was something I cottoned on to after reading The Art of Execution).

Your first point I agree with entirely and I am probably guilty of that here but the second one I am not sure applies in my case. 

I shall watch the share very carefully over the next few months but am prepared to give the stock plenty of time. Now 2.9% of portfolio so I think the exposure is manageable.

Thanks as always for the great reports, I lean as much from them now as I did when I first started reading them.

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Heisenberg 15th Sep '16 42 of 52

In reply to post #150566

Not for me but all the best with it.

I would question though how much faith can an investor have now in the CEO; as a public company CEO he is quite inexperienced. He may have done great at Lidl as part of a well oiled machine but Crawshaw is a far different proposition. The extract below from today's RNS would seem to indicate that part of the problems are to a certain extent self-inflicted e.g. Crawshaw (I presume the CEO decided this strategy) was actively positioning itself at higher price points - clearly this did not work and I don't accept Brexit as an excuse as the UK retail sector has been cut throat for years now so consumers seeking out good/best value in their shopping habits is an established trend. 

"Over the last year or so we have actively sought to rationalise range, reduce the number of price-led promotions and drive higher margin lines, and the strategy has worked well. However, with our customers now being even more price focussed post Brexit, and with the supermarkets very recently launching some aggressive meat promotions, we are reacting to ensure we maintain the value-led approach that has proved successful in the past. This includes introducing more local choice and lower price point packs. "

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johnrosier 15th Sep '16 43 of 52

In reply to post #150587

Clearly they took their eye off the ball but I think will rectify the situation. Luckily in the shower term the comparatives going into the autumn/winter are much easier. They have flexed the gross margin too far and I think lost some of its value proposition. I think like-for-likes will recover, the obvious question is at what cost to margin.

With an experienced Chairman in Richard Rose and with the recent appointment of Ken McMeikan as a Non-Executive Director they have a strong and experienced Board, which I'm sure will give wise counsel.

McMeikan is currently Group CEO of the Brakes Group, a position he has held since 2013. Prior to this, Ken was Group CEO of Greggs Plc, the UK's leading bakery food-on-the-go retailer, a position he held from 2008-2013. Additionally, Ken has a combined 18 years of senior retail experience with both Tesco and Sainsbury's.

Website: JohnsInvestmentChronicle
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PJ0077 15th Sep '16 44 of 52

Hey johnrosier.. 

Forgive me, but I disagree with the weight that you put on the management of this company. 

Experience is no guarantee of success, surely?!

We can all think of great managers e.g. Luke Johnson.

Yet the Board of Crawshaws and their 'experience' will not determine the eventual outcome for this company. The management may tweak the outcome, but ultimately the industry will be the arbiter:

For example:

  • Roy Hodgson  had huge experience as an international football manager.. but was blown away this Summer by superior managers
  • The Board of Lehman Bros in 2008 had huge experience.. yet were subsumed by their industry's problems
There are 1,001 reasons to continue to hold a stake in this company.. but management is not one of them.
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melody9999 16th Sep '16 45 of 52

CRAW - the fact that they have such an experienced management team but yet release an RNS which does not give any numbers is a massive red flag as far as I am concerned.

If you don't know the facts, then your investment surely just becomes a gamble?

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Raldridge 16th Sep '16 46 of 52

In reply to post #150539

Wow. Good luck in life

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back2value 16th Sep '16 47 of 52

Crawshaw is a textbook example of what happens to a share price when a stretched valuation meets bad news. It's been smashed.

Upon seeing the price fall I immediately thought to myself this may be a buying opportunity, but when I saw the total absence of figures and the stream of excuses in the RNS, I immediately thought "no way". Paul, I think you have let them off pretty lightly here - that's a shockingly poor bit of corporate communications which might well have made the impact of bad news worse. For me, it inspires no confidence in the management whatsoever. Anyway, best of luck to holders and buyers, but I am staying away from this one.


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dprminvestment 16th Sep '16 48 of 52

I've held CRAW ever since I saw them at Mello a few years back. After this profit warning I decided to sell the lot. I think they have a results announcement out soon if you go by the timings of last year's RNSs and I don't want to take the chance of the shares tanking further.

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sbotting 19th Sep '16 49 of 52

Regards Fairpoint (LON:FRP) they do seem pretty cheap but there legal services firm Simpson Millar has received *terrible* reviews online:
(look at adda1 's review )
all since the acquisition by Fairpoint Group

I hold some of them (at a loss now) and was thinking about doubling down, but this makes me wonder how sustainable their business is.

Any people with legal expertise care to comment, Paul what are your thoughts about the relevance of online reviews as a signal for investment decisions?

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Sam Koroma 22nd Sep '16 50 of 52

I find the article illuminating, critical and well-balanced.

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Carcosa 14th Oct '16 51 of 52

Fairpoint (LON:FRP) Press coverage states that a previous source of concern over group earnings may have gone away. seems the government have shelved a reform around minor motor accident injuries, specifically the operation of whiplash claims.

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TangoDoc 2nd Dec '16 52 of 52

I hold FRP and am in for the long haul. I too am pleased they are less exposed to the "whiplash" business. I make the assumption that there is no sign that we are becoming a less litigious nation, nor any indication that civil law is likely to become less complicated over time. In addition, I can imagine that the implications of Brexit, hard or soft, will inevitably call for far more legal assistance for some years to come, including, sadly, assistance with debt. I also note that, within days of putting her South London house on the market, my daughter has shown six prospective buyers round. Looking simplistically at the graph and with Article 50 invocation looming, I may well add to my holding.

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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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