Small Cap Value Report (22 Oct 2015) - MTC, SEPU, FOXT, LRM, ALU, SVCA
Good afternoon!
My apologies for being unable to file reports on Thu & Fri this week. We don't want gaps in the sequence, so I've set aside some time today (Sun afternoon) to catch up.
Mothercare (LON:MTC)
Share price: 254p
No. shares: 170.8m
Market cap: £433.8m
Q2 trading update - this covers the 13 weeks to 10 Oct 2015.
I like it when trading updates start with a brief summary, which makes it much easier to quickly absorb things. In this case it says;
Trading remains in line with our full year expectations. The UK is continuing to benefit from our digital and full price trading strategy while International has returned to underlying growth, although continues to face significant foreign currency headwinds.
I'm surprised that the share price has reacted so positively to what is, after all, just an in line with expectations update. Perhaps people were fearing something worse? Or perhaps investors are anticipating continued strength in trading?
The 6.5% increase in LFL sales (UK) for Q2 is excellent, especially as it's been achieved at higher gross margins too. It seems odd this has not translated through to out-performance against expectations. Perhaps the forex headwinds which the company refers to mean International has offset improvements in UK?
My opinion - I've discussed this one with Richard Crow in our audioboom chats, and he likes the turnaround potential here. I recall buying a few at about 230p, but don't seem to have them any more, so must have changed my mind at some point.
The balance sheet is much improved after a Rights Issue in late 2014, although note that there's quite a hefty pension deficit shown - £81.2m at 28 Mar 2015 - which needs to be taken into account when valuing the shares. Note 29 to the last Annual Report shows how the scheme liabilities shot up from £303.0m to £364.6m mainly due to changes in the actuarial assumptions. The discount rate fell from 4.5% to 3.5%, which seems to be the culprit, as that will expand the present value of future scheme liabilities by quite a lot, as they're being discounted at a lower rate. Maybe the pension deficit will disappear again in due course when interest rates normalise, but how many years have I been saying this, and interest rates remain artificially low. Is this the new normal? If it is, then pension deficits won't…
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Mothercare plc is a retailer for parents and young children. The principal activity of the Company is to operate as a specialist omni-channel retailer, franchisor and wholesaler of products for mothers-to-be, babies and children under the Mothercare and Early Learning Centre brands. The Company's operating segments include the UK business and the International business. The UK business segment includes the United Kingdom store and wholesale operations, catalogue and Web sales. The International business segment includes the Company's franchise and wholesale revenues outside the United Kingdom. Its clothing and footwear product includes ranges for babies, children and maternity wear; home and travel includes pushchairs, car seats, furniture, bedding, feeding and bathing equipment, and toys are mainly for babies. It operates in the United Kingdom through its stores and direct business, and across the world in over 60 countries through its international network. more »
LSE Price
Sepura plc is a provider of communications solutions. The Company is engaged in the design, development and supply of digital radios, infrastructure and applications for Professional Mobile Radio (PMR) users, providing specialist solutions for the public safety, transportation, oil and gas, mining, utilities, industrial and other commercial sectors. It offers terrestrial trunked radio (TETRA), digital mobile radio (DMR), Project 25 (P25) and long-term evolution (LTE) system solutions. Under TETRA, it offers systems infrastructure, applications, hand-portable radios, covert radios, fleet management, modem and accessories, among others. Its suite of control room applications includes dispatchers, automatic person location (APL) and in-building tracking. Its DMR radio systems include DMR Tier II, which links approximately 30 repeaters; DMR Tier III, which links over 1,000 sites, and Dispatcher applications, which provide call logging and call management. more »
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Foxtons Group plc is a United Kingdom-based company, which operates as an estate agent. The Company and its subsidiaries are engaged in the provision of services to the residential property market in the United Kingdom. It operates through three segments: Sales, Lettings and Mortgage Broking. The Sales segment generates commission on sales of residential property. The Lettings segment earns fees from the letting and management of residential properties and income from interest earned on tenants' deposits. The Mortgage Broking segment receives commission from the arrangement of mortgages and related products under contracts with financial service providers and receives administration fees from clients. The Company offers its residential property sales and lettings services through its network of approximately 60 branches. It offers independent mortgage advice and other related services through Alexander Hall. It offers corporate services, property management and other services. more »
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7 Comments on this Article show/hide all
than ks Paul
Paul
Does your dedication know no bounds?? Thanks for this SCVR in such circumstances.
Colin
Thanks Paul. I appreciate your comments about liquidity in small caps.
Best wishes,
Imran.
Yes, thanks Paul, interesting insights where small caps are concerned. I remember Giles Hargrave talking about this issue at Mello 2014 - is there going to be one this year?
Just a quick query re Alumasc (LON:ALU) and how you've flagged the pension deficit and the building industry in general. How does this differ from Norcros (LON:NXR) ? A similar company in a similar field - just interested in you take on things in general, particularly in relation to a perceived slowdown and Alumascs assertion that it was more to do with there not being enough builders to build the properties for them to put the roof on or screen.
Regards,
Sully.
Completely agree re tax grabs, stamp duty has become ridiculous over the years, although I would argue that any loss in buisness doing up properties is more than made up for with people building extensions and renovating their properties, because it's so expensive to move.
Re london specifically, the market will have stalled, but will gradually recover, I wonder if stopping the seemingly endless rise wasn't part of the plan in putting in these ridiculous high end rates.
At the same time, I commend the chancellor for at least trying to change the rules so people can't buy properties in foriegn companies, avoiding stamp duty, and capital gains while using the london property market as a casino. I'm not sure his changes will work but at least it won't be such a no brainer
K
I always enjoy Paul's writing and I always learn something new.......so thank you!
Hi Paul -
Re Alumasc (LON:ALU) The pension scheme deficit is indeed an issue. The company is currently paying £3m p.a. to reduce the deficit; some 75% of profit before tax as you said.
The rough rule of thumb is 8 to 10 x annual deficit contribution should cover the total deficit, so with a deficit of £21.4m that seems about right.
The next actuarial valuation is in 2016. The worst scenario is interest rates drop further since the last valuation and scheme asset values also drop. In which case the deficit could jump up substantially. The reverse case is also true.
So to me the current pension deficit contribution presents a fairly large operational gearing. Other things being equal, a 10% rise in revenues would have the effect of increasing operating profit by 17.5%. However if they don't meet current forecasts, then the gearing effect due to the pension deficit contribution would bring profits down significantly.
Regards, Ram
ps. a StockRank of 99 is to me incongruous with the risk profile of this company.