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

Thursday, Sep 15 2016 by
77

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 »

LSE Price
5622p
Change
-0.3%
Mkt Cap (£m)
7,490
P/E (fwd)
12.1
Yield (fwd)
3.1

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 »

LSE Price
2p
Change
 
Mkt Cap (£m)
n/a
P/E (fwd)
n/a
Yield (fwd)
n/a

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 »

LSE Price
10p
Change
 
Mkt Cap (£m)
n/a
P/E (fwd)
n/a
Yield (fwd)
n/a



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


52 Comments on this Article show/hide all

danyou 15th Sep '16 13 of 52
14

In reply to post #150462

Line of the day by Paul:
"a referendum doesn't suddenly trigger a wave of vegetarianism"
Brilliant!

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johnrosier 15th Sep '16 14 of 52
12

Paul, Good write-up on Crawshaw (LON:CRAW).

Management have got some work to do to restore confidence in the growth story. They have a couple of weeks until interim results to 'polish' the story; the trading update seems a little hurried and does pose a number of questions.

The supermarkets may have been a little more competitive in there meat offering over the summer but I think its a bit early to suggest that this is in response to a £40m sales competitor with 40 odd stores. Management however seem to have been a little slow responding.

As an aside, clearly there was some "clever" selling yesterday; it's a pity no one told the new non-exec Ken McMeikan beforehe bought 180,000 shares at 83p in July! 


For what it's worth, this was my conclusion to last year's full year results, written on 27th April 2016:

Conclusion: These are the first set of results under Noel Collett, who joined the company from Lidl UK last February and so far seems to be delivering to plan; 17 stores added last year and 15 planned for this. In the short term, as I have said many times over the last year, you cannot argue it is cheap but on a five/six year view I think there is a lot of upside as it heads towards its target of 200 stores plus, nationwide. On an enterprise value (market cap plus debt) to sales that should start to look more reasonable during the current year as another 15 stores are added. As I have laid out in previous posts, I think the shares could be 225p in 2021 (about +20% per annum from here) and today’s results do nothing to want me to revise that back of the envelope target. I am seeing the management tomorrow and will update my diary after wards. Happy Holder!


Following a meeting with management the next day, I concluded:

Conclusion: I know the story well and was pleased to hear it remains consistent with what I learnt at previous meetings. The management team are excellent: they are highly experienced, (Collett opened 76 stores in one year at Lidl), and highly incentivised and driven to build Crawshaw into a business with a national footprint. The question is how to value it? I like to keep it simple: in January 2024 it should have 224 stores, generating about £225m sales and £25m of annual cash flow. It does not seem unreasonable that the business would be valued at around £225m. That would require a 17% annual compound return from the share price over the next 8 years, starting from last night’s closing price. Of course there are risks, both to the upside and downside; it might struggle to achieve its target openings and the same returns with new stores as it currently is or to the upside, it might accelerate the pace of openings and achieve the target sooner.

So what to do now!

Clearly management credibility will be dented a little; more for the tone of today's statement than just having a poor few months trading. 

There will be questions about whether there has to be a wholesale change in strategy or whether it just has to be tweaked a little. 

The shares are off 44% as I write or 50% including yesterday's fall. (Some people are lucky with their timing!!!!). Since its high in November last year it is off 56%. 

At 41p the market capitalisation is £35m. That looks cheap to me given forecast sales for next year of £67m, (although that may be subject to revision).

If this turns out to be a blip along the way to achieving its 225 stores in January 2024, then taking my back of the envelope January 2024 value of £225m, that would see around 30% compound annual appreciation from here. 

Clearly, there will now be doubts that this is just a blip and the management will have its work cut out to restore confidence which will take time. The comparatives get easier as we move into the autumn as last October, November and December were pretty flat, so some better news for the "important peak winter and festive season" would help. 

Although my confidence in the story and management has naturally taken a hit today,I think the share price reaction has been overdone, (many will be throwing in the towel day and moving on).

I think today is decent entry point even if they only get it half right from here.

I added to my existingholding this morning at 44.4p


Website: JohnsInvestmentChronicle
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andrea34l 15th Sep '16 15 of 52
1

Does anyone like PURP? Today's trading sounds bullish:

Trading since the start of the new financial year on 1 May has been very encouraging, with little discernible impact following the EU referendum on the 23 June. For the period, UK instructions are up 121% year-on-year and have continued to grow month-on-month culminating in 3,156 instructions in August. Furthermore our market share versus online peers has strengthened to 65% at the start of September.

The recruitment of Local Property Experts (LPEs) is ahead of plan and on-course to deliver on our target of achieving 360 LPEs by April 2017. As at 14 September 2016 we have 300 LPEs recruited, an increase of 46% since 30 April 2016 when we last reported. We continue to roll out our share option scheme to our LPEs.

The launch of Purplebricks Australia in late August is progressing very well and has been executed on time and within budget. Early indications from the first two weeks are very encouraging, with the number of valuations substantially ahead of the UK business at the same point in its development.

The Company is well funded with over £28m of cash and is on course to meet the board's full year expectations, with the UK business moving into profitability this financial year.

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PJ0077 15th Sep '16 16 of 52
13

In reply to post #150471

John, you talk of the need for management to 'restore confidence in the growth story'. But in the history of UK retailing, has there ever been a retail roll-out premised on the initial core 40 stores delivering negative LFL sales growth? 

Doesn't this suggest that Crawshaw's retail concept (in current form) isn't working & hence raises the question 'is the growth story dead in the water'?!

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tads 15th Sep '16 17 of 52
3

In reply to post #150471

I asked Noel Collett at the AGM about the target of 200 shops....his response "why not 600". Was very impressed with him. It was Rose that was moaning on about Brexit...he is obviously a big Remainer.

Very disappointed with today's RNS. Handled very badly . I am a long term holder and have not sold any. There was always going to be bumps along the way. It is hard to believe that this is not a profitable business ...it's not long ago that we were told every shop is profitable from day one.

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JamesrWilson1989 15th Sep '16 18 of 52
5

In reply to post #150485

There are bumps and there is falling off the cliff! I wouldnt be rushing into Crawshaws, even at this level. I believe the share has further to drop until an RNS states otherwise.

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andrea34l 15th Sep '16 19 of 52
6

In reply to post #150488

I thought profit/trading warnings generally came in threes - just look at LAKE and FLYB, people talking on here of buying on the dips and recoveries and they just keep on going down and down with one negative announcement after another :-/

Doesn't it make more sense after a profit warning to wait to buy until after the company actually announces a shred of good news/hope?

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dmjram 15th Sep '16 20 of 52

In reply to post #150485

Did anyone ask how exposed Crawshaw's are to the US$ rate?

The feed stuff used to rear the meat they sell are priced in dollars and it passes through to their input costs ultimately when the hedges in place at their chicken/beef suppliers expire. Same for frozen meat imports. Could be why Rose was moaning about brexit - the tanking of the pound rate against the dollar is bad news for them, total opposite of the benefit seen by the big dollar earners.

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Julianh 15th Sep '16 21 of 52
3

Re: CRAW
The main problem with CRAW, except for those who bought in very early, has always been the high p/e. Stockopedia today puts it on a p/e of 245. Such a high p/e can be justified but only if absolutely everything goes right for quite a few years. And if not...
As you say, an update like this leaves the whole rational for investing in doubt.
And... Would you make an extra trip to buy your meat from a butcher, when you are already visiting your local Tesco, Sainsbury or Waitrose? I would go out of my way for something special - local farm produced, organic... - but not for a chain of butchers.

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LovelyLovelyGorgeous 15th Sep '16 22 of 52

Pauls comment about Crawshaw eating the supermarkets lunch made me laugh. Presumably it was the non vegetarian option !

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tads 15th Sep '16 23 of 52
1

In reply to post #150497

They buy from Poland and yes you are correct that was what Rose was moaning about. He did stop the meeting and asked the assembled shareholders if they thought the electorate knew what they were voting about.

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dmjram 15th Sep '16 24 of 52

In reply to post #150509

Their gross margins are coming under pressure from both sides then - cost inflation from the tanking pound and the price reductions Paul highlighted above to attract back the shoppers that have left them. Could well be painful given the nature of their other costs are pretty fixed - shop rents, rates etc.

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JohnEustace 15th Sep '16 25 of 52
1

Paul,
I have a lot of respect for the management at Next (LON:NXT). They must be the best team in UK retail. But that spectacular profitability is based on their strong pricing discipline on very high margins. I fear their offering isn't different enough to continue to justify those margins. Trying to maintain that pricing just leaves the door open to the competition. They seem dependent on the old Next Directory catalogue shopping model which they were very successful with. But nowadays why get into a credit agreement to buy their products when you can get something affordable elsewhere?

Another outfit that seems to be struggling to adapt to the new environment is John Lewis based on their statement today.

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shanklin100 15th Sep '16 26 of 52

tads

Well the GBP/PLN exchange has certainly not been a thing of beauty over the last few months, if one is using sterling to buy Polish goods as per:

https://uk.finance.yahoo.com/q/bc?s=GBPPLN=X&t=1y&l=on&z=m&q=l&c=

But if that's the problem, the RNS should have stated that clearly not just identified (twice) the fact that UK shoppers were more price conscious following the referendum result, which is not the same point at all.

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tads 15th Sep '16 27 of 52
1

In reply to post #150512

Happy to be shot down with this and told where I'm going wrong.

If they are no longer making £200.000 per unit and are only making £100,000 per unit . Assume they stop opening new units and operate as a stand alone business. That would give us an eps of 6.3p. With a share price of 41p that gives us a P/E of 6.5.

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shauniekent 15th Sep '16 28 of 52
4

In reply to post #150473

Yeah - sounds bullish but omits important details like cash flow and cash position.

The company may eek a profit - but you can bet their cash burn will be huge.

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dmjram 15th Sep '16 29 of 52
2

In reply to post #150521

From the latest accounts on here, the gross margin was £16.7m which led to an operating loss of 0.4m. If that margin takes a 10% hit which does'nt seem an unreasonable assumption given the fall in the pound/price cuts needed to attract back customers that's a c£1.7m hit which increases the losses.

Where are you getting the figures per unit from and what do they represent? Suspect it may be contribution and not profit.

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shanklin100 15th Sep '16 30 of 52
2

tads

50 shops (say) x £100k = £5m

We then need to subtract central costs (say £1m) and pay tax on the remainder at circa 20%.

So, perhaps (£5m - £1m) x 0.8 gives profit after tax of £3.2m.

With 79m shares (the situation at the 2016 final results), that would be an EPS of circa 4p.

Obviously I am guessing most of the figures above but, even so, I doubt £100k profit per shop gives rise to an EPS of 6.3p.

HTH. Cheers, Martin

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tads 15th Sep '16 31 of 52
1

In reply to post #150527

From Paul.My understanding was that each site made about £200k profit contribution,

You are probably right.

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PJ0077 15th Sep '16 32 of 52
4

In reply to post #150521

I get your logic tads ('what is the base level of profitability if they stop new openings?'), but I don't think the right starting number is £200K profit per store.


In the last financial year they achieved operating cash-flow of £1.87million from 39 stores i.e. £48K per store.

So still highly rated.. even as an ex-growth stand-alone business.

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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 Stockopedia.com on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »

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