Small Cap Value Report (19 July 2016) - RCDO, ENTU, STAF, SFE, PEN, IDEA, BRY, GTLY, DPP

Tuesday, Jul 19 2016 by

Good morning!

Brexit impact

This is probably the most important issue of the moment, determining what shares are worth, so I will continue to focus closely on what is happening. Here is a link to search for companies mentioning "referendum" in their RNSs. It's very useful - take a look.

I'm increasingly coming round to the view that most sectors are gradually getting back to business as usual, post Brexit. That's not to say it won't have some impact, but evidence is mounting that we're not heading for any imminent catastrophe.

An example - one of America's largest banks, Well Fargo, has just agreed to buy an 11-storey London office building for c.£300m. That's surely a good endorsement of their perception of London remaining a major international finance centre. Also, of course the weakness of sterling just made everything a good deal cheaper for American (and other overseas) buyers.

In a similar vein, an update from British Land (LON:BLND) yesterday was reasonably reassuring. There's an article in The Times today, pointing out that BLND has very low leverage now - LTV of only about 30%, its properties are 99% let on longish leases (so fixed rents), and the shares are at a deep discount to NAV. So the market is perhaps pricing-in too much of a downturn? Who knows, time will tell. I'm tempted to dabble though, as the discount to NAV should reduce if confidence returns.


Sterling is doing exactly what floating exchange rates are supposed to do - i.e. when a country has some kind of economic shock, then its currency devalues. That makes it more competitive, and attracts inward investment, which enables the economy to recover. Although it also pushes inflation upwards, due to the higher cost of imported goods.

So if the currency devalues too much, then it can trigger a vicious circle of hyper-inflation, and collapse of the currency. So a controlled devaluation is good, whereas a massive & disorderly devaluation is bad. A bit of inflation also helps inflate away Govt & consumer debt of course, which is handy.

We've seen the fall in sterling attracting inward investment this week, not only with the property purchase mentioned above, but also with the arguably opportunistic Japanese takeover bid for ARM Holdings (LON:ARM) - again it's the devaluation of sterling which made it more …

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Ricardo plc is a holding company engaged in engineering and strategic, technical and environmental consultancy business. The Company's operating segments include Technical Consulting and Performance Products. Its Technical Consulting segment is engaged in the delivery of engineering programs and technology projects, together with environmental and management consultancy services. The Technical Consulting segment also generates income from independent assurance services provided through its rail business. Its Technical Consulting segment includes engines, vehicle systems, driveline and transmission systems and test services, among others. Its Performance Products segment is engaged in manufacturing, assembly, software sales and related services. Its Performance Products segment includes manufacturing and software and also develops and sells licenses for a portfolio of computer-aided engineering software products. It operates in the United Kingdom, Germany, China and the United States. more »

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Entu (UK) PLC is engaged in the sale of replacement windows, double glazing, entrance doors, patio doors and exterior improvement products within the United Kingdom. The Company's segments include Home Improvements, Energy Saving & Insulation, and the Repair and Renewal Service Agreements (RRSA). The Home Improvement segment products, doors, windows, conservatories and roofline, are sold through separate brands. The Energy Saving & Insulation segment products include solar photovoltaic installations, air-to-air heat pumps, voltage regulators, remote heating controls and boilers, as well as cavity wall insulation, external wall insulation and loft insulation. The Company's brands include Astley Facades, ZEST, Zenith, Weatherseal, Penicuik, Europlas, St Andrews, St Helens, Eco Piggy and Job Worth Doing. Astley offer external wall insulations and render systems, lightweight external wall framing, composite and timber cladding, as well as specialist terracotta and aluminum rain screens. more »

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Safestyle UK plc is a United Kingdom-based company engaged in the sale, manufacture and installation of replacement un-plasticized poly vinyl chloride (PVCu) windows and doors for the United Kingdom homeowner market. The Company's segment includes the sale, design, manufacture, installation and maintenance of domestic, double-glazed, replacement windows and doors. The Company has over 30 sales branches and approximately 10 distribution depots located throughout the United Kingdom. Its product range includes EcoDiamond WINDOWS, EcoDiamond UPVC DOORS, EcoDiamond BI-FOLD DOORS, EcoDiamond REPLACEMENT CONSERVATORIES, GuardDoor, Pavilion and Inspire. It has manufactured over 279,000 frames and carried out approximately 60,000 installations. The Company's subsidiaries include Style Group Holdings Limited, Style Group Limited and HPAS Limited. more »

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50 Comments on this Article show/hide all

seadoc 19th Jul '16 31 of 50


Re: DP Poland (LON:DPP) All wot you says is true and back in 2005 I had a very similar view of Domino's Pizza (LON:DOM), be interested what you think of them now, My view is that Domino's Pizza (LON:DOM) is now a software company that makes the occasional pizza. Certainly there was an RNS last year (or maybe 2014) announcing a few hundred extra jobs, most in IT. In yr to 2015 DPP paid £6433 for software, I suspect there is a much larger charge buried in the accounts which I cannot find but do note that 67% of DP Poland (LON:DPP) pizzas were ordered on line in 2015.


I have a similar dilemma (the more so as most of mine were bought at 9p). Domino's Pizza (LON:DOM) was my star performer around 2005, similar views re loss or perhaps astronomical p/e (I think it was just making a profit) were expressed at that time and I sold out to the limit of cap gains allowance in 2005 and 2006 and at the time felt well pleased with myself. Bought back in in Sept/Oct 2008 into the ISA at about twice what I had sold for a couple of years earlier. The total return since then has been 586.3% and 30.2% on an annualised basis. I am reluctantly top-slicing DP Poland (LON:DPP) but only minimally on the basis of my experience with Domino's Pizza (LON:DOM). At the moment it is on-line/mobile phone ordering that is driving sales in UK and DP Poland (LON:DPP) has even higher on-line ordering. We are not allowed to mention Br*x*t on here but it may work in our favour as seems to be a roundabout of staff both within my own field (now retired) and that of my daughter who for many years has trained with, worked with, and still visits world-wide her Polish friends, all of whom think that Dominoes is the best.



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LongbeardRanger 19th Jul '16 32 of 50

In reply to post #143328


Thanks, yes I see it similarly, objectively DP Poland (LON:DPP) looks expensive but I am cognisant that Domino's Pizza (LON:DOM) looked expensive for many years, but was in fact terrific value....and I think the core Domino's business is quite a lot better than other roll outs such as Crawshaws and Patisserie Valerie (not that they are bad, it's just Domino's is better).

I too hold Domino's Pizza (LON:DOM) and it has done very well for me, it is expensive but not to a level that would make me top slice or sell......but DP Poland (LON:DPP) is quite a lot more speculative, hence why I am nervous.

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seadoc 19th Jul '16 33 of 50


Conviviality (LON:CVR) I hold. I am one of four siblings, as is my wife, so we have a surfeit of nephews/nieces and a couple of our own to boot. A quick pole last year universally suggested that students regard Bargain Booze as the best thing since sliced bread and as a number of them are still under 18 I can only conclude that the soft drinks are also good value. One pointed out we have a shop locally and I had a long chat with the franchisee, who has had the shop under several franchises over the last ten years and, on that basis, I bought in last year. I would point out that I bought on the basis of his views rather than the wines I bought on the visit. I had nearly doubled my money until the latest political events. It then lost a quarter and I was thinking of selling but we have a local "spoons", haunt of 16yr olds for post exam breakfast and I have chatted to a couple of the delivery drivers (Matthew Clark) who are raking in overtime (this is Wales so may just be local) I held on and on the news of results yesterday showing 40% gain over the year. If Paul could get an interview with Diana, who gave up a senior position (and serious pension) in Waitrose Wine, I would be very interested.



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00mrmark00 19th Jul '16 34 of 50

In reply to post #143367

Thanks Seadoc, agree an interview with the CEO would be great.

I am also a holder since around 2013.

It's the debt that is starting to worry me a little and the enlarged goodwill/intangibles.

What are your thoughts on that?

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MaxPower27 19th Jul '16 35 of 50

Hi Paul,
You mentioned: you have a "buy on a profit warning, or general market sell-off" list. I recall you shared some lists publicly before e.g. barge-pole. Is this other list one of them? If not, please could it be. Do understand this is only a personal perspective and not advice and we should form our own view, but at least it would help our research. I am also starting to develop such a list as expect some further market volatility in months and years to come.
Thanks - find your daily reports interesting, stimulating and helpful!

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arackwitz 19th Jul '16 36 of 50

Re: Ideagen. I like the GRC software space in general. Its driven by regulatory requirements and the cost of non-compliance is typically large versus the cost of the software which makes it quite sticky. Ideagen seems very mispriced however.

You mention it is on 20x PE but this is after adding back large share comp and before capitalisation of development costs. The right way to look at Ideagen and many software cos is on a tax affected (EBITDA - share comp - capitalised development cost) basis. This equates to FCF before working capital moves.

On this basis, Ideagen has a 3yr EPS / CAGR of 8.0% and is trading on 37.3x my earnings. There is no management commentary on the elevated share comp this year. If we were to assume that it was elevated and normalise it, then my 3 yr EPS CAGR is 14.5% and the LTM valuation is 31.4x my earnings. Doesnt strike me as good value or a particularly accretive acquisition strategy (the CAGRs arent much higher than organic growth).

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seadoc 19th Jul '16 37 of 50

In reply to post #143379


Those that made the most in the housing market were those that ran up huge debt in 1970's (and their children :-) The level of debt in Conviviality (LON:CVR) was chosen by the board, I for one would have joined in the new shares issue if I could but there were more buyers than debt to sell and although, had I got some at the market level, I would have made a good profit I guess the company knew they could easily sell that debt to the few and while we missed out on that potential profit we saved as the funds were raised more cheaply. Overall my holding increased in value. Looking forward interest rates are lower than perhaps could have been anticipated last year and likely to remain so for longer. So if happy last year they should be even happier now (I am). The company statement is opaque (to me) and perhaps Paul can comment but:

"At 1 May 2016 the Group's net debt totalled £86.1m (26 April 2015: net cash of £1.2m) and comprised £76.0m of term loans and £10.7m drawn down under the Group's working capital facilities, less unamortised banking arrangement fees. The bank facilities include a leverage and an interest cover covenant. The leverage covenant requires debt (excluding any amounts drawn down on under Matthew Clark's invoice discounting facility) to be less than 2.5 times the last 12 months adjusted EBITDA. The interest cover covenant requires adjusted EBITDA to be at least four times net finance charges. At the measurement date of 30 April 2016 leverage was 1.96 and interest cover was 12.1."

does not ring any alarm bells for me. I also note that the integration is ahead of schedule. Finally the dividend is well up, could be a Ponzi scheme (think Vislink (LON:VLK) or perhaps the next one, say IQE (LON:IQE) ) where the dividends are increased to push the up share price (often for benefit of directors bonus pay) but ultimately this is just your own shareholder money being returned in anticipation of, and requiring, further capital raising by the board. On this you have to make up your own mind, but I am confident (well, hopeful) it is genuine and appropriate.



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aflash 19th Jul '16 38 of 50

In reply to post #143259

You have either ignored or not understood all the points made.

He says that:
1) banks will lose positions transferred to Europe. It has already started with HSBC moving 1 000 people.
2) banks serve the corporations in London and the foreign ones using the UK as a European base will no longer do that.

From your previous remarks we know your position on Brexit. Do not let it delude you into thinking there will no effect on the City. Short term the uncertainty will.

Long term, if the Euro collapses, London will benefit. IF and when that happens there will be a crisis there which will also affect London and the City at that time. Subsequently it may benefit.

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janebolacha 19th Jul '16 39 of 50

In reply to post #143427

We also know your position on Brexit, from your previous remarks.
I really can't be bothered to reprise all that but neither do I swallow verbatim
the opinions of a journalist from The Independent. That is why I
confined my response strictly to the Wells Fargo transaction.

So you may speculate as much as you wish about the sequel to Brexit.

And we must agree to differ.

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Paul Scott 20th Jul '16 40 of 50

In reply to post #143301

Hi Mark,

I look at pretty much everything, so only write about things that I find interesting!

Conviviality - it's big now, and rapidly acquiring other low margin businesses.

I reckon it will be a massive muddle for years yet. But they reckon they can achieve buying synergies. Good luck to them!
There's a profit warning in there for sure, once they get in a muddle in 1-2 years. Been there, on a smaller scale, rapid growth always leads to chaos. Teams just cannot cope.

Not for me. But I can see the attraction. Good story, shares probably might go up. City boys have no idea - they've never actually done a roll-out! 

Regards, Paul.

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Ramridge 20th Jul '16 41 of 50

In reply to post #143319

dgold - There isn't a simple easy way to assess the quality (or lack of) of management. You need to build up a picture from several signals over time. Here are a few.
- a profit warning out of the blue
- followed up by more profit warnings
- CEO who talks up and makes rash promises. Delivery is significantly less than forecast
- CEO's past history
- an opaque set of results with lots of exceptionals, too many adjustments, significant capitalising of operational costs, etc
- read carefully the Chairman's and CEO's commentaries. And read between the lines too.
- take account of Paul Scott's feedback after his interviews; he can smell b*s* at 10 paces
- watch CEO s being interviewed on business broadcast streams such as DirectorTalk, vimeo, youtube, etc

 -  listen to Paul's audiocasts

You will soon form a picture about the quality and competence of the management in question.

Hope this helps.

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janebolacha 20th Jul '16 42 of 50

Paul, statement from the Bank of England this morning seems to confirm your view on there being no evidence of a sharp Brexit slowdown:

"Bank of England sees no clear evidence of sharp Brexit slowdown
The Bank of England said on Wednesday it saw "no clear evidence" that a sharp slowdown was underway in Britain's economy after the June 23 vote to leave the European Union, though around a third of firms it spoke to plan to curb hiring and investment.

The central bank's regional agents - who are based at BoE offices around Britain - said business uncertainty "had risen markedly" but there was little evidence that consumers were spending less either.

"A majority of firms spoken with did not expect a near-term impact from the result on their investment or staff hiring plans. But around a third of contacts thought there would be some negative impact on those plans over the next 12 months," the BoE said.

"As yet, there was no clear evidence of a sharp general slowing in activity," it added.

Report from Reuters"

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eddiegoldstein 20th Jul '16 43 of 50

Good morning Paul,

As an enthusiastic reader of your blog, would it be possible for your opinion on Angle PLC? The full year results are out on the 28th of this month.

Many thanks

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Trident 20th Jul '16 44 of 50

If you read the online FT Alphaville section, it often references a number of 'think' pieces on a number of fronts, and delves sometimes into frankly obscure areas. It has picked up on a few matters to do with Brexit technical matters that may arise that only the nerdy specialists trip across, but may have significant impact

I think in contractual matters this is referred to as the small print.

Let's hope the UK can field some good trade/banking lawyers, because the devil is often in the detail!

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WDWombat 20th Jul '16 45 of 50

Ricardo is one of the most brilliant engineering companies in the UK. I bought it a few years ago when a long-term deal was announced with Mclaren. I sold it but much too early. You will find that it has a long and distinguished history and apparently a vibrant present and future. How you value companies this good is always a problem but if you could get them to speak in Brighton I would have a go at attending to see if I should get back in. An obvious weak sterling beneficiary but more importantly perhaps a seemingly cracking company.

En tu, Brute? I was lured into this one by some bad error on my part. Luckily only a small position...

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catalogue 20th Jul '16 46 of 50

In reply to post #143244

This is useful for understanding where these companies feature. Carclo for example seems to have emerged out of Lucas and others so good old manufacturing Britain just does it with another name not just here but does it worldwide.

Copyright Investors Chronicle

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JohnEustace 20th Jul '16 47 of 50

In reply to post #143496

Or perhaps even better would be if they could be persuaded to host a meeting with a tour of their facilities? That would get me to drive down from Wokingham at the drop of a hat.

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dgold 20th Jul '16 48 of 50

In reply to post #143457

Ramridge, thanks, useful advice.

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aflash 20th Jul '16 49 of 50

In reply to post #143430

Merci d'avoir soulevé mes propres préjugés. Il n'y a pas d'avenir là.

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janebolacha 20th Jul '16 50 of 50

In reply to post #143577

Pas de quoi, bonne soirée.

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About Paul Scott

Paul Scott

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »


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