Small Cap Value Report (21 Jul 2016) - HWDN, EMR, WIN, TMMG, TSTL, MYSL, AO.

Thursday, Jul 21 2016 by

Good morning!

Some interesting macro stats/comments this morning from the Bank of England, in its monthly Agents' Summary of Business Conditions. Key points;

  • Unemployment rate fell to 4.9% in 3m to May, lowest level since 2005, and employment also at record levels (although obviously this is pre-Brexit).
  • Average earnings growth is going up, boosted by Living Wage, and is currently +2.3%. Although note that there will be an offsetting impact from reduced Tax Credits.

Post-Brexit comments;

  • Uncertainty- most companies say won't affect capex plans, but a third expect "some negative effects" in next 12m. 
  • Little evidence of any impact on consumer spending, although "some reports of consumers becoming more hesitant around purchases of higher-value items".
  • Optimism amongst exporters, benefiting from devaluation of sterling.
  • Few reports of companies seeking to pull out of the UK.
  • A few reports of foreign investment in UK being postponed.
  • Prices likely to rise, as impact of more expensive imports is passed on, especially in catering. Retailers feel unable to pass on price rises, and are seeking to protect market share (hence margins likely to come under pressure).
  • Demand for credit easing, but banks "appetite to lend had been maintained following the referendum decision".

Overall then, this confirms my view that nothing dramatic is happening as a result of Brexit. Although it sounds as if the economy is likely to slow down in the next 12 months. The jury is out on whether that turns into a recession or not, nobody knows at this stage.

Howden Joinery (LON:HWDN)

So far, this £2.6bn market cap (at 421p/share) joinery seems to be shrugging off the Brexit result, it says today;

·       Howden Joinery UK depot revenue increased by 5.2% in the first four week period of the second half of the year (to 9 July), which included the EU referendum;

·       Referendum result has created uncertainty about outlook for remainder of year, but no evidence of any impact on demand so far;

·       Continuing with plans but remain watchful and ready to respond;

·       Weaker exchange rate would affect cost of goods sold.

That sounds pretty bullish to me. It suggests that housebuilding & refurbishment is continuing as normal. Although I suppose there could be a time lag for any downturn, because a half-done property project is not going to be abandoned before completion.

Empresaria (LON:EMR)

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Howden Joinery Group Plc is a manufacturer and supplier of fitted kitchens, appliances and joinery products. The Company is engaged in the sale of kitchens and joinery products, along with the associated manufacture, sourcing and distribution of these products. It offers products in categories, such as kitchen collection, including inclusive cabinets, accessories, handles and taps; appliance collection, including ovens, hobs, extractors, refrigeration, dishwashers, laundry; doors and joinery collection, including internal doors, sliding wardrobe doors, external doors, door frames, linings and casings, and moldings; hardware collection, including door handles, door furniture, door security, and tools and accessories; flooring collections, including laminate flooring and accessories, and bathroom cabinet collection, including bathroom accessories, bathroom handles and bathroom worktops. Its operations are located in the United Kingdom, France, Belgium, the Netherlands and Germany. more »

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Empresaria Group plc is a United Kingdom-based international specialist staffing company. The Company's principal activity is the provision of staffing and recruitment services. The Company is organized across three regions: UK, Continental Europe and Rest of the World and operates across seven key sectors. The Company targets a balanced and diversified spread of operations across its regions and sectors. The Company also targets professional and specialist job levels where its brands can offer value added services to clients. The Company has three main service lines, temporary recruitment, permanent recruitment and offshore recruitment services. The Company’s offshore recruitment services represents a range of different recruitment services and provides training services in South East Asia. The Company's brands include Alternattiva, Ball and Hoolahan, Become, FastTrack and Greycoat. It has operations in 21 countries. more »

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Wincanton plc is a provider of supply chain solutions. The Company operates through two segments: Retail & Consumer, and Industrial & Transport. Its Retail & Consumer segment focuses on consumer products business and brings to customers through the entire supply chain from producer to retailer, and Industrial & Transport segment focuses on an integrated and optimized transport operation, and includes Containers business and Pullman business. Its Pullman business provides transport and fleet services. The Company provides its services to a range of sectors, such as retail, which includes fashion logistics, e-commerce, food, health and beauty, leisure and lifestyle, consumer electronics and paper products, as well as manufacturing, which includes water, milk and bulk food, construction, consumer goods, energy and defense. The Company provides a range of services, including road transport, warehousing and value added services. Its value added services include packaging and consultancy. more »

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41 Comments on this Article show/hide all

Paul Scott 29th Jul '16 22 of 41

The facts over BHS are not opaque at all!
If you follow the chronology, and read each years' accounts, from 2000 through to 2014, then the facts are the facts. Green paid himself divis in a perfectly legit way until 2004, then he stopped. The business was profitable until about 2008, when it spiralled downhill, as it was a crap format that was doomed.

Sadly, most commentators, and almost everyone who has an opinion on this, has NOT researched the facts! It's pathetic. But as always, people believe what they WANT to believe. Truth is irrelevant. Very dangerous. People are so stupid, it's truly scary.


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pka 29th Jul '16 23 of 41

In reply to post #144936

Paul, you wrote:
"If you wind the clock back to 2004, then Green's divis from BHS were legal, and perfectly reasonable. He did NOT plunder the company at all. BHS went haywire after 2008, as the recession killed it, and Govt policy caused pension deficits to balloon. It was amazing that Green kept it running for as long as he did."

I don't disagree with you on that. However, I think the question is whether Green, as the previous owner of BHS, has a moral obligation to make good the deficit in the pension scheme now that BHS has gone bust, bearing in mind: (1) the fact he can easily afford to do so, (2) the huge dividends from BHS that he paid himself previously, (3) the fact he arranged his affairs to pay no income tax on those dividends by putting the business in the name of his wife who is a resident of Monaco and by using various offshore companies (I accept that he did pay corporation tax on BHS's profits), (4) the fact that the deficits in the BHS pension scheme will probably ultimately have to be paid by us all collectively as British taxpayers.

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rhomboid1 29th Jul '16 24 of 41

Hi Paul

As you say it is the timeline that is key, divis taken were fine at the time they were taken viewed with the facts known at the time, In hindsight his mistake was to carry on with the BHS format way too long , he should have closed it down c. 2008,

What was crazy was to fiddle around with freeholds before selling to an ex bankrupt with no money and hope the PRA & the pension deficit would fall in the lap of Newco with no blowback to Arcadia & his family.

I think he's been hung out to dry for a load of stuff he didn't do as well as the stupid stuff he did do.

Bottom line the staff had jobs for years longer than the numbers suggest was appropriate and in the main get a 10% pension haircut in the PPF as a result . Swings v Roundabouts.

I'd agree it doesn't look pretty but as you demonstrate Paul the facts run counter to the accepted social media narrative at so many points.

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deucetoace 29th Jul '16 25 of 41

In reply to post #144993

When did politicians concern themselves with facts if they can avoid it

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shipoffrogs 29th Jul '16 26 of 41

"People are so stupid, it's truly scary."

Really? A lot of these stupid people are having some of their pension contributions for their retirement diverted to the PPF to fund the shortfall on the BHS pension scheme whilst he swans around the Med on a massive yacht with a knighthood.

Nearly all these people haven't the time, inclination or knowledge to do the research you've done. But they can recognise an injustice when they see one and then maybe the full truth is irrelevant. I don't find that scary.

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timarr 30th Jul '16 27 of 41

The MP's report is a depressing read with virtually no one involved in the process coming out of it looking good; cronyism and incompetence lurk on every page. But the critical issue is the sale of BHS to someone who was manifestly unsuitable for the task, under circumstances that virtually guaranteed that the company would go bust and that the pension liabilities would be left in the public domain.

We can argue about the other issues - whether or not dividends taken were excessive or whether there was a systematic failure to invest in the brand, or whether the way that property assets were stripped out of BHS and transferred into other Green companies was morally acceptable - but it's simply not possible to believe that the sale of BHS for zero equity to a man with no retailing competence or believable business plan was in accordance with good business planning. Let's face it, if Philip Green with half a century as one of this country's leading fashion retailers couldn't make BHS work what chance did Dominic Chappel, a man with no retail experience and no record of having run a company anywhere near the size of BHS?

And if we accept that the sale to Chappell was a nonsense in a business sense then we're forced to conclude that the liabilities he took one were virtually guaranteed to fail to be repaid. And as the main liability was the pension deficit the conclusion that the committee came to was that the sale of BHS to Chappell was simply a disguised way of Philip Green dropping the pension deficit onto the PPF which indirectly we all pay for.

And whether you agree with the Work and Pensions Committee or not, you can see how they came to that conclusion. The critical paragraphs are 170 and 171.


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Fangorn 30th Jul '16 28 of 41

"Thus far, the only good thing to come out of Brexit is the excellent BBC comedy "Brexageddon" - If you haven't seen it yet, make sure you do. Loads of hilarious moments, I particularly liked the "truthful subtitles" for Corbyn and Mays speeches but my fave was probably Marie Le Pen being called "a minx"! "

What an utter load of drivel that BBC effort was. Can't see what you found funny about it.

Typical BBC effort though, thoroughly predictable and tedious.

If only they'd bring Spitting Image back - far better political satire.

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Fangorn 30th Jul '16 29 of 41

Here's what Martin Vander Weyer thinks of the Philip Green BHS affair...

"Rough justice, but MPs have got Sir Philip ‘Shifty’ Green bang to rights"

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cig 1st Aug '16 30 of 41

In reply to post #145017

Isn't the implication that he should have let BHS go into straight bankruptcy a bit earlier, which would have resulted in the PPF having a very similar liability given ring-fencing under limited liability (less what was wasted on that little extra time play)? It'd be more elegant but would it make a material difference?

(Note that we also "all pay for" the social opportunity cost of people wasting their working lives in unwanted businesses past their sell by date.)

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Ramridge 1st Aug '16 31 of 41

In reply to post #145017

Hi timarr -
Like you, I would urge people who have a view on the Phillip Green affair to read the Work and Pensions Committee report in full.
The conclusion to me is clear, Green is a modern day corporate plunderer who specialises in hollowing-out companies to further his personal wealth and then discard the carcass to wannabees such as Dominic Chappell. For the sake of the pensioners, the real losers of this scam, the government should pursue Green to the utmost limit of the law.
Note that all the corporate advisers, bankers, brokers, consultants involved in this feeding frenzy (some 20 odd) also made substantial gains (in £m) at the expense of the pensioners.

A disgrace.

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timarr 1st Aug '16 32 of 41

In reply to post #145086

Hi cig

Limited liability doesn't definitely allow a subsidiary to escape the PPF's anti-avoidance powers. BHS was part of Taveta Investments, controlled by Tina Green. If BHS had gone bust while part of Taveta and the PPF found that Taveta was previously acting as the guarantor of the BHS pension scheme then it would be on the hook. And the PPF powers go beyond this. If Taveta failed to clear the sale of BHS to Chappell with the PPF - which appears to be the case - then the PPF can still force Taveta to fund the pension deficit.

As with so many things in this story the exact nature of the relationship between Taveta and BHS is unclear. Almost certainly Taveta did not formally guarantee BHS's liabilities, but it did underwrite the BHS accounts to allow them to be reported as a going concern. Quite what the difference is in those two positions is likely to be exercising the lawyers on both sides as we speak.


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Paul Scott 1st Aug '16 33 of 41

In reply to post #144999


You said:

Really? A lot of these stupid people are having some of their pension contributions for their retirement diverted to the PPF to fund the shortfall on the BHS pension scheme whilst he swans around the Med on a massive yacht with a knighthood.

Nearly all these people haven't the time, inclination or knowledge to do the research you've done. But they can recognise an injustice when they see one and then maybe the full truth is irrelevant. I don't find that scary.

Proves my point exactly!

What do you think actually CAUSED the BHS pension deficit?

If you engage your brain, and do your research, you will find that it was GOVERNMENT POLICY - to reduce interest rates to near zero, after the Great Financial Crisis, that caused these enormous pension deficits. It had nothing to do with Philip Green's dividends, which were entirely legal, and did not in any way harm the pension fund, if you do your own research instead of being a clueless muppet!

So save your indignation for the politicians who made that decision to reduce interest rates to zero, and hence create massive pension fund deficits.

BHS did NOT have a pension deficit in 2008, it was actually slightly in surplus!

Surprise you? It wouldn't do if you'd done your homework properly. But nobody has - hence my anger! This is how ignorant crowds convict & hang innocent men. So THINK! RESEARCH! Don't spout ignorant rubbish.

THIS is why you should do your own research, not slavishly follow what everyone else tells you.


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timarr 1st Aug '16 34 of 41

Responsible companies fund their pension scheme obligations correctly, regardless of government policy on interest rates, or anything else. Responsible companies don't wash their hands of their pensioners because their obligations become onerous, they recognise that pension payments are deferred recompense for people putting in years of effort to support earnings.

If we take the view that it's OK for BHS to fail to fund its pension properly because the government chose to drop interest rates to near zero then what stops every other company from doing this? At what point does a promise to provide retirees and employees a stipend in their dotage become a option rather than an obligation?

Responsible companies recognise that setting interest rates is the legitimate function of the state and that this will lead to varying levels of financial commitment. They also recognise that this is a coin that has the provision of a transport and energy infrastructure, an independent legal system and the respect for property rights on the flip side. Many companies in Russia would happily trade low interest rates for some certainty about their future. Most companies take the view that interest rates will eventually rise and their pension deficits will shrink: but most companies have a view that encompasses decades, not weeks.

The setting of near zero interest rates is not a unique UK government policy, it's a global phenomenon, triggered by the Great Financial Crisis of 2008. In order to keep the world economy going, including the rest of Philip Green's business empire, interest rates have been slashed to help stimulate the economy and keep debt levels under control. That situation was directly caused by a bunch of greedy bankers and business people failing to take any moral responsibility for their actions.

It is correct that Philip Green's dividends back in the early days of his ownership of BHS have nothing to do with the pension deficit. But the Work and Pension's committee's report doesn't say it was. It merely points out that having extracted a lot of cash from the company and gutted it of assets he might feel he had a moral obligation to look after the people who generated that cash in the first place; while suggesting that the sale of BHS and its pension deficit to a man who clearly had no ability to run the business was simply a smokescreen for Green to extract himself from a legal responsibility to fund a debt he didn't wish to pay,

Philip Green said in the papers yesterday that he has no legal obligation to fund the pension deficit. That may or may not be true - we're likely to see it tested in the courts if he doesn't stump up some cash - but of course the issue here isn't about his legal obligation. It's about the moral obligation of businesses to honour the promises they make to the people who work for them.


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Paul Scott 1st Aug '16 35 of 41

In reply to post #145164


You are writing all that with the benefit of many years' hindsight.

Nobody wrote that at the time. Think about it, as things actually happened. Not as you want to think about things retrospectively, to fit your narrative now - which is very dangerous.


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shipoffrogs 1st Aug '16 36 of 41

In reply to post #145161

I don't think there was anything in my post that was critical of your research or which mentioned dividend chronology - not sure why it justifies your clueless muppet jibe. But hey ho.

Low interest rates are probably the key reason for pension deficits being what they are, but not the only one: longevity, wage inflation, investment returns and allocations, previous contribution rates, Gordon Brown's raid on dividends etc all add to a more nuanced background.

As an aside, from memory those low interest rates arose from the debt binge in the years up to 2008. So, the high street benefits from both everyone borrowing to spend and then the low interest rates to keep them spending.

My earlier post was more in defence of "stupid people" who can recognise what has gone on here without all the expert explanations that have sought to justify it.

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Paul Scott 1st Aug '16 37 of 41

In reply to post #145173

Hi Sof,

Thanks for the nice reply, and I'm sorry for being rude. I didn't mean you specifically, I just meant all the wave of comments from people generally who have not done their research properly.

Green did nothing wrong, UNTIL he sold BHS to the chancer Chappell. That was a massive mistake.

His dividends when BHS was profitable, were absolutely fine.

People should recognise the facts, as they happened.

Green is flamboyant, Jewish, and that's the main reason a lot of people hate him.

If you do your research properly, he actually supported BHS for many years, and was a big loser when it went bust. But nobody cares about the facts. That REALLY bothers me. I have no axe to grind, I just like the truth. And I'm only 1/8th Jewish!! (we think! Not sure LOLL - prob like most people, I#m Heinz 57! Mainly Scottish, Celtish, but a smidge of Jewish too! IT might be 1/16th, not sure, but hey what the hell LOL!!!!! All good to me  :-D

Regards, Paul.

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timarr 1st Aug '16 38 of 41

In reply to post #145167


I don't see that hindsight has anything to do with this narrative. Interest rates have been very low which is a problem for all companies with pension schemes. Most have resolved that problem by pumping in more cash. BHS didn't.

BHS's pension deficit ballooned after 2008, as interest rates dropped. But, so did everyone else's. Most companies took action to resolve those deficits, BHS didn't, possibly because trading was so poor that they couldn't afford to as a standalone company. But they weren't a standalone company and we know from the evidence to the W&P committee that Green and his advisers dragged out the process of agreeing remedial funding to the pension scheme with the PPF.

So the problem was fixable, but in the end the suggestion the committee is making is that Philip Green himself decided he wasn't prepared to fix it, and that BHS and its pension problem had to be disposed of. Which it was, to Dominic Chappell, a man with no finance and no experience of running a large retailer. And it then went bust, leaving the pension with the PPF, which is investigating whether the sale to Chappell was an illegal avoidance measure.

Not sure how hindsight applies to any of that?


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Paul Scott 1st Aug '16 39 of 41

In reply to post #145182


Hindsight is everything in your view.

Freeze frame to 2008 - BHS pension fund was actually in surplus (slightly).
Green had not taken out a dividend since 2004.

BHS was still viable, in terms of balance sheet strength.

Perhaps now you might see how your view relies on hindsight.

I suggest you go through BHS accounts each year, as I did, then you might understand the chronology. As it is, you are clearly relying on hindsight to damn someone that you dislike (the flamboyant Mr Green).

BHS was NOT in crisis at all in 2008. I know people who were there. It was fine. To suggest now that Green had "plundered" it, is just a pack of lies! Totally untrue.

Regards, Paul.

P.S. We agree on Chappell - which I have made clear. A huge error of judgement by Green, which he should pay dearly for. But that was his sole mistake, if you base your view on facts & figures, as opposed to emotion. Prior to selling it to Chappell, Green had actually behaved like an uncle desperate to save BHS. People suggesting otherwise now are either clueless, or ...

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timarr 2nd Aug '16 40 of 41


I agree with you, people who are suggesting Green plundered BHS pre-2008 are talking nonsense. Which is why I never have. Neither has the W&P committee. They do suggest he has a moral responsibility to fund the pension deficit, given the way BHS bankrolled his businesses back in the early part of the century.

Of course, back in 2008 lots of companies had pension schemes doing OK then which would now be in a dreadful condition if they hadn't increased funding to cope with the low interest rate regime. They did, BHS didn't.

Tina Green's parent company Taveta Investments underwrote the BHS accounts from 2012 onwards because otherwise they wouldn't have been able to be presented as a going concern. We don't know why BHS wasn't put into administration in 2012: it could be because Phillip Green had a ongoing love and concern for BHS and its staff or it could be that he simply didn't want to have to cover the pension back then. You and I might come to different conclusions about the motivations, but both us would be speculating, the facts aren't in the public domain.

The sale to Chappell is the key event. The W&P committee work forwards to this through Project Thor and its abandonment for what look like spurious reasons (e.g. the Scottish referendum) and the various half-hearted attempts to come to an agreement with the PPF to agree a funding deal and come to the conclusion that the transaction was a deliberate attempt to get the pension liabilities off the books rather than a genuine sale. They then assess the likelihood of Philip Green not personally being involved in this process as somewhat shy of 0%, despite the ability of Green and his advisers to point the finger at each other.

But the image of Philip Green as a benevolent uncle is amusing, though!


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pka 2nd Aug '16 41 of 41

In reply to post #145185

Paul, You seem to be regarding as unimportant the fact that Green has paid no income tax on the huge dividends from his businesses, because he put them in his Monaco-resident wife's name. In view of that fact, don't you think he has a moral responsibility to make good BHS's pension deficit? Otherwise that burden will fall on members of other pension schemes who do pay UK income tax.

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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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