Small Cap Value Report (26 Jan 2017) - HYNS, CMCX, RNK, ARDN

26th Jan '17 by Graham Neary

18 comments 15261 reads

Good morning,

Quite a few announcements today.

I provisionally intend to cover:

Haynes Publishing (LON:HYNS)
CMC Markets (LON:CMCX)
Rank (LON:RNK)
Arden Partners (LON:ARDN)

I'll update this with a link to Part 2, if there is a Part 2 today.

Regards

Graham

Haynes Publishing (LON:HYNS)

Share price: 138p (+13%)
No. shares: 15.1m
Market cap: £21m

Interim Results

A really mixed bag of results here but the overall tone is encouraging (and hence today's share price increase).

I'm going to focus on the constant currency results, since they are more reflective of the company's competitive positioning and those elements which are under its control.

North America & Australia: sales down 20% to $7.5 million. Small operating loss (from small operating profit last year). Has been restructured. New sales initiatives being implemented.

UK: Sales up 17%. Excellent result.

Europe: Sales up 25%. Excellent result.

UK & Europe operating profit: £1.1 million.

Big picture: excluding FX movements, revenue was 1% higher in this period.

Other bullet points:

Huge investment in the product range (vs. the market cap) of £3.3 million.
Pension deficit up to £21 million after lower interest rate assumptions.
Interim dividend maintained at 3.5p (same level since 2013).

My opinion: I am really warming to new management here (though still part of the Haynes family).

Even though the FX-neutral revenue gain was very modest, I like the online direction the business is headed in. Digital products were 36% of revenue in this period.

A lot will come down now to the returns made on £3 million + of product investment, and synergies on acquisitions.

The pension issue shouldn't be ignored either.

Overall, an interesting and potentially lucrative value stock. If you can satisfy yourself that demand will be resilient for these products (on balance, I tend to think it will be), and if you could have faith in the management and in the balance sheet, it could be worth a closer look.

CMC Markets (LON:CMCX)

Share price: 111p (-2.4%)
No. shares: 288m
Market cap: £320m

Q3 Interim Management Statement

[Update: After writing this report, I took a long position in IGG.]

This spread betting / FX…

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Virgil Solozzo

26th Jan '17

Any views on STAF at all? Completely missed off from yesterday's report, cheers.

andyi

Paul / Graham Any views on EMIS (LON:EMIS) which reported today?

Graham Neary

I will check with Paul on this, thanks

FoolishBen

Graham - Just to be sure, did you mean IG Group (LON:IGG) might survive very well or CMC Markets (LON:CMCX) ? Or perhaps both?

edgrove

Graham, The price for CMC Markets (LON:CMCX) is 111p-not 695p.

Both look like they should survive but when I double-checked the French proposals and IG's reponse to them, I particularly felt that IG would do well. So I've now bought a few IG shares, putting my money where my mouth is.

Thanks Ed, I've fixed it.

Howard Marx

Re CMC Markets (LON:CMCX) & IG Group (LON:IGG), it was interesting listening to the latter's conference call yesterday.

The CEO claimed that as a constant in any period, 50% of the profit came from 2% of the clients.
I had previously assumed an 80/20 ratio i.e. that 80% of the profit in these businesses came from 20% of clients. Maybe it's nearer to 90/10. Regardless, if these 'high-end' clients get designated as 'experienced' or 'professional', then the new FCA rules will barely impact them.

Furthermore, given that IGG currently spend 14% of their revenues on advertising & marketing, any FCA proposal to reduce such activities' e.g. bonuses would be welcome in my view given the current excessive levels.

Investors may have overdone their pessimism towards this industry.

rhomboid1

If 50% of profits come from 2% , does that mean they're large scale clients or just large losing clients? If the latter then a more sensible definition of "professional" could knacker them? I recall receiving very generous hospitality from SB companies when I held a very large and ultimately large loss making series of positions, now I'm small scale and profitable they appear to have lost my telephone number!

Rhomboid

A key use of CFD's/spreads is to hedge a portfolio rather than to take directional 'bets'. This is a core source of underlying profitability for IG Group (LON:IGG) & CMC Markets (LON:CMCX)

NB The CEO was clear to point out that the '2%' of clients in a period evolves into a different cohort into a following period i.e. it is not the same 2% clients that generate 50% of their profit in each successive period.

daveinthelakes

Graham,
CMC/IG/RANK etc

If you want a little flutter in the gaming sector I suggest you look at Playtech who have a financials (CFD/spread betting) operation but more importantly are the leading provider of software to the industry having contracts with the likes of William Hill, Ladbroke Coral Group, Sun Bingo developing the gaming apps and providing the tech for their mobile gaming (THE growth sector) together with in store betting terminals.

The potential for Playtech with the US opening up on gambling is unlimited and a look at Playtech's leading shareholders will reveal a couple of US hedge funds.

Playtech throw off cash, have no debt, in fact loads of cash in the bank, buy up smaller gambling tech companies with this cash and hand out special dividends.

Playtech is my biggest holding. Years results out 23 Feb.

Dave.

dscollard

agreed with your take on the likely effects of regulations on the likes of CMC Markets (LON:CMCX) and IG Group (LON:IGG), I read through the various regulatory announcements which didn't seem too draconian to me and wouldn't greatly affect a relatively well-run business like IG Group (LON:IGG). Their platform and tools are probably the best in the industry while crucially their spreads keep costs low. Great for taking longs and shorts in the US and other markets: net-net spreadbetting a share is just a leveraged position and still needs the same rigour and rules as physically buying them: with the advantage that there is no tax
I'm of the view that no matter how much help support and tools you give some individuals, they won't change their habits and attitudes. A cursory look at some of the AIM bulletin boards reaffirms this ( I am currently fascinated by the CloudTag Inc (LON:CTAG) fiasco as a good example of story stocks and the madness of crowds).
Took a position in in IG Group (LON:IGG) in the 450s so nicely in profit on it but will hold a while. In my view many investors made more assumptions on what they thought would be regulated and shied away.

Thomas Stendall

Graham - re: £CMC, have you taken a look at their peer Plus500 (LON:PLUS) and do you have view? Whenever I've looked at it, it has always been on a very high yield and very low PER valuation even before the regulatory announcements. As I write, at about 400p, it trades on a trailing yield of just under 15% (even taking into account the Israeli withholding tax) and PER of below 6. H1 2016 EPS and divi appear better than last year + I am guessing that the UK referendum and US election results will have led to increased trading activity? It is due to announce results on 7 Feb.

Connor Davidson

I noticed that Luke Johnson took a stake in Arden Partners and joined the board recently. Usually stealing his ideas and backing his activism works well. However I've dumped the stock in the too hard pile for now. There might be a great opportunity here or the company could just keep bleeding money.

fdthomas

I'M sorry I can't comment, I'm in Cape town for the winter until May, spending last year's GAINS?bought Thomas Cook at 55p & sold at 91p two weeks ago, it's lovely & sunny here

drvodkaquickstep

27th Jan '17

Details of Haynes Publishing (LON:HYNS) Tennessee property for sale:

https://www.commercialsearch.com/listings/1299-Bridgestone-Pkwy_La-Vergne_TN_37086_b6CT34THKC4WKCEB16HK68T1J60TKERTQ64R3ACHJCTH36D9GC5H34CB26XJKAT1R

US$ 6m = GBP 4.7m or 22% of mcap alone (mcap on stocko site is wrong as there are 2 classes of share hence actual mcap is circa GBP 21m)

UK HQ site with OPP due to be marketed shortly and I anticipate a GBP3-4m asking price so those two properties alone = 40% of mcap hence investors are getting a significant part of the excellent Haynes business for effectively nothing.

Note: original post edited due to error (purely mine!)

Damian Cannon

Surely the problem with Haynes Publishing (LON:HYNS) is it's sizeable pension deficit? This could suck up the proceeds from both of these sales and still come back for more: http://www.iii.co.uk/news-opinion/richard-beddard/haynes-publishing%3A-whiff-panic

Hi Damian

This was discussed at the AGM (see notes of AGM on ShareSoc website) and is a very valid point. Mgt said that yes it was a concern but one that is manageable and something they keep a close eye on. With bond yieds now on the move the deficit could in fact be dramatically reduced as discussed elsewhere at length on this site:

http://www.stockopedia.com/content/pension-deficits-has-the-worm-turned-120746/

http://www.stockopedia.com/content/introducing-the-new-pension-deficit-ratios-152117/?comment=5#5

The US element of the deficit also uses a very high discount rate and much heavier mortality; this seems to be common practice in the US and is something often noted by Warren Buffett. The US liability is only a quarter of the total, however.

The pension deficit is also not on the balance sheet of the parent company and this is helpful because the existence of distributable reserves in the parent determines the ability to pay dividends. If the deficit is on the parent balance sheet, an increase can wipe out distributable reserves.

Still, its something to keep a close eye on for sure.

Small Cap Value Report (26 Jan 2017) - HYNS, CMCX, RNK, ARDN

Haynes Publishing (LON:HYNS)

CMC Markets (LON:CMCX)

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Graham Neary

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