Small Cap Value Report (2 Feb 2017) - GATC, FCCN, OTB

Thursday, Feb 02 2017 by

Good morning!

I've got a half-written section on 32Red (LON:TTR) to finish off from yesterday, so will update that later. I've been ill this week, so it's all been a bit of a struggle.

Probably the most frequently asked question posed to me is this: "Why do Gattaca shares keep going down?"

There's a trading update this morning, so we might be about to find out.

Gattaca (LON:GATC)

Share price: 290p (up 0.3% today)
No. shares: 31.2m
Market cap: £90.5m

(at the time of writing, I hold a long position in this share)

Trading update - for the 6 months to 31 Jan 2017.

Gattaca is a staffing group, specialising in engineering & technology sectors. It was formerly known as MatchTech, and it bought Networkers International (formerly a separately listed company), and the combined group now trade under the Gattaca umbrella.

This looks fine to me, with the key bits saying;

The Group delivered solid results during a period of some instability in the UK, following the EU referendum on 23 June 2016.... the Board has confidence that profit for the full year will be in line with its previous expectations.

It throws me off balance when trading updates include the word "previous" expectations. What previous expectations? What has changed since? When was previous? 3, 6, 9 m or 12 months ago? Further back than that? It's too vague.

What this announcement should have said is that trading is in line with market expectations, which the company believes to be PBT of £x, and adjusted EPS of y. I do wish that we could have some consistency and clarity in trading updates.

Some data is given for NFI (net fee income), which was down -2% in H1, or -5% in constant currency. Not great, but that appears to have been what was expected.

Broker note - Equity Development (commissioned research) has put out an updated note this morning. I like the Gattaca notes, written by Paul Hill. His notes are always worth a good look, as they often contain much useful background. In the case of Gattaca notes, he also covers various other companies in the sector. Harvey Nash & Gattaca stand out as the cheap ones. Although personally I've never been drawn to Harvey Nash in the past, maybe I should have a fresh look at it?

Revised forecasts today from ED, for Gattaca show…

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Gattaca plc, formerly Matchtech Group plc, is a human capital resources business dealing with contract and permanent recruitment in the private and public sectors. The Company operates through two segments: Engineering and Technology. The Engineering segment comprises Barclay Meade and Alderwood recruitment consultancy brands. The Technology segment includes the Connectus recruitment consultancy brand. The Company is a provider of specialist recruitment services to the engineering and technology industries, both in the United Kingdom and internationally. The Company offers three core solutions: Contingent Workforce Solutions, Permanent Recruitment Process Outsourcing (RPO) and Total Workforce Solutions. more »

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French Connection Group PLC designs and supplies branded fashion clothing and accessories for men and women. The Company operates retail stores and concessions in the United Kingdom, Europe, the United States and Canada and also operates e-commerce businesses in each of those territories. Its principal brand is French Connection, which designs, produces and distributes branded fashion clothing, accessories, such as toiletries and fragrances, shoes, watches, jewelry, eyewear, furniture and homeware through its distribution channels: retail stores, e-commerce, wholesale and licensing. Its other brands include, Great Plains and YMC. The Company operates in approximately 50 countries around the world. The Company's subsidiaries include French Connection Limited, French Connection UK Limited, French Connection (London) Limited, Contracts Limited, French Connection Group Inc., French Connection (Hong Kong) Limited, French Connection (Canada) Limited and YMC Limited. more »

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On the Beach Group plc is a United Kingdom-based online travel agent. The Company operates in two segments: Core and International. The Company's core segment conducts its activity through the United Kingdom Website (UK). The Company's international segment conducts its activity through Swedish Website ( The Company is an online retailer of beach short-haul beach holidays, primarily targeting customers in the United Kingdom under the On the Beach brand. The Company's technology platform enables customers to package the constituent components of their holiday (including flights, hotels and transfers) to build custom-made holidays from a range of flight and hotel combinations. The Company offers customers a range of flight and hotel products bookable through online channels (including by desktop, mobiles, tablets and applications) and over the phone. The Company's subsidiaries include On the Beach Beds Limited and On the Beach Travel Limited. more »

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

42 Comments on this Article show/hide all

Lord Zion 2nd Feb '17 23 of 42

Hello Paul. I appreciate it is only a couple of weeks since your last post regarding Hotel Chocolat (LON:HOTC) but I wondered if you had any comments regarding the quite large slide in share prices since their 17th Jan trading update which, after all, wasn't all that bad! Many thanks.

Oh, and yes, I do have a vested interest having purchased some about a week prior, patiently waiting for a not-too horrific spread to do so. Trying to ascertain whether to increase my holding at a "bargain" (something I wouldn't ordinarily do) or just to keep as-is and see what happens. So any thoughts and comments welcomed for this relative newbie!

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Collector 2nd Feb '17 24 of 42

If a retail specialist like Paul thinks FCCN is worth multiples of its current valuation then why wouldn't a retail specialist like Mike Ashley, who I have always thought is a lot smarter than people give him credit for, is driven and typicaliy for an entrepreneur, brave..
Most of FCCN will sit nicely in SPD's 'premium lifestyle brands' and i think there are multiple ways Mike Ashley could wring cash out of a takeover.
i.e. SPD online business is effective but they have the wrong product / client base (cheap sports gear) for this to go far but with fashion, sky's the limit.
I may be wrong but think FCCN could finally be in play, with so many people holding large positions that could be open to a deal, and have put money where my mouth is this morning.
The many multiples may not be there with the players involved but maybe 2x.
FCCN is pocket money price to SPD if they consider it a strategic fit for Flannels, republic, fabric or hot tuna etc.

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bestace 2nd Feb '17 25 of 42

In reply to post #169960

On The Beach (LON:OTB) talk about 3 years (i.e. not before January 2018) before their Swedish operations start to deliver positive returns, mostly due to large marketing costs required to establish a presence. If this is characteristic of every territory (and there is no reason to assume it isn't), then I'm happy enough with a gradual international rollout so they don't overextend themselves.

From the directorspeak I think it is unlikely they are suddenly going to start expanding into multiple territories.

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Wimbledonsprinter 2nd Feb '17 26 of 42

I generally agree with the general sentiment that Gattaca (LON:GATC) just seems to cheap. However, it is worth noting that the acquisition it is making today is at a similarly "cheap" valuation, namely 5x EBITA. While we cannot know rhe reasons why the selling shareholders agreed to sell (I note the CEO and shareholder Richard Lawrance is staying on) or what other offers there might have been, at least the price at 5x EBITA was not a stumbling block.

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Collector 2nd Feb '17 27 of 42

'When Mike Ashley meets Stephan Marks'
The more I think about it the funnier it gets what chance they get on like a house on fire,
they both built retail empires from nothing they both use strong language so will not be
offended by that, both have run ins with the city. In age one could be the others father.
SPD has been under pressure to improve its governance for years what chance of a new NED role at SPD,
for old Stephan Marks to massage his ego, stranger things have happened.

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alihaouas 2nd Feb '17 28 of 42

i would be grateful if you can comment on the takeover of Netplay for 9p which is sheer robbery- do you know why?

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simoan 2nd Feb '17 29 of 42

In reply to post #169975

Not entirely happy with the idea of them making further acquisitions while they already have debt,though.Perhaps I'm too conservative.

Me neither Alan. I'll be honest I dumped half my £GATC holding that was in my main trading account  and left the rest to rot in the "deep value" (that's "deep" as in deeply concerned it's a value trap and I could end up knee deep in merde :)) corner of my SIPP. 

Of course, the original reason for the debt was the purchase of Networkers which, let's face it, has not been a great success and has seen the share price fall from £5 to £3. No wonder they felt the need to re-brand the company! The results since have been nothing to write home about with no growth and now we get another acquisition and a bit more debt. It seems to me like a company running very hard to stand still with no organic growth in what has been an otherwise decent job market for the past few years. 

Also, I don't really like people businesses and I can't help feeling there maybe an underlying problem here - have all the Networkers team dumped stock into the market, left the company and taken their clients with them? 

All the best, Si

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Carey Blunt 2nd Feb '17 30 of 42

In reply to post #169960

I am also OTF (On The Fence) about On The Beach (LON:OTB) . It carries too high a risk of Brexit turmoil for me to fully commit to it.
Possibly as Sterling depreciates, inflation goes up, less people holiday abroad, revenues stall, SP drops.

Of course it could alternatively be a way that cost concious people can get a holiday even in the situation of higher inflation because it can compete better than high street players. And so it grows and prospers.

Still can't decide so still haven't bought.

| Link | Share 2nd Feb '17 31 of 42

With regards to FCCN, the position of the business is unique. At headline level the Share price and Market cap (£39m after the rise in the last two days) reflect a business which lost £3.5m last year and has made losses in the last four years, but with £7.7m of cash at the last count, albeit this is dwindling as the losses erode it.
The real frustration, as Paul alludes to, is that underneath the headline number there is a business of huge potential value. With a shared overhead of £8.5m, they have Licensing and Wholesale which contribute £20m but a retail arm which loses £15m.
The retail business has 138 stores, so the average contribution per store is a loss of over £100k a store. One would assume that 80% plus of the stores are loss making and only a small number (plus Internet) making any sort of contribution to the Central Overhead. The average remaining lease length is 4 years, and a simple arithmetic assumption from this is that 15-20 will expire each year. In addition to expiries, they will have stores where it is possible to dispose with a positive Premium (eg the recent Regent St disposal) and others where the reverse premium would still make sense given the loss the store may be making.
Over 3-4 years with an aggressive retail disposal plan, one could envisage a business of different shape..with Wholesale/Licensing contributing c£20m, a much reduced store estate which at least washes its face, Internet £1m-£2m and a much reduced Overhead for the reduced scale business of (say) £5m. That business would potentially be making PBT of £16m - £17m and in theory be worth 4-5 times its current market cap.
It is an obvious plan, and FCCN are moving slowly towards it, but at nowhere near the pace they should be, given the cash burn.  They seem to dispose around 10 stores a year, and then add a few new ones in. I suspect that Marks is the blocker, FCCN feeling like "his baby" and perhaps being reluctant to dispose of enough stores fast enough
Significant value here, underneath the headline numbers.

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grb 2nd Feb '17 32 of 42

Hope you get better soon, Paul. I hope you do manage a 32Red (LON:TTR) review - the market has gradually responded positively to yesterday's update and volumes are well up.

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spaceinvader2 2nd Feb '17 33 of 42

Any views on the Netplay offer at 9p as a shareholder I am disgusted it's recommended by the board

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beatingmrindex 3rd Feb '17 34 of 42

In reply to post #170056

What makes you think its worth any more?

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Paul Scott 3rd Feb '17 35 of 42

lets crush, ooh i love that!

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Bushranger 3rd Feb '17 36 of 42

In reply to post #170017

I too dumped Gattaca (LON:GATC). shares today. I was hoping there would be some positive news that would see the end of the never ending see-saw of one step forward three back share price depression. I'm not convinced this RNS will do so, though for those who continue to hold I hope I'm wrong.

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spaceinvader2 3rd Feb '17 37 of 42

In reply to post #170068

Because at the results in Sep 16 things were generally upbeat after a difficult couple of years and slump in share price from around 23p to 7p.At this time they had cash of 9m and were on 7x times earning after stripping out net cash.Dividend yield 6% and also there was plenty of director buying up to 10.75p in recent 18 months,I'm happy to hold and don't want 9p it happen to me with Rethink group couple of years bk-takeover just gave me some of my money back I'd rather hold.


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DoctorV 3rd Feb '17 38 of 42

French Connection (LON:FCCN) - Not sure there is any value in this at all. Cash will run out before they can get out of most store leases.

Mike Ashley would be better off waiting for French Connection (LON:FCCN) to collapse and then pick off the bits that he can leverage in the SPD empire. Akin to Boohoo.Com (LON:BOO) and proposed Nasty Gal transaction.

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Zipmanpeter 4th Feb '17 39 of 42

Re French Connection (LON:FCCN), I worked for 15 years with classic big FMCG companies like P&G in emerging markets but have spent last 10 years in SME owned by Indian/Lebanese owner-founder entrepreneurs. BIG cultural difference. I am entrepreneurial - they are entrepreneurs like Marks.

I am currently MD of a business that is the living dead : illiquid and insolvent - with interest bills higher than revenue! (Paul would not have a bargepole long enough!!) . But the owner keeps on pumping money in. Some Entrepreneurs NEVER quit until they are dead with a stake through the heart. It is NOT about the money so accountancy and rational calculations are 2y. They got where they are by financial balls not brains.

Mark's life, his identity IS his business. Rationally, he should : Option 1, sell out and with £50Mn or whatever in his pocket, drink cocktails on a beach with a few NED roles to massage the ego. Option 2, close down Retail rapidly and hide out in w/s and online and make money.

However, he may prefer/enjoy/be unable to tear himself away from his baby, his dream. Exiting Retail is a huge blow to his public face and probably what he loves. Exiting the business is an exit of his identity.

At £500K pa salary, there is still 'rice on the familiy table' and he could borrow money to stay alive for years. Given his shareholding power it remains an industrial scale lifestyle business. Only ill health or insolvency (years away) will prompt retirement or giving away of control and thus sale in my in my view.

I agree with all analays and comments from Paul and other commentators (better options available for £FCCN). But I disagree with BOTH expectation of trade sale or DoctorV above (liquidation sale to Mike Ashley - will need to wait years.

Most likely years more struggle more or less where we are today - these things can go on for years more than seems sensible. I would expect no action before Marks turns 70, 75 or suffers a heart attack!

I will wait 2 more years before investing.


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ridavies 6th Feb '17 40 of 42

In reply to post #169996

Apologies for late response. Travelling. I note that the 'purchase' of the 11% share is by CFDs. I assume that is different from buying a holding of shares, but am ready to be corrected. I am a babe in arms in this area, compared with Paul and also with you I am sure.

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ridavies 6th Feb '17 41 of 42

In reply to post #169996

Further to my first late reply, here is an additional thought, perhaps the real thought. PS After travelling, I have come home with a stinker of a cold and can only think of one thought at a time! Here is the second one.
I was really querying the signficance of the difference between the two. An 11% physical shareholding presumably would be indicative of a firmer intent, and by CFDs rather a speculative move?

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ridavies 6th Feb '17 42 of 42

In reply to post #169996

Re French Connection (LON:FCCN), Im not doing very well today. I have now noted that 2 days after stating the holding was in the form of CFDs, this was cnaged into a firm stockholding. In between, Schroders seem to have sold down their 5% holding to zero - to MA?

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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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