Small Cap Value Report (23 Jan 2017) - FLO, STHR, PPB, PHTM, BMS, MYSL

Monday, Jan 23 2017 by

Good morning!

Today, I'm planning to look at Flowtech Fluidpower (LON:FLO), SThree (LON:STHR) and Paddy Power Betfair (LON:PPB), and anything else that seems worth covering. Paul is traveling at the moment.

When he returns to London, Paul will be meeting MySale (LON:MYSL), and I am also planning to cover their trading update from last Friday, later today.



Flowtech Fluidpower (LON:FLO)

Share price: 124,6p (-7%)
No. shares: 43m
Market cap: £54m

Trading, Acquisition, Strategy & Notice of Results

There's a disconnect between the tone of this announcement (positive) and the share price reaction (negative), because I think the profit guidance is actually a miss against market expectations.

Somewhat strangely, the company says that it is planning a 5% dividend increase, which is "in line with current market expectations" - but it doesn't say that the profit guidance is below market expectations!

Against difficult trading conditions the Group has delivered a solid performance.

Group revenue was c.19.9% up on 2015 at approximately c.£53.7 million (c.19.3% in constant currency)

The GBP devaluation looks to be culpable:

"...some margin contraction was experienced in H2 while prices were managed upwards on products sourced in Euro and USD and sold in GBP markets.

Checking last year's annual report, I see that Benelux revenue was c. €5 million, versus £30 million in UK revenues. And the underlying operating result from Benelux was less than 10% of the UK result. I'm not sure how this has changed since then, but there is a lot of GBP exposure here.

Significant investment in central and sales resources aimed at optimising cross channel opportunities, and future acquisition integration programme underpinning long term growth.
As a result of these investments and the gross margin contraction in H2, the Board expects underlying* PBT will be in the range £7.0m to £7.2m.

According to the forecasts available to me, £7.6 million was the consensus forecast here. So it's a miss.

The company also announces the acquisition of a Shropshire-based hydraulic equipment distributor for total consideration (including debt assumed) of £2.65 million. There are said to be "several acquisition and product opportunities being actively pursued".

My opinion: More important than the valuation here, for me, is…

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All my own views. I am not regulated by the FSA. No advice.

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Flowtech Fluidpower plc is a United Kingdom-based distributor of technical fluid power products. The Company operates through two divisions: Flowtechnology, which is geographically split into Flowtechnology UK (FTUK) and Flowtechnology Benelux (FTB), and Power Motion Control (PMC). FTUK and FTB focus on supplying distributors and resellers of industrial maintenance, repair and operation (MRO) products, primarily serving urgent orders rather than bulk offerings. The PMC division is engaged in the design and assembly of engineering components and hydraulic systems, which are managed by component supply along with a service and repair function. Its business is focused on its distribution offering in over three categories: Pneumatics (products that enable the use of gases to provide mechanical motion), Hydraulics (products that enable the use of fluids to provide mechanical motion) and Industrial (products and accessories that act as conduits for gases and liquids). more »

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SThree plc is an international staffing company, which provides specialist recruitment services in the science, technology, engineering and mathematics (STEM) industries. The Company provides permanent and contract staff to sectors, including information and communication technology (ICT), banking and finance, life sciences, engineering and energy. The Company's segments include the United Kingdom & Ireland (UK&I), Continental Europe, the USA, and Asia Pacific & Middle East (APAC & ME). The Company's recruitment brands include Computer Futures, Progressive Recruitment, Huxley and Real Staffing. The Company's other brands include Global Enterprise Partners, Hyden, JP Gray, Madison Black, Newington International and Orgtel. The Company delivers contract, permanent, projects, retained and executive search recruitment solutions. Its support and mobility services offer contracting, relocation and relevant visa support. It provides resources to support its brands with contractor services. more »

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Paddy Power Betfair plc, formerly Paddy Power plc, is an Ireland-based public online betting and gaming company. The Company operates through Online (ex Australia), Online Australia, UK Retail, Irish Retail, and Telephone segments. The Company offers sports betting and gaming, which include gaming machines, games, casino, bingo and poker, and business-to-business (B2B) services. The Company's Online (ex Australia) services are delivered primarily through the Internet, telephone through the public telephony system, and UK Retail and Irish Retail through licensed bookmaking shop estates. Its Online Australia segment provides sports betting services to Australian customers using primarily the Internet with a small proportion using the public telephony system. Its UK Retail segment has retail outlets in Great Britain and Northern Ireland. Its Irish Retail segment has retail outlets in the Republic of Ireland. It has presence in the United Kingdom, Australia, Ireland and across the world. more »

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  Is Flowtech Fluidpower fundamentally strong or weak? Find out More »

33 Comments on this Article show/hide all

herbie47 23rd Jan 14 of 33

Graham, I think other countries have already gone down that route, I'm reading about Germany and Ireland.

The US is not happy about number of fake passports and has warned 5 EU countries to clamp down on it, I can see this becoming more of an issue.

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peterg 23rd Jan 15 of 33

In reply to jonno, post #13

Concerning PHTM my inclination is to agree with Graham, as logic suggests that Governments will err on the side of caution and increased security regarding the integrity of important documents such as passports, given the proliferation of international terrorism.

Though given that they have recently relaxed the rules I'd think that may be an optimistic view. Do PHTM have any business that is not heavily dependent on photo booths? What else does anyone use them for in the age of the selfie? The only time I've ever had anything to do with PHTM has been for passport photos and similar. It looks quite likely I'll never use them again.

If this really works itself through I can't see PHTM having much chance of surviving in current form at all.


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JohnEustace 23rd Jan 16 of 33

Re Photo-Me International (LON:PHTM), people are assuming that a photo booth is more secure than the system that the Home Office has rolled out, but I think not. On the contrary Photo Me will have to upgrade their systems to match the security offered by the new Home Office system if they are to remain accepted and even then the home taken photo will erode their market share as it is free for the technologically literate to use.

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ds1980 23rd Jan 17 of 33

Also biometrics will be implemented instead of passports by the sounds of it. Fingerprints. Retina scanners. Boat recognition etc. People will still need a passport I think though? No position

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pgs501 23rd Jan 18 of 33

Regarding PHTM I have to agree with peterg. It looks like a business where there is an effectively free and far more convenient alternative. If I am right the value of the business falls to nearly zero bar any dividends they can pay out in the next 5 years.

True the government may require a certain standard of photo but if so both
a. PHTM will need significant upgrades to security and the fact these machines seem to be often in run down and scabby ends of stations would be somewhat worrying, would they need to replace almost their whole current stock of machines, would they need to install security cameras outside the machines? and
b. suddenly this area becomes much more attractive to potential competition; I do not believe PHTM has any particular patents on photo machines and if there were to be a government required type they cannot exactly patent it can they (At least not without government price restrictions which the current government will not want)?

All in all this would need to be a seriously cheap proposition for me to get interested; print newspaper level cheap.

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Metatron 23rd Jan 19 of 33

With gambling companies like Paddy Power/Betfair there is always a risk from govts.Ironically although Trump has made his money in gambling his VP is a Born Again Christian and the Republican Religious Right are the clowns who in 2006 banned Americans from gambling online and as such the share prices of all gambling companies who allowed Americans to gamble were hammered .Betfair were rightly cautious before 2006 but that was with a different management and before they became an IPO .
At this moment there are people in the UK regulation industry worried about the way that gambling companies are maximising short profit by banning any regular winning smalltime punter.I`ve been a regular small time punter for 25 years and have had 6 online betting accounts closed in the last 2 years. in the previous 23 years none
3 that have closed my account are listed on the stockmarket:Bwin.Gvc (Sportingbet) ,Ladbrokes
There used to be a view by the bookmakers that allowing small time winning punters was a smart long term policy.
If the word can get around that one cannot win with a bookmaker why bet with them?

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Hot Socks 23rd Jan 20 of 33

In reply to danielbird193, post #11

I'm not so sure the Braemar balance sheet is rock solid. The biggest asset is £77m of goodwill, followed by £60.5m of receivables (compared to six monthly revenue of £70m so it is taking over five months to get paid on average).

There's not much debt, but the stockreport says it had negative free cashflow in 2014 and 2015. 2016 better but free cashflow not quite enough to cover the dividend. Also there's a (admittedly smallish) pension deficit. So burning cash and the balance sheet doesn't give it much staying power?

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Roger Lawson 23rd Jan 21 of 33

Re Paddy Power , really hate these stories about bookmakers suffering from the punters winning. It should not matter who wins or loses if their "book" has been constructed based on the weight of money wagered. I wrote an article on this about William Hill claiming the same - see . It's just nonsense in my view, unless they are betting against their clients, which they should not be doing. Comparing bookmakers to insurance companies is inappropriate.

Website: Roliscon
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AlanJenkins2 23rd Jan 22 of 33

In reply to Roger Lawson, post #21

I suppose the unspoken subtext is that those punters are likely to plough most of that money back in the near-future.

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ds1980 23rd Jan 23 of 33

In reply to Roger Lawson, post #21

You've obviously not been a bookie rog. Margins are wafer thin. Yes books balance but that's only for individual races / events it's the accumulators that can't be balanced and this is the majority of where losses occur. Bookies can't lay off everything. If you make a book at 120% round but everyone backs the winner it don't matter what your percentage is! Take a look at the bookies who went to the wall when frankie got 7 up. With all the offers (money back second, money back if thistlecrack wins the King George etc then it's impossible to balance books sometimes. Long term of course the bookies will always win ( well not from me ;-)) but short term there will always be these stories you hate. Long may it continue.

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BlueFrew 23rd Jan 24 of 33

Surely the issue for PP was that they paid out on a Hillary win early. Ended up as very expensive "free" publicity.

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back2value 24th Jan 25 of 33

In reply to Hot Socks, post #20

In shipbroking business, much of the revenue is fixed "forward", for example the brokers conclude a time charter but the revenues are a commission on charter hire paid monthly for the duration of the charter, which may be years. Very seldom are commissions paid up front. In the case of shipbuilding contracts or shipsale transactions, the commission is usually paid only upon successful delivery of the vessel, which again may be months or years ahead. As a result you have to adjust your evaluation of receivables in the case of a company which derives a significant proportion of its income from shipbroking.


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Mikkiggy1 24th Jan 26 of 33

PHTM. All very helpful to one, who was a long term shareholder; bought at 40p. Dividends and special dividends have been excellent. Successful laundry business to diversify. Now, "sitting on the fence", awaiting future news of Governmental action. Michael G

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Roger Lawson 24th Jan 27 of 33

ds1980: As I pointed out in my blog post, for individual large risks bookies can "lay off" the risk (I.e. reinsure it with others), or they should not be taking them on. The really amusing thing in the case of Paddy Power Betfair is of course that in Betfair there should be no risk at all - this is what their web site says: "Betfair is a betting exchange - an online marketplace for punters to bet against themselves on sporting and cultural events around the world . Customers bet against each other not against Betfair".

I suspect that with public bookmakers they are now adjusting the odds in reaction to what their competitors are offering so as to maintain volumes and profits, with the result that they are now losing big time on certain events.

It certainly raises a lot of questions about their management when they continually trot out the excuse of "unlucky/unforeseen" events.

Website: Roliscon
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ds1980 24th Jan 28 of 33

Roger. Sorry didn't read your blog but its nowt to do with management betair and paddy power have the best in the game bar none and are head and shoulders above the rest bar 365. As I said single events kind of look after themselves generally as the books balance but that doesn't mean the books will win as the amount of money wagered isn't equal. A bit like a horse handicap. All the horses are meant to finish in a straight line ain't they? A book of 8 horses will often have two losers and 6 winners. That's before mentioning best odds guarantees, price promises, enhanced place terms when that book could easily turn into 8 losers!!. You've also got to remember the odd compilers are humans which is what us punters prey on. if they get it wrong then it won't matter how much the shorten or lengthen the odds they can't win. Take the kinloch/coral case currently happening. All of this squeezes their tiny margins and some books will run at a loss it's just how it is. Bookmaking in this day in age is simply a turnover game. Punters have never had it so good.

You only need man city, Arsenal, Man U, Chelsea, Rangers, Celtic all to win on the same weekend and no bookie could cover his liability. They're happy to lay these bets because they know long term that won't always happen but imagine it happens 4 weeks on the trot. It's not an excuse it's simply bad luck and is IMHO a completely viable excuse when we're talking about a business that relies on good and bad luck!!

The exchange you are talking about is exactly right. They make 5% on every book but that makes up a small percent of the betfair paddy power business and is completely different to normal bookmaking but remember the exchanges now dictate the markets on course. In the olden days bookies could send money to the track to shorten up a horse if they needed it to. That simply can't happen now so add that in to the fray and you should be able to see why bookies don't always make money.

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Hot Socks 24th Jan 29 of 33

In reply to back2value, post #25

thanks that's interesting and not something I knew.

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paraic84 24th Jan 30 of 33

Thanks so much for covering MySale (LON:MYSL), much appreciated. Can't wait to hear about Paul's meeting with the management.

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Graham N 24th Jan 31 of 33

In reply to paraic84, post #30

You're welcome Paraic, thanks for being a regular reader & commenter

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herbie47 24th Jan 32 of 33

I see MySale (LON:MYSL) are now down 8% according to Stockopedia. Can't see any reason for the fall.

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Ardipithecus 24th Jan 33 of 33

In reply to JohnEustace, post #16

I have been following PHTM off and on on for years. The threat of obsolescence was,an ongoing concern particularly when the rapid shift to digital photos happened and again with the rapid take up of smartphones, However the company seemed to innovate fast enough to stay ahead and the financials were pretty good so I bought in a couple of years ago. Maybe this time they really are heading for obsolescence but the demand for security compliant imaging is not going to go away. Probably PHTM will be adding on biometrics and holographic imaging next. So I shall hold wait and see.

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About Graham N

Graham N

Full-time investor and independent analyst. Prior to this, I spent seven years in the financial markets as an analyst and institutional fund manager. I'm CFA-qualified and hold an audited, FTSE-beating investment track record.  Away from finance, my main interests are recreational poker and everything to do with China, especially Mandarin Chinese. more »


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