Small Cap Value Report (24 Jul 2017) - MCLS, STHR, DIA, TUNG, QXT, TMMG, EPO

Monday, Jul 24 2017 by

Good morning!

McColl's Retail (LON:MCLS)

  • Share price: 206.4p (-0.8%)
  • No. of shares: 115 million
  • Market cap: £238 million

Interim Results for 26 weeks to May 2017

I took my eye off the McColl's share price for a while, and it's been roaring ahead, up nearly 60% versus the low last July.

It's a national chain of "neighbourhood retailers" - 1,292 convenience stores and 358 newsagents.

Performance appears to be perking up. Life-for-like sales fell last year by 1.9%, but are stable for the latest H1 period, and up 1.4% in Q2. Good weather played a role in this (and it's refreshing to hear weather used as a positive excuse for once!)

Gross margin improved last year, and improves a bit more to 25.4%, due to a higher mix of convenience stores (selling more fresh food and groceries) rather than newsagents.

The company has got a lot bigger thanks to taking over 298 sites from the Co-op. These new stores are all trading now and early performance is in line with expectations.

However, profitability has not improved much despite the increased size, higher sales and improved gross margins.

Even if you add back exceptional costs and store pre-opening costs, you only get a PBT of £8.1 million, down from last year's £8.2 million H1 result.

In addition to the pre-opening costs, the CEO says earnings were "held back by continuing cost pressures due to legislative wage inflation". That's a big issue for the sector and one that is likely to continue to hurt for the foreseeable future, in my view.

Outlook statement is balanced. Interim dividend is unchanged.

My opinion


As you can see from the graphic above, McColl's doesn't have a bad rating!

Indeed, on the financial metrics, it's looking very good - cheap, consistently profitable, and growing.

When you think in terms of competitive advantage, however, it's hard to come up with too many except for sheer scale. It has arguably reached a size where it can negotiate increasingly favourable deals with wholesalers, and indeed it is currently in the process of tendering out those major contracts again.

There is also the small matter of £135 million in total borrowings, resulting in £110 million of net debt, or nearly half the market cap.

So there is an element of…

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

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McColl's Retail Group plc is a neighborhood retailer. The Company operates approximately 1,375 convenience stores and newsagents. The Company also operates over 1,00 McColl's branded United Kingdom convenience stores, as well as over 370 newsagents branded Martin's, except in Scotland where it operates under its heritage brand, RS McColl. In addition, there are also the operators of Post Offices in the United Kingdom with approximately 560 in its stores. Its convenience stores provide a range of everyday products and local services ranging from a pint of milk in the morning to an evening meal, from an open-all-hours Post Office to a selection of fresh fruit and vegetables and food-to-go, from the newspapers delivered to the door to online collections. With over 370 newsagents across the, the Company also operates as specialist confectioner, tobacconist and newsagent. It has operations in Scotland, North East, Yorkshire and Humber, East Midlands, South East, Wales and London. 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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Dialight plc is a holding company. The Company manufactures and sells lighting products in the industrial market. It operates through two segments: Lighting, and Signals and Components. Its Lighting segment develops, manufactures and supplies light emitting diode (LED) lighting solutions for hazardous and industrial applications, and includes anti-collision obstruction lighting. Its Signals and Components segment develops, manufactures and supplies status indication components for electronics original equipment manufacturers, together with industrial and automotive electronic components and LED signaling solutions for the traffic and signals markets. Its LED lighting solutions include Vigilant Industrial Solutions, DuroSite Industrial Solutions and StreetSense Infrastructure Solutions. Its LED signaling solutions include transportation signals, obstruction signals and SafeSite hazardous area signals. Its indication solutions include Circuit Board Indicators and Panel Mount Indicators. more »

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

25 Comments on this Article show/hide all

Graham Neary 24th Jul '17 6 of 25

In reply to post #201651

Covered it sharw



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Graham Neary 24th Jul '17 7 of 25

In reply to post #201623

Yep, as mentioned, it's certainly without much of an economic moat!

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paraic84 24th Jul '17 8 of 25

Does anyone know why Next (LON:NXT) is down so much today? The only relevant news I spotted is that Asda is lining up a bid for B&M plus the FTSE100 generally falling today

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andrea34l 24th Jul '17 9 of 25

In reply to post #201659

Herbie, do you know what the forecast was supposed to be? These numbers look pretty good to me and the company doesn't seem to be that fully valued based on these highlights:

Excellent performance by the Group in the first half of 2017 with strong organic growth reported by Aptitude Software complemented by further progress in the Trust & Fund Administration business of Microgen Financial Systems

* Overall revenue growth of 45% to £28.4 million (H1, 2016: £19.5 million), growth of 39% on a constant currency basis*

* Group adjusted operating profit increased by 42% to £6.5 million (H1, 2016: £4.6 million), growth of 33% on a constant currency basis**. Group operating profit on a statutory basis of £5.6 million (H1, 2016: £4.0 million)

* Adjusted basic earnings per share increased to 8.0 pence (H1, 2016: 5.9 pence). Basic earnings per share increased to 6.9 pence (H1, 2016: 5.1 pence)

Maybe some investors didn't like the comment about Aptitude "The exceptional growth in demand for services experienced in 2017 is expected to moderate in 2018", although this is surely not sustainable with the implementation services revenue having doubled in these results.

There doesn't seem to be an awful lot of buy or sell activity... though there was a fairly early buy of 500K shares which seems positive.

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andrea34l 24th Jul '17 10 of 25

I don't know whether anyone holds M&S shares (I know it is outside the scope of this site) but I was shopping at a big M&S store on Saturday and there were racks and racks and racks of truly awful clothing in the 60% sales, and the non-sale/new-line range was pretty dire too. Next was a little better... but not a lot. (I don't hold either)

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Brian Hamilton 24th Jul '17 11 of 25

Local McColls in Ponteland has nice staff but a horrendous layout after 'improvements'.  Not one for me.

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herbie47 24th Jul '17 12 of 25

In reply to post #201679

I was going on Stockopedia figures, which forecast EPS +55.4% for 2017. So seem under to me. I'm continuing to hold.

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crazycoops 24th Jul '17 13 of 25

Re: Microgen (LON:MCGN) I think forecasts were upgraded following the recent trading update, so today's results represent a stonking beat against the original forecasts. The recurring revenue profile commands a high PER but one-off growth makes it difficult to value. I took some money off the table today and sold just over half my holding, this tranche representing a 56.5% profit - why be greedy?

Blog: Share Knowledge
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nicobos 24th Jul '17 14 of 25

In reply to post #201623

McColl's Retail (LON:MCLS) certainly doesn't tick many boxes on a stand-alone basis.

I think the share price growth has primarily been driven by sector M&A (Tesco's acquisition of Booker, rumours about Ocado, ASDA rumoured to be circling B&M etc).

The value of the business is in its portfolio of leases and that they may be attractive to one of the big four grocers (or as a distribution network for an online player). The UK consumer's shopping habits have changed and as well as the growth of online, brinks and mortar grocery growth has come from the smaller convenience store format roll-out.

Whilst the 'weekly shop' is still common amongst families, many have swapped to a smaller weekly shop and then multiple smaller top-up shop visits midweek. This was driven by the recession resulting in consumers increasingly prepared to shop around to take advantage of each shops' weekly offers, and acceptance of the discount (Poundland, LIDL etc) channel into their shopping repertoire.

I think it's difficult to value McColl's Retail (LON:MCLS) as solely a stand-alone business but more as its potential as an acquisition target.

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stockscreen 24th Jul '17 15 of 25

In reply to post #201623

Our local store in SE London has always looked so dreadful as retailing space (overcrowded shelves/piles of newspapers/handwritten signs about special offers/barely room to move) that there is no feeling that it's part of an organised group, and we could never bring ourselves to buy the shares. It's look is not improved by being a regular target for thieves breaking in, so may not be wholly the group's fault, but there has been no sign of any improvement since McColl's IPO. I'm always ready to reconsider an investment view, but given all of this and the level of competition on the high street + the decline in the sale of newspapers and presumably related traffic I will take some convincing.

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dangersimpson 24th Jul '17 16 of 25

Dialight (LON:DIA) had the twin positive of both a currency translation tailwind as GBP weakened against the USD and a cost tailwind as their manufacturing is in mexico where the Peso weakened against the USD due to the Trump effect.

Since both the GBP & the Peso have strengthened recently these will both be tailwinds going forward at current levels. Given the 12.8p underlying and 8p statutory EPS in H1 they will need to generate significantly higher revenue growth than 3% in H2 to overcome those tailwinds and hit their 36.1p full year consensus.

Given the valuation & the history of aggressive accounting the risk still seems to the downside to me.

Book: Excellent Investing: How to Build a Winning Portfolio
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JMLDutch 24th Jul '17 17 of 25

In reply to post #201671

This is what I got from the H&L midday mssg: "Clothes retailer Next was down after analysts at RBC Capital Markets reduced their target price for the shares to 4,000p from 4,300p.".

Presumably that answers your query.

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Beginner 24th Jul '17 18 of 25

In reply to post #201691

Microgen (LON:MCGN) has a wide spread and small trades seem to move the price disproportionately. The fall today is nothing to worry about (I hope). crazycoops (post 13) is perhaps not alone in deciding to take some profit here. The volume at the moment is 625k, but 500k went in that single trade at 0923. Old Mutual are now at almost 11%.

The price has risen 15% since the update earlier this month, so much was already in the price. Forcasts from April have been well exceeded, and seem to be in line with later amendments. Seems a 'hold' to me for now.

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Gromley 24th Jul '17 19 of 25

In reply to post #201715

This is what I got from the H&L midday mssg: "Clothes retailer Next was down after analysts at RBC Capital Markets reduced their target price for the shares to 4,000p from 4,300p.".

Both Marks and Spencer (LON:MKS) & Debenhams (LON:DEB) are also down today, so I would that  all be down to a single analysts view of Next (LON:NXT) ? (When that analyst  still has a 'target' above the current).

Not sure what else was going on though as I thought the prices may have taken a temporary respite from the stronger than expected June retail figures.

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ACounsell 24th Jul '17 20 of 25

McColl's Retail (LON:MCLS) is Ed Croft's NAPS and SNAPS for 2017 so I guess we will have to wait and see who wins out - the NAPS /SNAPs process or Paul and Graham's view. Any one taking bets!

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herbie47 24th Jul '17 21 of 25

In reply to post #201735

IQE (LON:IQE) was replaced, that has gone up about 30% this month.

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AlanJenkins2 24th Jul '17 22 of 25

I hold some Earthport shares.Their revenue has been rising steadily,whilst their losses have been shrinking.Since their business is cross-border payment services,I believe that they have a moat.I accept that it has taken them a long time to reach this position.

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Paul Scott 25th Jul '17 23 of 25

In reply to post #201739

IQE looks fantastic to me. I've backed up the truck on this one - I have an impulse to keep buying more. It's about my equal largest position in my personal portfolio. Can't find anything in BMUS to sell, to make room for it. I've just geared up in my personal portfolio.

The RNS about possibly having to majorly up 2018 forecasts, is something I rarely come across. Peel Hunt reckon the upside could be 12-15p EPS. If so, we could be off to 300-500p share price. That's the upside. May not happen. But looks exciting to me, so I'm all-in. Risk:Reward looks exciting, in my view. Please DYOR.


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vik2001 1st Aug '17 24 of 25

McColls update>
McColl's Retail Group ("McColl's"), one of the UK's leading neighbourhood convenience retailers is pleased to announce that, following a competitive process, it has reached an agreement for Wm Morrison Supermarkets PLC ("Morrisons") to supply McColl's growing estate of 1,300 convenience stores, and 350 newsagents.

this has sent the SP roaring up by 9.2%

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Edward Croft 1st Aug '17 25 of 25

In reply to post #203603

Another big win for the NAPS portfolio :-)

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

About Graham Neary

Graham Neary

Full-time investor and independent analyst. Editor at Cube.Investments, small-cap writer at Stockopedia. Previously a fixed income analyst in the City and institutional fund manager. I'm a CFA charterholder and have the Investment Management Certificate and STA Diploma in Technical Analysis for good measure. When I'm not talking about finance, I enjoy recreational poker, chess and Mandarin Chinese. more »


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