Small Cap Value Report (21 Sep 2015) - DX., SAL, FCCN, NXR

Monday, Sep 21 2015 by
48

Good morning!


DX (Group) (LON:DX.)

Share price: 81p (down 0.6% today)
No. shares: 200.5m
Market cap: £162.4m

Results y/e 30 Jun 2015 - the figures announced today look quite good to me, considering the low valuation on the shares. This is a delivery company, of mail, parcels & freight.

  • Turnover of £297.5m (down 4.6%)
  • Operating profit of £25.3m (down 6.6%)
  • EBITDA flat at £33.7m
  • Adjusted EPS 1.9% at 10.9p
  • 4p final divi, total for the year 6p = yield of 7.4%

Note that the PER comes out at only 7.4 (based on a share price of 81p, and adj EPS of 10.9p)

Let's cut to the chase - why is it so cheap? After all, it's rare these days to find a share where the PER = divi yield, which is the case here, with both at 7.4. Is the balance sheet ropey?

Balance Sheet - businesses that are floated by private equity owners are usually left with too much debt, but in this case it looks fine - net debt was only £1.8m at 30 Jun 2015 - negligible really, for a business this profitable.

Net assets of £194.2m is dominated by intangibles of £199.3m, so writing that off takes NTAV down to negative -£5.1m. That's not a concern, given the high level of profitability, and the favourable cashflow - customers seem to pay up-front, since there is deferred income of £23.9m shown in current liabilities - i.e. the business is partially financed by customers paying up-front, which is fine if you can keep that rolling.

The current ratio of 0.74 looks weak, but that is largely because customers are paying up-front, so it's skewed by deferred income - again, not a concern for such a strongly profitable company with minimal net debt.

You can't look at the balance sheet in isolation, it has to be seen in the context of how profitably & cash generative a company is. So whilst this is not a particularly good balance sheet, it's absolutely fine overall due to the strong profits.

Note also the large upcoming capex of £35m (net of property disposals) for a new Midlands distribution site of 44 acres. The new site should be operational by Q2 2017, so there might be some disruption to operations when that move goes ahead. Although the company is only a box-shifter, so it really should be a fairly straightforward matter to move premises. Net debt will…

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DX (Group) plc is engaged in the provision of parcels, mail and logistics services in the United Kingdom and Ireland. The Company's segments include parcels and freight, mail and packets, and logistics. The parcels and freight segment offers services, such as DX 1-Man, engaged in the delivery of irregular dimension and weight items; DX Courier, which provides next day parcel services, and DX 2-Man, which offers a business to consumer home delivery solution for heavier and bulkier items. The mail and packets segment comprises services DX Exchange, a business to business (B2B) mail service providing its customers with collection and delivery times; DX Secure, which provides security, and DX Mail, a mail service offering downstream access for smaller volume users. The logistics segment includes the provision of customer-liveried vehicles and uniformed personnel, such as fleet management solutions and integration with customer's business operations. more »

LSE Price
16.2p
Change
4.5%
Mkt Cap (£m)
92.9
P/E (fwd)
26.5
Yield (fwd)
n/a

SpaceandPeople plc is a United Kingdom-based media specialist company. The Company is engaged in marketing and selling of promotional and retail licensing space on behalf of shopping centers and other venues throughout the United Kingdom, Germany, France and India. The Company's segments include Promotional Sales, Retail, Head Office and Other. The Company markets, sells and administers promotional space in a range of footfall venues across the United Kingdom, including shopping centers, theme parks, garden centers, retail parks and airports. The Company offers a service covering from consultancy services to the provision and management of retail merchandising units in shopping centers. It enables venues to market, administer, promote and sell their promotional space. Its subsidiaries include MacPherson & Valentine Limited, SpaceandPeople GmbH, Retail Profile Holdings Limited, POP Retail Limited, Retail Profile GmbH, SpaceandPeople India Pvt Limited and S&P+ Limited. more »

LSE Price
13p
Change
 
Mkt Cap (£m)
2.5
P/E (fwd)
5.7
Yield (fwd)
3.8

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 »

LSE Price
42p
Change
-0.9%
Mkt Cap (£m)
40.6
P/E (fwd)
29.7
Yield (fwd)
n/a



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


20 Comments on this Article show/hide all

ACounsell 21st Sep '15 1 of 20

Paul,

Unrelated to DX Group but do you have any thoughts on Cello who reported poor interim results last week. Your last comment (March 19th) was less than enthusiastic but wondered if their latest VAT issues and declining turnover set any more alarm bells ringing (it still has a 90+ Stockopedia ranking)

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Funnymoney 21st Sep '15 2 of 20

Paul,

French Connection please!

Regards

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herbie47 21st Sep '15 3 of 20

Paul,
If you have a chance Finsbury Food (LON:FIF) please.

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janebolacha 21st Sep '15 4 of 20
4

Paul, the SAL deal with Immochan could be a springboard to quite a lot more business.

Immochan seem to operate in 370 shoppimg centres in Europe and Asia:

http://www.immochan.com/en/worldwide-standard-page/immochan

"370 shopping centres in 12 countries*

Western Europe >> 192
Spain >> 31
France >> 106
Italy >> 45
Luxembourg >> 1
Portugal >> 9

Central and eastern Europe >> 90
Hungary >> 18
Poland >> 22
Romania >> 11
Russia >> 35
Ukraine >> 4

Asia >> 88
China >> 66
Taiwan >> 22"

It could turn out to be a very smart move, indeed.


PS:  There's some very serious buying of AVAP going on today after the confirmation of the purchase of the Air France Airbus aircraft.

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retireby56 21st Sep '15 5 of 20
1

Paul,

A friend of mine has a company that uses DX (Group) (LON:DX.) for parcel delivery and their experience is not great. There is a real gap in the UK market place for delivery of large items over 1m in length. DX are competitive but .....

Cheers

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bsharman 21st Sep '15 6 of 20
2

DX (Group) (LON:DX.) is a very disappointing investment and I cant get excited about its prospects, as they operate in a declining market. I should have thought about this before investing at around the current price, but was tempted by the yield and also the fact that they have such an illustrious shareholder list: Hargreave Hale, J O Hambro, Unicorn, Ruffer, Schroders, standard life, Miton, Liontrust, M&G etc.
Spaceandpeople (LON:SAL) however is a very different story and a much more positive one. I was impressed with the management's honesty and willingness to learn and change. They now under promise and over-deliver and are very conservative in the forecasts. I'm glad I bought this one in late 2014 as a turnaround situation. The new contract in France looks potentially very interesting. I hope the management can keep delivering new business.

Paul - I would really like to hear your thoughts on XLMedia (LON:XLM) - It's delivering impressive growth, has lots of cash and is cashflow positive. It also pays a dividend (the cash is real!). It is however based in Israel and I know your thoughts on Foreign companies which are listed on Aim.... 

Thanks

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browner 21st Sep '15 7 of 20
1

DX Group (LON:DX.). List of major shareholders - https://www.dxdelivery.com/investor/shareholder-centre/.

NOTE: On the DX website the no of shares held by Hargreave Hale is incorrect. They appeared to have copied across the wrong figure from the relevant TR1 form when HH increased to 22,243,775 in March 2015. See http://www.investegate.co.uk/dx--group--plc--dx--/rns/holding-s--in-company/201503241430213378I/

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Cleeve 21st Sep '15 8 of 20

Paul

You used to own shares in FCCN but note that you don't mention this in the heading did you dispose or just a typo?
Many thanks
Steve

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Paul Scott 21st Sep '15 9 of 20
2

In reply to post #106784

Hi JAne,

That's really useful info about Spaceandpeople (LON:SAL) French client - thanks very much.
As you say, it could be a foot in the door type of contract that might lead on to bigger & better things.

The MPKs are tons better than the old kiosks, as they refresh each week with a new operator. So it prevents them getting stale and/or annoying to the public, and the shopping centre owners.
Also, they can be managed remotely, and there's a good barrier to entry, since you need lots of operators signed up to use a MPK, otherwise it would be empty half the time & hence potentially loss-making, especially as an empty kiosk could attract vandals.

Regards, Paul.

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cyberbub 21st Sep '15 10 of 20

Paul, do you see DX (Group) (LON:DX.) as possibly similar to Trinity Mirror (LON:TNI) when it fell to 25p a few years ago? ie. a profitable leader in a structurally declining market? I suppose that TNI had/have more freehold property perhaps, as an asset backstop?

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Flackwell 21st Sep '15 11 of 20
2

My guess as to where the profits at DX. come from would also include the one and two-man delivery services as presumably they can be sold at a premium given their value to their end customer (the retailer).

After all they wouldn't want to spend the next few weeks answering complaint calls and are therefore perhaps willing to suck that little extra in terms of price

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Brackendale 21st Sep '15 12 of 20

French Connection - difficult because (unsurprisingly) there is no transparency on how many problem stores there are. Hundreds of stores, so can closing 6 make much of a dent on the problem?
I also wonder/worry about the fact that it is still run by the founder - is he too attached to the business to really acknowledge the problems? Are retail stores a bit of an ego trip?
I think a lot of investors here will be hoping for a takeover, can someone give Philip Green a call?

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piotrmanczak 21st Sep '15 13 of 20

Hi
Did you sell fccn? I'd be grateful for an answer.

Regards

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narp 21st Sep '15 14 of 20

In reply to post #106784

Jane,

Re AVAP,

If Air France is changing leasing company then one would think the terms are better for Air France and therefore they are at lower rates for AVAP than the other leasing company. Is that a good strategy?

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janebolacha 21st Sep '15 15 of 20
1

In reply to post #106817

Your remark puzzles me.

The terms are reportedly at normal commercial rates.

I don't know the circumstances leading to the change

in the leasing company but presumably "normal

commercial rates" means just that.  It isn't unheard

of for leasing companies to rebalance their portfolios.

for whatever reason. Isn't this aircraft from Avolon,

 the Irish lessor which is the subject of a take-over offer? 

Why do you find a lease at normal commercial rates an unwise strategy?








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narp 21st Sep '15 16 of 20

In reply to post #106819

Jane,

Why would Air France change lessors unless they had an incentive to do that?
Normal commercial rates is subjective, therefore open to interpretation.
Re strategy if your margins are lower, than a setback can have a major impact on profitability.

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janebolacha 21st Sep '15 17 of 20
1

Narp,

I've no idea why Air France would wish to change lessors (since I'm not privy to their commercial decisions or the reasons for them) but I assume that their decision to accept AVAP would have been done on a competitive basis. Aircraft leasing is a business like any other where you need to be competitive to secure business. Why should this transaction be any different? AVAP's margins appear to be typical of those in the industry and there seems to be no evidence that they cut rates, in fact their margins seem to have been growing, rather than diminishing. But, hey, I simply remarked in my first post (and simply as a one-line PS to another matter) on the share price moving up today, nothing more, you know I'm not a spokeswoman for AVAP so, please, simply interpret things as you wish and decide for yourself.

Best wishes with your investing,
Jane.


PS: AVAP is actually buying the aircraft from Avolon so isn't it perhaps simply a case of the lease being assigned, perhaps on the same terms as previously?  Perhaps Avolon are rebalancing their  portfolio of aircraft, perhaps they need funds to buy other aircraft, again not uncommon.  But hey, I don't know, decide for yourself.

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Paul Scott 21st Sep '15 18 of 20
3

In reply to post #106800

Hi Cleeve,

You used to own shares in FCCN but note that you don't mention this in the heading did you dispose or just a typo?

I'm terribly sorry, this was a complete oversight on my part. I have now added the correct disclaimer. Apologies, totally unintentional. So yes I do still hold, and as mentioned in the article, I intend buying some more once the price has stopped falling!

Regards, Paul.

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gus 1065 30th Nov '15 19 of 20
2

Sparkling trading update from French Connection (£FCCN) this morning.

Improved trading and, critically, impending vacation of their (loss making) Regent Street flagship store for a £2.4m compensation payment. Also notice of a further disposal of 7 other properties. Mr Market approves with shares up nearly 17% (albeit after a bit of a dip on Friday).

A significant step in Paul's value realisation play for the company.

(I have a small holding in the company's shares)

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value101 30th Nov '15 20 of 20

Hi Paul,

What do you think of Norcros pension liability? I think it's huge compared to their net income.

According to the 2015 annual report, the pension deficit more than doubled from 2014. It jumped from (£21.8m) to (£44.3m).

For 2015, that more than 5x net income of £8.2m and more than 4x operating profit of £10.6

Thanks for any insight on that situation.

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 Are LON:DX.'s fundamentals sound as an investment? Find out More »



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 Stockopedia.com on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »

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