Small Cap Value Report (19 Aug 2016) - C21

19th Aug '16 by Paul Scott

38 comments 13720 reads

Good morning!

It's extremely quiet for results again today - CEOs and FDs are probably lying on beaches, or their yachts, at the moment.

So I'll circle back to some remarkably good economic data & surveys out yesterday. This is reinforcing my conviction that Brexit has only had a small, and temporary impact. As I've mentioned before, you have to take a view on the macro picture, otherwise you really can't invest with any particular logic - unless your strategy is to buy & hold forever.

The devaluation of sterling is very positive for any UK company which makes things, and sells them abroad, or sells them in the UK against competition from imports. The UK just got a lot more competitive, thanks to sterling's devaluation. That's the whole point of floating exchange rates - that struggling countries adjust & become competitive again through devaluation of their currency. This is the gigantic flaw in the Eurozone - there's no mechanism for such adjustments to happen, other than deep recessions to crush wages & asset prices lower.

The problem with a devaluing currency, is that it drives up inflation, because imported goods & raw materials become more expensive. So I do think we need to prepare for higher inflation next year, and that could prove difficult. Mind you, sterling has recovered c.2-3% from its low, on the more positive UK economic outlook.

The Office for National Statistics published a report yesterday on July retail sales. It makes very interesting reading. Sales volumes were up a remarkable 5.9% in Jul 2016 compared with Jul 2015. Although this is flattered by price inflation being negative at -2.0%. So putting those two together, the overall value of retail sales rose by 3.6%, which is probably the most meaningful figure.

EDIT: I forgot to mention, the online sales growth is remarkable - it's up 16.7% for Jul 2016 vs. Jul 2015. Now, I would treat that with caution, as am not sure how they're measuring it. However, there's no denying that online is being enthusiastically embraced by Brits. Therefore, I am very focused on good online businesses, with a decent profit margin (e.g. Boohoo.Com (LON:BOO) ) - as opposed to low margin stuff-shifters, like Ocado (LON:OCDO) , AO World (LON:AO.) , and arguably ASOS …

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Abcurtis

19th Aug '16

"So it seems the British consumer has shrugged her/his shoulders and said "so what?!" It's very much business as usual for the consumer"

OR, could that be foreign holiday makers coming to the UK, buying stuff and taking advantage of the favourable exchange rate? In which case come the end of holiday season, will it reveal the true level of the national consumers and their spending?

Rusty2

Or less British people going abroad as its more expensive.

Crusty

....or British consumers buying imported large ticket items before the higher prices come through. Must say I did consider for a moment or two getting a high-end Merc for that reason, but decided to stick with the Aygo. ;-)

JohnEustace

From a quick Google, it seems the case is being heard in the High Court in October, with an appeal to the Supreme Court expected by January. The Government told the courts that the timetable wouldn't be a problem.
So Mrs. May's hands will be tied at the European Council meeting on October 20th. Sir Humphrey would be proud.

MrContrarian

Re the Friedman quote "The dog catches the car. And, of course, it has no idea what to do with this car. There is no plan."

There is no plan! That's not right. No, these dogs want to drive the car but only when they get in the driving seat do they realise they are incapable. There are so many controls which take months to master even if you have hands and shoes.

I think I've driven that analogy into a ditch...

ap8889again

So I went into town today with the wife. Checked out the state of the high street.

My thoughts: Marks and Spencer's (£MKS) was doing a roaring trade, especially the food hall. Footfall seemed high. I was a bit disappointed to see heavy discounting in the clothing areas to shift the summer stock.

N Brown Group was deserted. But the wife liked some of the clothes range. She is sadly, too slim for Simply Be range, but thought they would sell ok in the target market.

Next (£NXT) had some very close copies of designer gear, at keen prices. No discounting at all. I thought their offer was rather good, and had to limit myself to a couple of items. The homeware area had some decent items but was not visited at all during my time in the store.

Debenhams ( £DEB) was appallingly hot. The clothes seemed to be selling, but there was again heavy discounting.

Laura Ashley (£ALY) is in a more secondary location in my city, but a brief visit saw decent customer numbers for the day/weather.

Away from clothing, I popped into Games Workshop, now rebranded as Warhammer. I spoke to the manager who seemed to be pretty positive about the recent rebrand and update to the Fantasy range. He said stock was selling, and I observed sales of the new range were occurring while I was in the shop. I am considering buying shares in Games Workshop (LON:GAW), largely for yield and foreign earnings but have been put off by Google trends data showing declining searches for their brands. I am concerned it may be a cigar butt business in decline as the dungeons and dragons generation grow up. That said it seemed to be ticking over nicely in my locale at least, with a bevy of keen gamer kids playing the summer holiday away in the shop.

Anyway, just a glimpse from a six hour stint of hands on shopping. My overall impression was that shoppers were spending, which makes me a bit less nervous about my retailers in the portfolio.

brileen

Hi Paul

I know that its market cap is higher than you usually comment on in this column, but I am wondering whether you have looked at N Brown (BWNG) as it is a company that falls well within your personal expertise and interest. The share price has fallen from 360p in March and now stands at 192p having recently bottomed out in the 160's.

The company has a number of clothing brands and is in the process of migrating its business online which is is now responsible for some 66% of turnover. Now trading on a PE of 8 and an increasing online business in the US. It also has a low PEG and a high yield. Market Cap £537M and a turnover of £900m. There is debt.

Do you have a view on this company which you might wish to share.

Coincidentally I looked in the window as I walked past the Games Workshop store in Reading this morning. It was empty and I concluded the local youth are spending their pocket money on more electronic pastimes.
Not a listed company, but if John Lewis care about selling me bedroom furniture in store as opposed to on line, they need to employ some staff in Reading. I think they are in a bit of a spiral down - lower than expected sales in-store, cuts in staffing levels, no-one to serve the customers who do go in to buy, sales forced on-line or to competitors.

My concern with N Brown was the debt level. The local store here is in a prime location, but was today worryingly deserted, making me concerned that they have badly positioned the shop. As a specialist retailer for the salad-challenged they might have better margins in a secondary location, as their customer base will likely seek them out based on personal recommendation and online. My current gut feeling is my money is safer in a more diverse retailer, despite the yield.

ExpectingValue

"specialist retailer for the salad-challenged" is probably the best description of them I've heard!

Reminds me of one of the early series of the Apprentice in which, when the team captain was questioned as to why he had picked plus-size wedding dresses & fancy wedding cakes as his products to sell at a bridal fair, he replied "well, they're plus-size for a reason - they must REALLY love cake!".

ridavies

Paul, may I bring up a holding of mine Lavendon (LON:LVD) which you have commented on in the past. Cant remember whether you are long or not. On the other hand I do remember that you were bemused that the share price, PER etc were so low for a company which may be in a sector which is out of favour in the UK but is doing well. A recent company document confirmed this - gaining share etc. In the last 2 days the SP has risen by about 15%, following unusually large volumes of shares changing hands yesterday - including arou8nd 10m around lunchtime yesterday. Today, one of the 'culprits' came out of the closet with Black Rock declaring they had reduced their holding of 6.1% (10m+) to less than 5%. Any thoughts on whether someone may be building a stake with a view to making an offer - last one(s) to do that I believe was a consortium of UK (£AHT) and Belgian companies, which was rejected as undervaluing the company.
PS Hope you are enjoying the holiday, if you have started it yet!

Paul Scott

Hi ridavies,

Yes, I really like Lavendon (LON:LVD) and have been buying lots more recently. It's now my 5th largest family long position.

Interim figures should look OK, as the company has already announced a solid update.

Balance sheet is sound. I think it's terrific value.

I don't really get into speculating on bids, or what major holders may or may not do. To my mind, it's really good value, and I'll just hold for the foreseeable future, until it re-rates. I reckon it's worth about 200p per share.

Regards, Paul.

fewer!

Correct.

Hi paraic84,

Yes, I'm more than happy to be patient about French Connection (LON:FCCN).

I've written about the upside potential of this share in 20 articles over the last few years here;
http://www.stockopedia.com/share-prices/french-connection-LON:FCCN/discussion/

I almost bored myself to tears about it LOL!

The value is still there, it doesn't matter what the market price does. There will (in my opinion) be a good payday for shareholders at some point, same as I've always said.

Regards, Paul.

Hi ridavies,

I've written about Lavendon (LON:LVD) thirteen times in the last 3 years, here;
http://www.stockopedia.com/share-prices/lavendon-LON:LVD/discussion/

Here's why I found it "strikingly cheap" after its recent H1 trading update;
http://www.stockopedia.com/content/small-cap-value-report-14-jul-2016-emr-wjg-lvd-142661/

(NB. I hold a long position in LVD)

Regards, Paul.

dscollard

alternative view: British consumers understand currency devaluation and front-run the hit to pricing by buying inventory bought pre -referendum. case in point, I bought a Oneplus 3 for £25 less in early July as price was set to rise to compensate for sterling weakness ( and no it wasn't a sales tactic)

Ditto with cars imported from Asia..wait for the impact of currency on inventory and buying behaviour

Meanwhile I am surprised by the number of friends staycatioining and selling property.

I'd wait a few months before making any judgements on the impact of a referendum that has done nothing but change sentiment for a while and cause many consumer to become ultra cautious and buy on the perceived cheap before inflation starts to kick in.

Most of the recent surveys are lagging indicators

. IMO this is the economic equivalent of the quiet before the storm.

Just as I have cognitive biases to remain, so do you have biases to leave. We all need to check these and try and remain objective

Net=net we don't have enough data to make a meaningful conclusion.

Meanwhile I love the trading environment , it has been spookily easy to make money...and that worries me !!

jonesj

Hello Paul,

When is the book going to come out ? With the inevitable combination of experience and directness, I'm going to be a buyer.

Jeff

21st Aug '16

Thanks for that
Regards Ian

PJ0077

22nd Aug '16

Yep, confirmed.. it's a SUPPLY-side shock!

Today's Financial Times:

images.stockopedia.co.uk

Small Cap Value Report (19 Aug 2016) - C21

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Paul Scott

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