Small Cap Value Report (18 Jan 2017) - BRBY, TRB, MIDW, PFD, BOTB

Wednesday, Jan 18 2017 by

Good morning!

I'm kicking things off today, but Paul will probably be along later with a few thoughts of his own.

I am looking at Burberry (LON:BRBY), Tribal (LON:TRB), Midwich (LON:MIDW) and Premier Foods (LON:PFD), while Paul is looking at Best Of The Best (LON:BOTB).

Also, please note that yesterday's report now covers 10 stocks, thank to a huge contribution by Paul, including late updates. The report now includes:

Brady (LON:BRY), Craneware (LON:CRW), Distil (LON:DIS), dotDigital (LON:DOTD) Elegant Hotels (LON:EHG), Games Workshop (LON:GAW), Greggs (LON:GRG), Hotel Chocolat (LON:HOTC), Johnston Press (LON:JPR), Miton (LON:MGR).

Click here for yesterday's report.



Burberry (LON:BRBY)

Share price: 1616p (+1.4%)
No. shares: 440m
Market cap: £7,000m

(At the time of writing, I holding a long position in BRBY.)

Third Quarter Trading Update

Though it is not a small-cap, I think it would be remiss of me not to mention Burberry. This is a stock I've previously owned and purchased on behalf of clients, and is currently a substantial (nearly 20%) part of my portfolio. (I don't recommend that others run such a concentrated portfolio as this.) 

I had a poor year in 2016, partly due to some heavy GBP exposure in my companies, but it would have been much worse without Burberry, which produced a total return of 45%.

Look at the Q3 result: revenue is up 4% underlying, but 22% at reported FX.

I really think it's a shame that currency issues have to wreak such havoc on the international financial system, but it's not a problem I'm going to be able to fix. I just need to be more careful with it.

Anyway, I'm pretty happy with these results. China, a country with which I…

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

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Burberry Group plc is a manufacturer, wholesaler and retailer of luxury goods. The Company also licenses third parties to manufacture and distribute products using the Burberry trademarks. The Company's segments include retail/wholesale and licensing. The Retail/wholesale segment is engaged in the sale of luxury goods through Burberry mainline stores, concessions, outlets and digital commerce, as well as Burberry franchisees, prestige department stores globally and multi-brand specialty accounts. The Licensing segment is engaged in the receipt of royalties from the Company's partners in Japan and global licensees of eyewear, timepieces and European childrenswear. The Company's product divisions are Womens, Mens and Childrens apparel, Accessories, and Beauty (which includes fragrance and make-up). Its subsidiaries include Burberry Latin America Holdings, S.L, Burberry (Suisse) SA, Burberry (Taiwan) Co Ltd, Burberry (Thailand) Limited and Burberry FZ-LLC. more »

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Tribal Group plc is a United Kingdom-based company, which provides software and services for education management. The Company's segments include Product Development and Customer Services (PD&CS), Implementation Services (IS), Professional and Business Solutions (PBS) and Quality Assurance Solutions (QAS). The PD&CS segment represents the delivery of software and subsequent maintenance and support services. The IS segment represents the activities through which it deploys and configures software for its customers. The PBS segment represents a portfolio of performance improvement tools and services, including analytics, benchmarking and transformation services, and the QAS segment represents inspection and review services, which support the assessment of educational delivery. Its products and services include license and development, implementation, maintenance, professional and business solutions, quality assurance solutions and other systems related. more »

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Midwich Group Plc, formerly Jade 320 Limited, is a holding company. The Company's principal activities are to carry on business as a general commercial company and to carry on the business of an audiovisual (AV) and document solutions distributor to the trade market, with operations in the United Kingdom, Europe and Australia. The Company's segments include UK & Ireland, France, Germany and Australasia. The Company provides a portfolio of audiovisual categories, such as large format displays, projectors, digital signage and printers. The Company's brands include BOSCH, CASIO, CHIEF, SONY, SHARP, NEC, PHILIPS, RICOH, PLANAR, BrightSign, DATAPATH, revolabs, Reserva, Canon, SAMSUNG and Panasonic. The Company serves AV integrators and information technology (IT) resellers in corporate, education, retail, residential and hospitality sectors. more »

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

43 Comments on this Article show/hide all

the0ni0nking 18th Jan '17 4 of 43

In reply to post #167293

I think the important point on the WJG incentive plans is what prompted the triggering of the payment - the wording is fairly explicit in that this as a result of the successful IPO as opposed to significant amounts due to BAU operational performance.

Worth also noting the detail mentioned in Note 5 of the accounts:

"The charge for management incentive payments comprises amounts payable to certain senior management of Watkin Jones Group Limited in connection with various long term incentive plans which fell due on the admission to AIM of Watkin Jones plc. The amount comprises a total charge of £21,735,400, plus stamp duty costs of £98,440, less an amount previously provided of £1,773,200. Of the total incentive payments made, management invested £13,942,984 in shares in Watkin Jones plc as part of the IPO."

So a fair chunk of this was reinvested in the listed shares which while not benefiting the cash position of the company does give me some re-assurance of the longer term prospects. Of course, they may well have had no option other than to do this and we don't know about lock-ins etc.

Not a holder as yet but I can see the merits - with a relatively low P/E (c10/11) and a reasonable yield combined with a positive outlook.


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Laughton 18th Jan '17 5 of 43

Burberry (LON:BRBY) - 20% of your portfolio!!!
WoW - now I don't feel so guilty that Boohoo.Com (LON:BOO) is almost 8% of mine.

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JohnEustace 18th Jan '17 6 of 43

In reply to post #167314

I agree. I am keeping my small position. The update encouraged me in thinking they have excellent opportunities in the private rented sector beyond student housing, which is becoming over supplied in some cities.

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tabhair 18th Jan '17 7 of 43

Mitie (LON:MTO) looks like a possible buying opportunity, margins are not great, but it has a long history of good free cash flow generation, even in the bad times. I'd be interested to hear thoughts on it.

I think that Premier Foods (LON:PFD) also looks interesting. It has more hair on it thanks to the debt, but it does own some good brands in the consumer products business and is currently generating nice cash flows and bringing the leverage down.

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JDW72 18th Jan '17 8 of 43

Re Best Of The Best (LON:BOTB) , does anybody have any insight into what this means "The Company has noted the recent VAT decision concerning a company with similar activities in our sector. The Company is reviewing this decision and will update shareholders in due course. "


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steviej 18th Jan '17 9 of 43

In reply to post #167335

I believe that is Sportech (LON:SPO) :

"Following the Court of Appeal's unanimous judgment in favour of Sportech in relation to its £97m VAT repayment claim on the "Spot the Ball" game, Sportech is pleased to announce that the Supreme Court has refused Her Majesty's Revenue & Customs ("HMRC") permission to appeal. This now, for Sportech, successfully brings this matter to a close."

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luckym 18th Jan '17 10 of 43

This one's for Paul, I think.  You've covered Water Intelligence (LON:WATR) a couple of times and I've been looking at the share recently. I notice in today's RNS that the company announced that on 18 January it bought  21,222 of its own shares at 95p and sold them onto a 3rd party at the same price.  Two questions: (1) why would it do this? and (2) the share price has not been near 95p since c5 Jan 2017. I realise settlement dates might come into the equation but it still seems odd to me. Any views on this?  Thanks.


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JDW72 18th Jan '17 11 of 43

Re Watkin Jones (LON:WJG) , I was concerned about their focus on student accommodation as there is some oversupply occurring now and being a student is becoming more and more expensive which is inevitably going to lead to a reduction in overall numbers of students living away from home at some point.

As such, their move into PRS was interesting/good to see. However, I personally favour Sigma Capital (LON:SGM) who are PRS specialists and making great progress.


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andyi 18th Jan '17 12 of 43

In response to post 11, I would not agree that there is an oversupply of student accommodation currently and that it will inevitably lead to a reduction in student numbers living away from home. One of the principal drivers of demand in this sector is overseas students especially non Europeans. The decline of sterling makes the UK even more attractive as a destination and helps to push demand up. I am not a holder Watkin Jones (LON:WJG) but £UTG is on my watchlist.


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Mark Carter 18th Jan '17 13 of 43

Premier Foods (LON:PFD) is certainly between a rock and a hard place. I dabbled in it a few years ago, and got my fingers burned.

Seems incredibly risky, and it doesn't look like they're making progress on turning this thing around.

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rmillaree 18th Jan '17 14 of 43

In reply to post #167323

Ref Mitie (MTO)

I have not looked at this one before that i can remember, a very unimpressive update today.
Its pretty pattycake poor to say 10 months into the year that expected profits have been overstated by 14 mil - its ok though as it a one of exceptional item.
Contract delays now rearing their ugly head 10 months into the year - strewth makes one wonder how much of the profit is booked on day one of the contract start date :)
Very small reduction in shareprice today but looks like the price has been ticking down for some time now - hmmmmmmm coincidence?

On the plus £50 mill plus profits seems enough safety net that there is something left and presumably they are a fairly stable business turnover wise and contracts wise due to the amount of time they have been about.

Could they be kitchen sinking the bad news here ? May be worth a lookout if they can bounce back from these wobbles - i may have a closer look at their balance sheet and keep an eye on this one.

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ap8889again 18th Jan '17 15 of 43

Not a smallcap, but Pearson (LON:PSON) have had a shocker today. Not sure if I should buy more (because its cheaper than a lottery ticket), sell all or just sit tight. The company is clearly poorly right now.

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Aislabie 18th Jan '17 16 of 43

BRBY as 20% of your portfolio is a very confident call - my inclination is to run a mile from high street and that goes redoubled in spades for fashion retail.
One of my largest concerns is the management of inventories and in this connection, despite growing online demand, it appears that Burberry inventory climbed by £100millon in the year to 30 September 2016. Is there a good reason for this?

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JohnEustace 18th Jan '17 17 of 43

In reply to post #167359

Re Premier Foods (LON:PFD) - Looking at their stable of brands I am not hopeful. They mostly look like the stuff my Mum used to buy thirty years ago. If it all disappeared off the supermarket shelves tomorrow I would hardly notice.

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Graham Neary 18th Jan '17 18 of 43

In reply to post #167293

Hi Steve, sorry I won't personally have a chance to cover that today. Good luck


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Mark Carter 18th Jan '17 19 of 43

In reply to post #167395

I noticed some time ago that the supermarkets didn't seem to have much compunction in removing brands that I actually quite liked. Things like Warburtons muffins. The last few times I checked, they just have really awful inedible muffins. I'm not really sure of the supermarkets logic, as I would rather pay a bit extra to get something half-decent. I suspect that part of their logic is "because we can", sending a warning shot to all suppliers.

With inflation back on the agenda, I expect companies like Premier Foods (LON:PFD) to be squeezed harder than ever. It's not looking hopeful. Premier Foods (LON:PFD) were really stupid, of course, racking up enormous debt in order to acquire brands. The whole thing has been thrown into reverse the last few years.

The way it's looking to me is that Premier Foods (LON:PFD) will have to sell off their brands, leaving a hopeless debt situation and nothing for shareholders.

I'd like to think that Premier Foods (LON:PFD) will make it through, but it only looks as if the hole they've dug for themselves is getting deeper.

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FREng 18th Jan '17 20 of 43

In reply to post #167353


I'm nervous about student accommodation because of the pressure to reduce net immigration numbers, the repeated refusal to exclude students from the figures, the reduced opportunity to get student visas (and to convert them to allow employment after graduation) and the nervousness of the university sector that I see in the columns of Times Higher Education.

Can you offer reasons for reassurance?

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hayashi22 18th Jan '17 21 of 43

The damage that ceo decisions make can be catastrophic and blight the performance of their successors.
Many examples today. The Pearson ceo is hardly new but he is still trying to sort out the mess left by Scardino.
The Mitie woman was a disaster and allowed too much rope by a weak board/Chairman.
Premier Foods simply had and has too much debt.
And what about RR -Sir John Rose the ceo and some Old Etonian toff as Chairman -now being fingered for bribery-maybe they should have their collars felt.

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gus 1065 18th Jan '17 22 of 43

In reply to post #167386

With hindsight looks like they ( Pearson (LON:PSON) ) threw the baby out and kept the dirty bathwater when they sold many of the profitable physical publishing assets such as the FT and bet the house on online education software in the US. I've looked at it a few times over the past 18 months and it keeps getting cheaper. Not sure it's hit the bottom yet so I continue to stay on the sidelines.

Good luck.


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rhomboid1 18th Jan '17 23 of 43

In reply to post #167386

The big issue for me with Pearson is the total wipeout it's had in strategic thinking, basically whenever they've made a strategy move it's looked illogical to many an outsider and proved costly ultimately for shareholders. The whole focus on US education ( was that the idea of US born Marjorie Scardino?) seemed crazy given the strength of the FT brand )They've now sold or are selling family silver to go toe to toe in v unattractive markets which just seems like Hari Kari to me.

I cannot see how John Fallon still believes he is the right person to lead them out of the swamp that he has so ably created.

Uninvestable before today , marginally more palatable 30% cheaper but I'd rather back a mgt. with a surer touch.

Good luck anyhow!

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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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