Small Cap Value Report (16 Aug) - QRT, LOOK, EPWN, HAT

Wednesday, Aug 16 2017 by

Good morning!

Paul is taking a well-deserved holiday for a couple of days, so it falls to me to keep this show on the road.

Stocks on my radar today include Quarto Inc (LON:QRT), Lookers (LON:LOOK) and Epwin (LON:EPWN). I may also discuss yesterday's results from H & T (LON:HAT) (in which I hold a long position).

Best regards


Quarto Inc (LON:QRT)

  • Share price: 122.5p (-21%)
  • No. of shares: 20.4 million
  • Market cap: £25 million

Termination of Discussions with Potential Bidder

Just over a week ago, this book publisher issued a fairly underwhelming H1 report, offset by the news that an unnamed potential acquirer was sniffing around. Not many details were given,  least of all the potential offer price.

Paul thought it was a rather peculiar announcement, and reckoned that the shares would have fallen off much more sharply without the bid interest.

The bid has evaporated for now, leaving the share price to promptly deflate. Commiserations to holders.

The reason given is as follows:

"...these discussions were not progressing to the satisfaction of the Board. It became clear that the regulatory approvals required by the bidder to complete the proposed acquisition were increasingly less likely to be granted on the timeline first indicated.  Recognising the importance of delivering a strong finish to the year and after carefully considering the interests of all shareholders, the Board was not prepared to prolong discussions further to avoid distraction to management at such a critical time of year for the business."

That actually sounds like a good justification to me - the distraction cost of actual and potential M&A is underrated, in my view. I don't know what the regulatory approvals for the bidder might have been.

Of course, for those shareholders who were looking forward to getting a bid, it is a disappointment, and some of them have headed for the exits today. That is to be expected.

What of the underlying value of the business? It remains an enigma.

There is a fascinating article by user lavinit which deals with a lot of the nitty-gritty, which I recommend reading for those who have the time. It's…

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All my own views. I am not regulated by the FSA. No advice.

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The Quarto Group, Inc. is an illustrated book publishing and distribution company. The Company is engaged in creating content and publishing books from a diverse portfolio of imprints. The Company operates through segments, including Quarto International Co-Editions Group; Quarto Publishing Group USA; Quarto Publishing Group UK, and Quarto HK. The Quarto International Co-Editions Group segment creates illustrated books that are licensed and printed for third-party publishers for publication under their own imprints. The Quarto Publishing Group USA segment creates and publishes illustrated books in North America and sells co-editions of them internationally. The Quarto Publishing Group UK segment creates and publishes general non-fiction and illustrated books in the United Kingdom market. The Company’s books are sold in approximately 50 countries and in 39 languages. more »

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Lookers plc operates as a motor retail and aftersales company in the United Kingdom. The Company operates through two business segments: motor distribution and parts distribution. The motor division consists of over 150 franchised dealerships representing over 30 marques from approximately 100 locations. Aftersales represents the servicing, repair and sale of franchised parts to customers' vehicles. Its parts division operates in the independent aftermarket sector of the United Kingdom's motor retail market, where it operates through three operating companies: FPS, Apec Braking and BTN Turbo. FPS is a warehouse distributor of automotive parts. Apec Braking is a provider of dry braking (pads and discs). BTN Turbo is a distributor of turbochargers and supplier of related value added services. Its operations are also carried out across Ireland. It sells approximately 180,000 new and used cars and vans per year. In addition, it has an independent parts distribution business. more »

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Epwin Group Plc is a manufacturer of extrusions, moldings and fabricated low maintenance building products, operating in the repair, maintenance and improvement, new build and social housing sectors. The Company operates through two segments: Extrusion and Moulding, and Fabrication and Distribution. The Extrusion and Moulding segment is engaged extrusion and marketing of polyvinyl chloride-unplasticized (PVC-U) window profile systems, PVC-UE cellular roofline and cladding, rigid rainwater and drainage products and wood plastic composite decking products. It operates from extrusion and molding facilities in Telford, Tamworth and Scunthorpe, among others. The Fabrication and Distribution segment is involved in fabrication and marketing of windows and doors, distribution of cellular roofline, rainwater and drainage products, and manufacture of glass sealed units. It operates from over five window and door fabrication sites, and approximately two glass sealed unit manufacturing sites. more »

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

24 Comments on this Article show/hide all

Wimbledonsprinter 16th Aug '17 5 of 24

In reply to post #208923


Re Epwin (LON:EPWN), I see both Panmure Gordon and Zeus are bringing their EPS numbers down by
around 9% for 2017 and 2018. This I feel is a little bit strange as management seemed to be saying that H1 was in line with expectation but H2 is deteriorating and there are risks to the downside (because of ENTU and SIG - the two clients). I would have thought that there would be therefore a bigger effect for full year 2018, when all this can feed in, than for 2017, where we have already had nearly 2/3 of the year. Therefore I fear there is a risk of further cuts to numbers for some of the outlying years, if efficiencies don't materialise etc. I must admit that I was also surprised that Entu only accounted for 5% of sales.

But this is tempered by the fact that the stock looks so cheap, with FCF this year estimated by the brokers around £16- 17 million (11p - 12p a share). And as you point out the dividend yield is high and looks well covered by earnings, cash flow and the balance sheet. A lot of future bad news seems priced in. Therefore, I bought (some more) today.

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matylda 16th Aug '17 6 of 24

In reply to post #208943

It is a good read and a good reason to read the news each day - When you spot great growth in an update and the numbers look good - It's time to get excited - I do remember though the LPA "galloping" statement! It's now back around the same price!

Blog: Briefed Up
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apad 16th Aug '17 7 of 24

FFX takeover of CardOne. It would be good to have an opinion.

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Michael Billingham 16th Aug '17 8 of 24

IQE (LON:IQE) falling heavily this afternoon. Anybody know why???


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steviej 16th Aug '17 9 of 24

In reply to post #209048

Normal market volatility?

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mojomogoz 16th Aug '17 10 of 24

Hi Graham, I agree with the optionality point on Quarto Inc (LON:QRT).

However I think the point is at about 50p for 2-3x stake type return. This seems ridiculously low but Quarto has not meaningful assets to sell and an acute need for strong cash flows to service debts. That there has not been any news on how covenant breach was rectified and will be void in future with newly inked covenant suggests the bank is anxious and is searching for reassurance.

Not a good situation as the bank will effectively become an angry CFO and tie CEO hands and direct short term cash maximisation at expense of long term potential.

What's the way out:

1) A genuine turning of corner in standalone publishing in H2. This could happen but looks low odds.

2) A private equity takeover. They will only do this at approx 0p given debt. This is a painful road to a H1 2018 event. The bank will like this as it gets all of most of debt back

3) Rights issue. They should have done that 9 months ago. They may be able to do now but the discount would be heavy. Round number I'd guess 40p and 3 for 1. Raise c $30m minimum.

The last option is what they should do. Time is probably short for that though as delay more and they are left with second option.

I'd buy the rights issue and with the current CEO in charge long as he gets better help on financial management side.

Best wishes

PS thanks for $LOOK note and view. I will look at results more when back from holidays (too irritating to do on iPhone!) as hold Vertu Motors (LON:VTU) as my preferred option in potentially interesting sector. Used car prices are key risk here as when they fall the time frame between the average punter buying new car goes up as the financing deals that are offered will get less attractive and people will need to.l be able to afford the new car ticket price. This is more marked the more premium the dealer - there's less people that can afford a depreciating Merc in UK than currently buys them. I think this dynamic is fully in the Vertu price, don't know on lookers.

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herbie47 16th Aug '17 11 of 24

In reply to post #209048

Profit taking I suspect.

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Michael Mortphew 16th Aug '17 12 of 24

In reply to post #209048

Up 80% in just under a month - something had to give.

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CliveBorg 16th Aug '17 13 of 24

IQE is also shorted quite a bit, so perhaps some people think it's valuation has got ahead of itself, and following on from that, others have sold, spooked by the amount of shorting.

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smatthews1 16th Aug '17 14 of 24

Hi Graham,

" It also outperformed in commercial vehicles, a segment where general industry conditions aren't so tough at the moment"

Do you have any  sources of information regarding this? as its of particular interest to me at the minute as its an interesting read across to Northgate (LON:NTG).



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seadoc 16th Aug '17 15 of 24

In reply to post #209048


3rd most shorted share on AIM, just behind Telit Communications (LON:TCM) and Majestic Wine (LON:WINE)

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bluetonto 16th Aug '17 16 of 24

(iqe) yes profit taking i think,after having a breather will surely carry on it,s upward trend.

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Michael Billingham 16th Aug '17 17 of 24

IQE (LON:IQE) - thanks to all that replied - one of my larger holdings - sitting tight waiting for a recovery.

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Graham Neary 16th Aug '17 18 of 24

In reply to post #208883

Hi camtab, I've covered it.

Agreed that it's a great defensive stock with respect to the economy.

It does have a strong balance sheet but utilising all of those assets in a productive way is rather difficult, hence the low ROA.

Sorry, I can't help you with that trading strategy!

All the best


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purpleski 16th Aug '17 19 of 24

In reply to post #208943

Yes I read the book 100 Baggers a while ago and agree that it was an interesting book and that the title may well put off "serious" investors. I may well read again.

Thanks for today's column. Excellent as always.

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Alex Rackwitz 17th Aug '17 20 of 24

In reply to post #208968


Do you know which division of Epwin's supplied ENTU and SIG?

5% of revenue for each client may understate or overstate the impact of profits since one division (Extrusion and Moulding) makes up almost 90% of profits. If it is related to Extrusion and Moulding, then the revenue impact of each client is 8% each on that division or 16% together. Starts to look a bit scarier.

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Graham Neary 17th Aug '17 21 of 24

In reply to post #209178

Cheers, you're welcome!

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Graham Neary 17th Aug '17 22 of 24

In reply to post #209123

Hi Sean, I was just going by the industry stats quoted in their report,


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paduardo 18th Aug '17 23 of 24

In reply to post #208968

Hi Wimbledonsprinter

If I recall correctly both Zeus and Panmure Gordon have commented previously on managements active approach to managing costs. Maybe they believe there are actions EPWN will take to either mitigate the sales loss or manage the cost base in response to this which will ameliorate the impacts in 2018 / 2019. One of the brokers also refers to the fact it might not be easy for SIG to replace EPWN completely as the end customer can dictate which products they are supplied with. Either way my buy on Wednesday looks poorly timed as the share price is off again today. I opened up a spreadbet long at 66 this morning to bring down my average price. I am happy to continue to hold. Cheers Peter

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TangoDoc 18th Aug '17 24 of 24

I too am happy to hold while I see how the management copes. I still like the fundamentals and what has been said by a fairly cautious management approach to growth and debt. I'd be surprised if they haven't been addressing this loss of custom for many months, in every direction they can. Even 10% loss of sales at the worst, hardly justifies this level of dumping. Given that 60% of Epwin shares are held by institutions and 26% by insiders and only 10% by the general public, you'd imagine that fairly soon, the sellers will be away. Surely, the ENTU issue is very old hat by now?
I am still convinced of the wisdom of diversifying into decking and composite materials. It shows that the management is not asleep at the wheel, content to bang out the same old plastic extrusions. I am still convinced of the necessity for politicians and money lenders to encourage the building trade and I take comfort from the trends seen with the likes of Bovis, Barrett, Persimmon as well as an overall trend with Norcros, Howden Joinery and even such as Travis Perkins. Brexit or no, we still need a lot more housing.

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 Are LON:QRT's fundamentals sound as an investment? Find out More »

About Graham Neary

Graham Neary

Full-time investor and independent analyst. Prior to this, I spent seven years in the financial markets as an analyst and institutional fund manager. I'm CFA-qualified, also holding the Investment Management Certificate and the STA Diploma in Technical Analysis.Away from finance, my main interests are recreational poker and everything to do with China, especially Mandarin Chinese. more »


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