Small Cap Value Report (19 Jan 2017) - SIV, RBG, FREE, PMP, TMMG

19th Jan '17 by Paul Scott

52 comments 27055 reads

Good morning!

It's just me (Paul) reporting today, as Graham is busy with other stuff. There's lots to cover, so I'll be taking my time & updating this article throughout the afternoon.

Time permitting, I hope to cover the following companies today;

ST Ives (LON:SIV) - shares down 40% on another profit warning.

Revolution Bars (LON:RBG) - in line trading update, and solid Xmas trading.

FreeAgent Holdings (LON:FREE) - interesting deal with a major bank.

Portmeirion (LON:PMP) - slightly ahead of expectations for 2016

Mission Marketing (LON:TMMG) - good trading in 2016, so management have decided it's time to help themselves to some upside with a "growth shares" scheme. I'm selling my shares, in protest.

ST Ives (LON:SIV)

Share price: 84p (down 33.6% today)
No. shares: 142.8m
Market cap: £120.0m

Trading statement (profit warning) - it's deja vu time. This marketing group warned on profits in Apr 2016, and the shares dropped 45%. I reported on that here. The same sort of thing has happened today. Today's RNS covers H2, being the half year to 27 Jan 2017.

Problems mentioned today are;

Project deferrals & cancellations
Delays in generating replacement work - full benefit of which won't happen until Q4
"Very challenging" conditions in its marketing activation division - which relies heavily on clients in the grocery market.
New business won, but on lower margins.
Cost-cutting has been done, but again the benefit won't be felt until Q4.

This naturally all feeds through to reduced profits.

Outlook - not good;

As a result of the above, the Board now anticipates that the out-turn for the full financial year will be materially below its previous expectations with the majority of the shortfall due to the pressures within the Marketing Activation segment.

The Board remains confident in the long term strategy currently being pursued, and in the growth opportunities open to the Group. The balance sheet remains sound and we have the necessary cash flow capabilities to support our investment priorities and to further reduce debt.

"Material" in the context of profits means 10% or more. I hate it when companies use a phrase like this, as it leaves us completely in the dark. It could be…

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Philip Wigg

19th Jan '17

I use FreeAgent and it is indeed excellent.

One risk might be that there is likely to be a drop in the number of one-man band Ltd co. contractors if the governments IR35 reforms are applied to the private as well as public sector.

That would basically force contractors into umbrella companies, so no Ltd. co and no need for FreeAgent.

See http://www.contractoruk.com/news/0012861transport_london_bans_limited_companies_ahead_ir35_change.html

AnonymousUser252054

"I have to plough through thousands of trading updates every year, and it really bugs me that so many are badly written, and fail to give readers the accurate information we actually need. Instead we now have to struggle to get hold of the latest broker updates. Brokers will of course have been given a steer by the company. So the market is left in the dark, whilst brokers are given the information that everyone should be given. What a daft system."

So true! Not only does this traditional set-up favour the broker, (and fund managers, Institutions and their clients), over and above ordinary private investors I think it flouts LSE and possibly FCA rules, as it is clearly material information that is not simultaneously being made available to the whole market. To me, the term 'insider trading' seems most accurate to describe this arrangement - not that anyone at the LSE, FCA, AIM or SFO will do anything about it, of course.

The possible argument against fair-handed disclosure on the grounds of impracticality are certainly no longer a defence. As we all know there are various low, or even no-cost, platforms readily available that would allow us all to have a feed during those heads-up briefings. If that is too much progress for boards to stomach then disclosure of all material statements should be prepared in advance by a company and made immediately available online, at the start, putting everyone on an equal footing.

Unfortunately, I believe there are too many vested interests to make sure this will never happen and the present system of disclosure limited to favoured parties is set to remain.

WatsonNimrod

Looking forward to reading your take on Mission Marketing

JohnEustace

Hi Paul,
I'll ask just in case - I assume you or your accountant have local backup copies of your Freeagent data?

Roger Lawson

Re the disclosure issue, we need a Regulation FD (Fair Disclosure) as they have in the USA which ensures the same disclosure to everyone. Now the FCA is currently doing a public consultation on its "mission statement". Suggest we tell them we need this, as ShareSoc will be doing.

We have had the "city" insider bean feast for far too long.

tads

Up here in Newcastle it's not unusual for kids to go out and spend £500 in a night.....so my son tells me.

ds1980

20th Jan '17

RE $RBG. Pay very little attention to review sites but glass door is can be quite informative. Feedback is a concern re management from the smallish but seemingly reasonably unbiased sample. https://www.glassdoor.co.uk/Reviews/Revolution-Bars-Group-Reviews-E989641.htm

WhaleHQ

RE: Watch and wait: Yes I agree I also don't think the current PEG compares all that favorably with other options out there at the moment but I'd also like to caveat that any time I disagree with Paul and his blog I'm generally incorrect.

Whitbourne

Thanks ds1980, very enlightening. As you say, the comments have the ring of truth about them (i.e. there are consistent areas of concern from both supporters and detractors of Revolution Bars (LON:RBG) ).

Incidentally, if the company really does not pay employees holiday pay then it is breaking the law. It seems to be adding some kind of holiday compensation on to the basic rate. That is not on. "Holiday pay should be paid for the time when annual leave is taken. An employer cannot include an amount for holiday pay in the hourly rate." Source: https://www.gov.uk/holiday-entitlement-rights/holiday-pay-the-basics

IR35

Paul regarding TMMG.

They haven't come out with "broadly in line with management" expectations - they have given an explicit number, something I think you have been banging on about recently. It seems a little unfair to call that spin.

The forecasts of 7.2M ptp have been around for several months and have been available on the likes of Sharepad , Digitallook and Morningstar. They are going to miss forecasts that are several months old by 3% - that isn't a disaster in my book and giventhe growth over last year it is a pretty decent performance.

The weak balance sheet isn't anything new either. It has been about the same since 2011 and prior to that was considerably worse.

The directors own about 20% of the shares so hopefully the growth plan isn't going to be anything along the lines of the VLK plan that trashed the share price. Would have been better if they had given some more details on that rather than leaving it so open to interpretation - as no-one is likely to interpret it in a positive way.

I am keeping my holding for now and no doubt will be selling at a big loss when the growth plan is announced :)

unwise2

How many rich concentrations of young vodka drinking professionals are there in UK...From memory they target only 80 outlets nationally and that feels about right.

You are forgetting the Cuban restaurants which are performing well and are very early stage, in the results presentation its states there are 140 potential locations across the 2 brands, so far they have only 67 locations.

mw8156

How come a company as small as mission marketing needs 10 Directors each being paid over 100000?

herbie47

Revolution Bars (LON:RBG) Not sure where the vodka drinking comes from but according to Paul they are more for " groups of ladies on a night out after work, who will have 3 cocktails each, have some food, then go home." Anyway I thought it was gin now that is the trendy drink?

simoan

Whilst on the subject of privacy and security when doing on-line accounting, I thought it worth pointing out to all would-be dodgy accountants that the much heralded Investigatory Powers Act (aka Snoopers Charter) which allows certain government departments to view your internet history, includes HMRC and the Ministry of Work and Pensions. Best stick to pen and paper eh? :)

All the best, Si

Not sure that's true Mucker. We used to pay our casual staff 'holiday pay' il hour contracts. I suspect this is what is happening?

Fangorn

Presumably these kids are bankrolled by their parents? £500 on a night out - wowsers. If they're in their 20's then it's no surprise they can't russle up a deposit on a property. What a waste of money.

Still that's the UK these days...consume,consume, instant gratification,consume, consume.

Don't recall my parents behaving so extravagantly..Nor myself. Started my first Savings plan with Foreign & Colonial,in a PEP, in 80's.

From small acorns large trees do grow.

People have wrong priorities these days

Graham Ford

I am a bit concerned that this time last year St Ives was riding high in the stock ranks, 97, and with broker strong buy recommendations.

So, it feels like this is hero to zero in a very short period of time. Does that suggest that the stockranks while interesting are missing something fundamental in their algorithms?

alan000@yahoo.com

At first glance the RBG numbers do appear to be lowly rated on a forward P/E of 12.5 for a self funding roll out. It is instructive to compare against Patisserie Holdings (CAKE) whose forward P/E is closer to 19.5. Both are SCVR favourites, similar turnover, and both are funding a roll out from existing cashflow, and both are spending a similar absolute level of Capex of c£6m on that roll out...albeit CAKE was 21 small stores and RBG on 5 big bars. Is the P/e discrepancy between the two a "pricing anomaly" which indicates that RBG is the more compelling..or is that differential justified? A number of factors:-

1) Payback / ROCE on Roll Out Capex

The ROCE on RBG new openings is an excellent 38%. However, CAKE say their Payback is 23 months, implying a ROCE of 52%. Both are excellent, but CAKE decisively better, and gives a steeper gradient to its future profit growth path. Its amazing how quickly that P/E comes down for each future year when the growth gradient is that steep

2) Cash and Cash Generation

CAKE has £13m on its year end Balance Sheet, compared to £2m for RBG. Cake's Cash Balance increased by £7m last year, even after the £6m Roll out Capex spend, whereas RBG's cash balance was similar to a year earlier. Two big reasons why CAKE Cash Balance increased while RBG stayed the same is that RBG existing estate was more "Capex hungry", requiring over £4m Capex to maintain its existing store estate compared to only c£1m for CAKE. Also, RBG pays a more generous Divi. In theory, CAKE already has the financial resource to significanty increase the roll out speed, whereas RBG would need to change its Capital structure (adding some debt or issuing more shares) to do so.

3) Risk

If RBG open 5 stores a year for £6m CAPEX, the impact of one (or two) being failures...choosing a wrong location, would be felt more for RBG than CAKE, whose risk is more diversified in lots of much smaller shops.

4) How Long into the future can the roll out last?

I think both businesses have a long list of Markets they could expand into.

I like both these businesses, and think both are more compelling that other "Retail Roll Outs" which are often discussed on here, like CRAW (requires a turnaround in performance while RBG and CAKE are already pointing in the right direction) or Hotel Chocolat, which is a lot more expensive, for reasons which are not obvious to me.

However, I think that differential between the P/E's of CAKE and RGB can be justified by the reasons above. In reality I can invest in both, I can have my Cake and eat it (sorry!). IfI could only invest in one, it would be CAKE.

Bushranger

22nd Jan '17

NHS pay staff in this way (additional £ to weekly paycheck pro rata to hours worked) if they are not fixed hour contract. So if you worked full time despite no fixed contract when holidays are taken you get no income.

bestace

24th Jan '17

You make a lot of good points and as a holder of both companies, I tend to agree with you.

On your 4th point about their potential ceilings, the figures currently being quoted by the companies are that RBG are looking at 140 sites and CAKE at 250+. They may both be able to expand beyond those figures, but the law of diminishing returns must kick in at some point, and it's interesting to consider the implications if we take those figures at face value.

At annual roll out rates of 5 and 20 new sites for RBG and CAKE respectively, it will take RBG nearly 15 years to get to 140 sites but only 3 years for CAKE to get to 250 sites. Even if 250 'plus' means something nearer to 270 sites, that's 4 years before they reach steady state.

At that point, CAKE may still be generating high ROCE on the existing estate, but they won't be able to reinvest those returns into the business at the same rates, so the earnings multiple could drop considerably.

At the same point in time, RBG will still have another 11-12 years of rolling out new sites before they reach their ceiling.

Taking that into account, it could be argued that at their current share prices, CAKE's future growth is already priced in, while RBG's share price has a much higher potential to re-rate if you're prepared to hold for the longer term.

Small Cap Value Report (19 Jan 2017) - SIV, RBG, FREE, PMP, TMMG

ST Ives (LON:SIV)

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Paul Scott

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