Small Cap Value Report (24 Mar 2016) - BRY, TRCS, ABDP, IEH, AFN, NAR, CHH, FJET, LAKE

24th Mar '16 by Paul Scott

25 comments 24963 reads

Good morning!

Brady (LON:BRY)

I'm busy preparing for another interview with Gavin Lavelle, CEO of Brady (LON:BRY). He asked for an opportunity to respond to the points I raised in my report here on 21 Mar 2016, which was critical in parts.

If fundamentally sound companies want to engage, then great, I'm happy to do so. Indeed I enjoy helping sound companies and private investors communicate with each other, whether or not I hold the shares personally. I won't waste your time with dodgy resource stocks, or blue sky nonsense. Let's see if Gavin can be persuasive enough to tempt me (or you) back into Brady shares!

EDIT - all done - here's my new interview this morning with Brady's CEO (audio, 26 minutes)

IT improvements

Good news re the annoying HK tickers that sometimes pop up in these reports - Ed has tweaked the coding so that the £ symbol before a ticker will now only pull up UK companies. Hoorah!

Also, I was given some re-training yesterday on a better way to insert pictures into my reports. So hopefully we should not get a repeat of past technical problems where sections of the reports disappear. It's fair to say that my relationship with computers is, at best, an uneasy truce!

Timing

At 12pm I have a (non-recorded) call with another company CEO to learn about his recently floated company. So if it sounds any good, I'll let you know. Therefore, timing-wise, most of this report will get written this afternoon, and possibly this evening.

Incidentally, I added loads more sections to yesterday's report last night. So please do have a recap on that report here whilst you're waiting for today's report to gestate. It's so busy at the moment! I can't cover everything, but do my best to report on the most interesting announcements.

Tracsis (LON:TRCS)

I should also mention that the CFO of Tracsis emailed me yesterday to point out that the deferred consideration creditors on their balance sheet should be self-funding. So the deals have been structured as earn-outs. This means that challenging profit & cashflow targets have to be hit, in order to trigger the payments. To be prudent, the company has booked the maximum possible earn out onto its balance sheet.

This is a really important point, as it…

Unlock with Facebook

Unlock with Google

or Unlock with your email

simoan

24th Mar '16

HI Paul,

Glad to hear reverse gear is working on your truck :-) I am of the same mind. I think the market has taken fright at the reference to the year 2008 and has maybe incorrectly assumed this indicates 2016 EPS will be 168p!!

I have to admit, reading Next results is an absolute pleasure... why can other companies not provide such detailed information with such clarity? In particular, their use of tables to show the full breakdown of various figures such as margins is a model that all other companies should aspire to... take note Laura Ashley.

All the best, Si

billytk

Intelligent Energy Holdings (LON:IEH) another blue sky story stock. The SP was 100p not long ago on "Apple' rumours in the papers. When will people learn?

tomps3

Here too is a results presentation by Gavin Lavelle Brady (LON:BRY) CEO, a webinar recorded by their PR.

http://www.piworld.co.uk/whats-new/2016/3/24/brady-results-presentation-bry-21st-march-2016

Worth a listen in conjunction with Paul's interview.

bicboy100

Paul re ABDP surprised you have top sliced at this stage. I reviewed my position this morning and came to a similar view to yourself, however after taking into account the asset position, particularly the cash in the bank, it seems prudent to adjust the PER to reflect that. Based on adjusting for the cash I'm getting a PER of around 14. Given there looks to be more growth in the tank, I don't see many better opportunities out there.
I assume you considered this in your decision?

Lee

dscollard

had a look at Next (LON:NXT) as well: it has pierced a few key technical levels today though any name below its 200 DMA seems prone atm (Next (LON:NXT) dropped below that in Dec 15).Has been showing a topping pattern for a while. Might well be that difficult transition as it goes ex-growth given competition in the online retail space.

I've put it on a watch list as it may well test the 5200-5300 region yet. Now below its 50 month MA just as it was in 2008: will see if it retakes this first

John McArthur

Paul,

Thanks for making that clarification on Tracsis re the deferred consideration payable on the deals we did last year. As you now know, all of our earn-outs are largely - if not entirely - funded from the profits generated by those businesses and our mantra is always to protect investors on the downside and share a large proportion of any upside (i.e. super profits) with the management of companies we come together with. This model has worked well and keeps people motivated.

As I've said in the past, if any Stockopedia readers have further questions on Tracsis please email me or my CFO (Max Cawthra) directly on j.mcarthur@tracsis.com or m.cawthra@tracsis.com.

Best regards
John
(CEO, Tracsis Plc)

ShareInvestment

Good afternoon Paul

I have never used this board and I'm not sure if this is the correct way. I have recently purchased some SPH shares after having seen an article in the 'Shares' magazine which ties in with what the latest accounts state and namely the fact that the company has sold part of the business, repaid all debt and is now left with the high growth aesthetic arm, which as we are still in an offer period, might also be sold. It almost looks as if this could be packaged by institutional holders (Toscafund etc) for a sale of all assets and related value maximization for the shareholders. I was wondering what you thoughts were overall ? Thanks and Happy Easter

Joeydisco

"Also the drivel posted by many of its genuine members suggests that they're (a) not very bright, and (b) haven't got much money."

LOL.

I sometimes find insightful comments and analysis on ADVFN BB's but it does seem that every single corrupt bargepole stock that's heading to zero attracts the most zealous variety of fact and reality resistant investors.

Effortless Cool

This is what happens when you open a thread on AFN on the ADVFN bulletin board:

ADVFN is closing this thread. Please do not open any further threads for this company, as doing so will result in your banning from the BBs.
Regards,

John

Says it all, really.

chrigil

I'd be interested to know what affect the Next result will have on BOO and their recent supply contract with Next re low cost unbranded garments.

Will Next see it as an opportunity to offer more low cost (but presumably higher profit potential) goods or will they go in a different direction and offer higher quality etc.

Modform

Paul, the problem with LAKE is corporate governance. I personally don't believe the reassurance from the company that they will meet the revised target.
When a company issues a good trading statement as they did in December and the sp keeps falling, it tells me that the trading statement was massaged to get the people in the know to sell on a high. I don't accept that the bod were not aware that the company was not doing well and deliberately misinformed the pi, so for me it's a bargepole stock until the corporate governance is sorted.

I was a holder from 93p but sold out a few weeks before the profit warning because the chart was telling me something that didn't match the December trading update.

Remember MAR, it started with similar sort of issues and ended in the dustbin.

GL and thanks for the report

herbie47

25th Mar '16

Lakehouse (LON:LAKE) to me seems like Entu (UK) (LON:ENTU). I held both, I got out of Entu (UK) (LON:ENTU) before the profit warning because I did not trust the management. Lakehouse (LON:LAKE) I got hit but stop loss saved me from the full fall. Although both look good value I doubt I will be investing in either again.

Beginner

Re your twitter joke:
Q. What do you get if you pour boiling water down a rabbit warren?
A. The cell next to Adam Johnson.

Have a good break.

-12

xcity

Re: LAKE, the prospective PE is low - but only if their expectations are met. They have already had to reduce them once, just 2 months after the results and positive outlook. They have been taking over businesses quite rapidly, so lots of scope for rot to be discovered in the woodwork and imaginative accounting to make everything seem OK to the customer. I'm not suggesting that any of that has gone on, just that it would be harder to see from outside than in a stable business.
And this statement clearly shows that it is personal between them and Rawlings. Makes it hard to believe that current execs will stay if he wins or that he will just sit on his shares if he loses. You'd imagine he'd be followed by Slater and maybe another institution or two. And it doesn't look rosier for the business if he wins, if the Board's statement about direct involvement is true.
Possibly some current execs are very frustrated with the Board and would love Rawlings back; I don't know, and will be interested to see the Rawlings/Slater response. That will have to be more measured with Slater on board, so would need to peer deeper beneath the lines.
I don't hold the shares and haven't listened to the recording of the presentation, but I don't expect that to sway me either way. They may have been unimpressive at the start, but would have to have been affected by the amount of emotion swishing around. I did place a small limit order after the warning, but it never got down to that level and then went up. I think I would go lower now but, even if I did, I don't think it would reflect the risks involved.

Re: NEXT, I know it's a big % fall, but is it really cheap at the current price? It might be just one disappointment, and it might have been unseasonably warm, but they have had a very long and steady run in what is often a volatile industry. M&S never got their mojo back. Wolfson seems to be talking about clothing having times when less is spent on it, and a lot of companies have been trading less well. Directory prospects not as good as they were. Personally, I think they have been trading off their reputation for quality while the quality of their clothes has been gradually falling - more shades of M&S. I do see the positives, but I have thought it too dear to buy, at least for the last year when I was looking for opportunities, and I'm not sure if it is suddenly cheap enough. A lot of anchoring going on.

gus 1065

Finally had the chance to read through the extensive Next (LON:NXT) earnings release. It is a very clear and thorough document. What I particularly liked was the way in which they provide a metric, say change in operating margin, and then drill down into it anticipating the sort of issues an analyst might raise and addressing them. The historic figures are generally excellent and even where they aren't at face value (e.g. Fall in Directory margin from 24.5% to 24.4%) the reasons are consistent with the strategy and if anything underline how it is working (e.g. Expanding international sales and size of the high margin credit book).

What seems to have spooked the market is the section at the end on expectations for next year and their view that (a) the economy may slow; and (b) the proportion of consumer expenditure allocated to clothes etc., compared to eating out, travel etc., may reduce. While neither would be a good thing, the impact would hardly be confined to Next (LON:NXT) alone and is only an opinion of what might happen and what a prudent company should prepare itself for. It does seem that absent a more meaningful problem (I recognise the TAs see a number of technical challenges in the Next (LON:NXT) chart patterns etc), a 15% fall that hasn't immediately spooked the rest of UK fashion retail (I note the likes of Marks and Spencer (LON:MKS) were down a little bit but others such as Boohoo.Com (LON:BOO) where up in a generally bad day for the market) seems to be an over reaction.

Interesting to see what happens after investors have had a long four day weekend to reflect on things.

Gus.

Lee,

Like you, using an adjusted target PE ratio of 14, I value ABDP at almost exactly the current share price. Given the likelihood of further upgrades implied by the outlook statement, and supported by historical precedent, I am very happy to hold for now, albeit would not look to add.

Paul Scott

Hi xcity,

For me personally Next (LON:NXT) is not about anchoring to previous share price - as I've previously thought it was too expensive when in the 7000-8000p range earlier this year. Also, the published buy price for share buybacks concerned me, as it acts as a one-way ratchet, which traders were gaming, to create a non-stop upward trend. So there was always a risk that it would smash through that floor on some unexpected bad news, as it has.

So I started buying when the price got to a PER on 2015 figures of just below 13. That seems a good price for a fantastic business - although its earnings growth will be a lot slower in future than in the last few years.

The narrative tends to be overly pessimistic in tone with Next I think. When actually they will in all likelihood do what they do every year - execute well, and produce good numbers.

The really interesting thing though is how the company does big share buybacks, year after year. This has led to the number of shares in issue falling by almost a QUARTER since 2010 - remarkable stuff. Good divis on top of buybacks too, so the shareholder return has been fabulous.

After the big drop recently - it's fallen by about 30% since the peak in Dec 2015 - I think it now looks decent value. Bear in mind too that the company will itself presumably now be going into overdrive with its share buyback programme. That provides a nice tailwind for the share price to bounce back somewhat.

Price target for me is a 10% gain from the current level - it's just a trade, rather than an investment for me.

Regards, Paul.

Re Next (LON:NXT) I don't agree with their outlook I don't think the high is anything like as grim as 2008 at the moment, yes it could get that way but I think that is some way off still, even if China goes belly up it will take a while to affect the UK consumer, anyway thats my opinion. Did they not issue a similar outlook last year? Yes Bretix may cause some cause problems. I wonder with the switch to online shopping if Boohoo.Com (LON:BOO) will be a takeover target?

OK had a quick look at last years report and they were a bit downbeat, said forecast pretax profits would be between +0.4% to 6.7% Well they have come in at +5% so towards the higher end of the forecast. Anyone would have thought the profits were down 10% from the reaction.

29th Mar '16

Thank you Paul for your rationale on Next. I can see that there might be a nice bounce in the share price, and it's a safe bet if it's a share you are happy to hold anyway. I'm not really a trader, so I'm looking longer term,and I can see that it might be worth starting a holding at this price. Will probably open higher though, and I do still have a concern about whether they are maintaining their product quality - so patience will be my watchword.

Small Cap Value Report (24 Mar 2016) - BRY, TRCS, ABDP, IEH, AFN, NAR, CHH, FJET, LAKE

Brady (LON:BRY)

IT improvements

Timing

Tracsis (LON:TRCS)

Unlock the rest of this Article in 15 seconds

About the Author

Paul Scott

25 comments

Unlock this StockReport™ in 15 seconds

Unlock this StockReport™ in 15 seconds