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

19th Jan '17 by Paul Scott

52 comments 28178 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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Carcosa

19th Jan '17

1pm (LON:OPM)
Cost of sales up 57%
Admin costs up 86%
Bad debt also up -although that might be expected as revenue increases but non-the-less unwanted.

Still its on a forward P/E of ~10 and P/NTAV is okay

A 10% fall in the share price seems a bit much so may recover some ground tomorrow.

Carcosa

Brilliant Leader

Thanks for clarifying Paul

MikeBrenner

Hi grb,

Nothing related to their recent results. I went to the recent Mello event in Richmond in December '16 where £1pm CEO presented ... sold my 5% of SIPP portfolio holding after the meeting for a small profit as wasn't comfortable with risks over the next 1-2 years.

The next stage of their planned growth is investment in a fintech platform and I had a few key concerns.

1. The CEO didn't give a clear problem that he was going to focus on and solve with this "tech" investment and expected value it would create - Instead said it would be a platform to go across the business ... the good news for shareholders being that at the end of this is that they would re-rate as a fintech leasing platform on a higher p/e. Hmmm. If he could have answered with a clear vision for the problem they would solve with their tech investment then i would be ok. e.g. Become the best lending platform for high volume brokers to do business with as its the easiest to use, makes the fastest decisions at the highest approval rating (with best commissions) so increases the £ commission a broker could earn per minute. Benefits to 1PM would be £ and market share). Huge red flag for me with my background in tech when no clear vision statement can be made.

2. They are looking at either procuring (with lots of exclusivity / bespoke build) or even buying a fintech platform to do this in house. The trend I see in technology is that speed to test & learn and scale helps you improve your product and business much faster to win, so I have concerns that the other 72 other fintech businesses are much further ahead - If 1PM were clear on their vision statement above this would have potentially allayed this fear.

3. However I asked further questions and its clear they have a real lack of technology and product skill sets / experience within the business today (no board or C level who are much more asset finance backgrounds) so there is a huge execution risk in spending £££ and not delivering returns.

Hope they do well as like the company but not for me for now.

ithomson1

I read the St Ives trading update as I previously considered buying early in 2016. I also felt that the Trading Update would poorly written. I'm glad you wrote that down in black in white, I thought that perhaps I wasn't good at reading in general!

Trident

I think the reaction to the Revolution Bars Trading announcement was partly to do with the fact that it was an 'in line' guidance to trading rather than an 'exceeded market expectations' announcement.

Maybe expectations have got slightly ahead of themselves, though the forward PE is not exceptional, but relative to where it original was (circa 10x) it has made up some ground in recent months. Also as Paul suggests a bit of profit taking would have dented the price.

Paul's initial reaction above seems to me a good take on the general economic soundness of the stock.

bestace

So the market expected something better than market expectations. Makes sense...

Paul Scott

Hi Ramridge,

1pm (LON:OPM) is basically a sub-prime lender. So sooner or later, they're likely to be hit with a big wave of defaults. So to my mind the profits aren't real.

Regards, Paul.

Yes. The logic of the madhouse possibly. But who said market were rational :-)

unwise2

I to was surprised by the market reaction to RBG's update, a P/E of 12.5 for a company with no debt and only halfway through a national rollout seems mean.

The only thing I find odd about RBG is why the board is bothering to pay a dividend, from memory the dividend cost £1.6m which would have been enough to fit out another large Cuban restaurant or nearly 2 bars. According to the last presentation recent additions have had a ROI of 38%, I doubt many shareholders could beat that. It would make more sense to keep the cash and accelerate the rate of growth.

I hold.

simonty

Very interesting and knowledgeable reply. The culture at OPM have changed since the Maria and Helen show. The Academy business was, I have heard, very different. It may just be growing pains, but OPM seem to have tried to change what was already working pretty well.

nigelo

FreeAgent Holdings (LON:FREE) a provider of services to UK micro-businesses has signed a contract with RBS.

I knew RBS has been shrinking for a while but I didn't realize it has now reached micro status!

simoan

Paul,

So it's up & running all the time, from any computer, with no downloads, or security issues for end users to worry about.

As a point of order there are plenty of security issues, so this should not necessarily be used as an advantage! For instance, I am assuming you need to use a web browser to access the front end of the software, in which case the usual PC web browser security issues still apply. There is also of course the standard data security issue with keeping any data in the cloud, particularly essential and commercially sensitive business data which is subject to the usual hacking attacks.

All the best, Si

skyjacker

Good assessment on Freeagent, I will add my couple of cents...

The likely discount to to RBS will be very significant accountants can get 30-40% off their monthly prices so I'm guessing RBS would have got bigger discount considering their size.

Also as you correctly point out there are a lot of cloud based bookkeeping packages some are charging significantly less than Freeagent. Sage One want to grab market share of the market and charging even less than Freeagent other providers like Kashflow charge less. Even what is seen to be market leading product Xero is loss making. So I'm afraid until there is market consolidation there continue to be race to the bottom.

Although accountants are incentivised to offer Freeagent other providers offer similar discounts and/or charge even less. Bookkeeping application is not particularly complex so barrier of entry is fairly low especially with other accounting software providers such as Capium selling their Tax & Accounts preparation software and throwing in bookkeeping as freebie.

Where Freeagent excels is customer services and they might be better adapted to UK rule as they are UK based. Also it is very well tailored at Sole traders But It lacks in integration with other cloud based software where Xero and Quickbooks excel at. So time will show Freeagent will be one of the winners in the sector.

Unwise2.

I think the dividend is part of the 'new' trend of being a cash generative share on AIM, and a welcome one in my eyes, as long as matters are sensibly balanced. The market is maturing and dividends are seen as one of the competing factors for getting investors attention. After all haven't we had over the years a surfeit of growth stocks stuffed full of Directors options. I also think it has the possibility of encouraging staff and exec purchases?

I note the RBG incentive scheme, at which I have only glanced, seems to have a built in expectation that execs will 'invest' at least the equivalent of their annual salary in shares, only 50% of which can be made of incentive shares under the LTIP arrangements, over a period of time.

I like to think the management and the interests of shareholders are aligned to some degree. With no debt, and good cash generation and being well covered by profits, I think all the sensible perameters are in place for the time being.

Wimbledonsprinter

Re: pension deficits (a frequently discussed topic on this site), I think it is worth pointing out that Communisis (LON:CMS) had a trading update today. Company has a large defined benefit scheme. At end- June 2016, the deficit had increased to £44 million, by mid-October as gilt yields fell further the deficit had increased to £57 million. Today, the company announced despite the back-up in yields, the deficit has only fallen back to £55 million at end-Dec. However, I model them, pension deficits always seem to come in worse than I estimate. Other bits of the Communisis trading update were fine. (I hold the shares.)

JMLDutch

Re: RBG - reportedly tourism has received a boost from sterling slump. I can therefore understand the market is disappointed that RBG did not exceed expectations despite this reported tourism boost.

Zipmanpeter

RE Revolution Bar Group RGB I think the negative/muted reaction today reflects some caution/scepticism as to whether the immediate future of an an upmarket and relatively expensive spend per visit chain establishment is going to do well in the next 12-18 months (unless bought over by PE/big chain!)

This is especially since although only 'part way' through national roll out, the upside is not huge. How many rich concentrations of young vodka drinking professionals are there in UK - although not a demographic I personally know well now! From memory they target only 80 outlets nationally and that feels about right. Demographically, it the 55-70 age group who are numerically growing.

By contrast consider Franca Manca in pizza: - if that takes off potential could be enormous and its 'lower than competitors' price and stripped down/streamlined model approach may be seen to times better.

On RBG, private investors may therefore feel watch and wait and a better price might come. No need to jump in now since only 'in line' vs smashing forecasts. However, it it halves in price at some point in next 12months, deploy the truck (not the bargepole).

Personally that's me : watching RBG for a better price but bought Fulham Shore (FUL) last week to hold for 5 years.

(Apologies no GBP sign possible on my laptop :))

andyi

Many thanks to Paul for his previous comments on ST Ives (LON:SIV) and their weak balance sheet, which caused me to review my holding a few weeks ago. That is one bullet that I managed to dodge! These reports and the related comments are very informative and a great boon to PI's.
Andyi

Chris Brown

I had a close look at £RBG around three months ago, but held back because like-for-like sales growth seemed to be slowing towards zero: 3% FY15, 2.7% 1H16, 2.3% FY16 and only 1.8% for the first 12 weeks of the new financial year.

This concerned me somewhat, however it appears the trend has now at least partially reversed, as they give LFL sales at +2.0% for 1H17.

Does anyone have a view on the importance of LFL growth for this share? I suppose once a bar's up-and-running it's pretty hard to increase revenue greatly - it's the extra sites that add value.

Pension deficits as reported using standard accounting rules are completely misleading in my opinion. It makes little sense to use a discount rate based on gilt yields or corporate bonds when the pension scheme is invested in assets which will generally provide investment returns far greater than gilts over the long term.

Communisis (LON:CMS) has the bulk of its pension assets invested in what it calls 'diversified growth' which I assume is mostly equities of some sort. I've just done some 'back of the fag packet' calculations using figures from their last annual account which indicates their pension deficit would be more like £17m if they used a discount rate based on what their pension scheme actually invests in rather than one based on the vagaries of the bond markets.

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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