Small Cap Value Report (26 May 2016) - HSW, DEB, LRM

Thursday, May 26 2016 by

Good morning!

Ed is doing an interesting-sounding webinar today at 12:30 - signup link here. The topic today is different ways of using the StockRanks system to find good shares.

I see that Debenhams (LON:DEB) (in which I currently hold a long position) has appointed a new CEO. It's noteworthy because he's come from Amazon. So it shows how much emphasis retailers are now putting on online & mobile. Debenhams already has a very substantial online operation - it's actually one of the UK's largest internet retailers. It's funny the way the market ignores that, and puts it on a low earnings multiple, as if it were just a stores-only retailer.

Another stock I hold, Restaurant (LON:RTN) has still not said anything to the market about very specific potential takeover stories in the media. How can this be? Normally when a share price surges strongly, on rumours of takeover approaches, the company is obliged to make a statement to the market.

To date, RTN has said nothing. This seems most irregular. RTN shares are up 32% in the last 3 weeks, largely driven by takeover speculation. The company MUST make a statement, confirming or denying the situation. Also it needs to explain why there has been such a long delay in updating the market with price sensitive information that is currently being withheld - the rumours are either true or false. We need to know, now!

Hostelworld (LON:HSW)

Share price: 188p (down 27% today)
No. shares: 95.6m
Market cap: £179.7m

AGM statement (profit warning) - I haven't read it yet, but it must be a profit warning because the shares are down 27% - a typical drop for a standard-type profit warning.

A city friend asked me to look at this company, to give him a second opinion on it a few weeks ago. I've not written anything here about it before now. My view at the time was that the website looks good. The business is profitable & pays divis. However, growth seems to be stalling, and the group appears to be cannibalising sales from one of its own websites.

Anyway, on to today's statement. Q2 trading is not going well:

Reflecting recent geo-political events, particularly in Europe, trading over the second quarter has been at a level below our expectations...

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Hostelworld Group plc is an Ireland-based company, which provides hostel-focused online booking platform. The Company operates through over 20 different languages by connecting young travelers with hostels around the world through its brand Hostelworld and supporting brands Hostelbookers and The Company, through its subsidiaries, provides software and data processing services that facilitate hostel, hotel and other accommodation across the world, including ancillary online advertising revenue. The Company focuses on hostels, which maintains a global hostel database with over 13,000 hostels and approximately 22,000 other forms of budget accommodation available across the world. The Company builds a progressive internal training policy that includes ongoing skills training, personal development training plans and management development. The Company has over eight million reviews across approximately 33,000 properties in over 170 countries. more »

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Debenhams plc is a United Kingdom-based company, which is engaged in multi-channel business. The Company’s brand trades through approximately 240 stores in 27 countries. The Company's segments are UK and International. The UK segment consists of stores in the United Kingdom and online sales to the United Kingdom addresses. The International segment consists of international franchise stores, the Company-owned stores in Denmark and the Republic of Ireland, and online sales to addresses outside the United Kingdom. The Company's stores trade under the name of Debenhams other than the Danish stores, which operate under the Magasin du Nord banner. Its stores offer customers a range of services, including restaurants and cafes, personal shopping assistance, hairdressing and beauty treatments, nail bars and wedding or celebration gift services. Its Debenhams Direct ( offers a range of products and services for online customers. more »

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The Restaurant Group plc is a United Kingdom-based company, which operates over 500 restaurants and pub restaurants. The Company operates through operating restaurants segment. Its portfolio covers a range of categories, including table service, counter service, sandwich shops, pubs and bars. The Company's principal trading brands include Frankie & Benny's, Chiquito and Coast to Coast. The Company's Frankie & Benny's brand offers classic American and Italian style food and drinks. The Chiquito menu offers a range of authentic Mexican and Tex-Mex dishes. The Coast to Coast offers classic American food, such as double burgers, stone-baked calzones, distinctive steaks, amazing seafood dishes and South-West American specials. The Company also operates a concessions business, which trades principally at the United Kingdom airports. The Company's concessions business develops partnerships to deliver catering solutions that meet the needs of its clients and clients' customers. more »

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  Is Hostelworld fundamentally strong or weak? Find out More »

55 Comments on this Article show/hide all

simoan 26th May '16 36 of 55

Elsewhere, I notice there has been little effect on prices of the car dealers today despite a fairly large acquisition by Marshall Motor Holdings (LON:MMH). Who's next?

All the best, Si

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PJ0077 26th May '16 37 of 55

In reply to Paul Scott, post #4

The absence of an announcement is proof of either:

1. The offeror &/or RTN are ignorant of the UK Takeover Code, or;


The Sky story from a week ago suggested that Cinven were in the EARLY stages of appraising a potential bid.

It would appear that wishful thinking has led a few investors into believing that this appraisal was instantly positive, that talks have begun & that a bid is imminent! Oh dear :(

In the words of David Hume: The wise man proportions his belief to the evidence.

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mammyoko 26th May '16 38 of 55

Why would any sane PE house make a move on Restaurant (LON:RTN) now? From the evidence of the analysts' call there is plenty more value destruction that could be wrought by the incompetent CEO before the update in August. Add in the absence of any finance guy and there's absolutely no hurry. LFL sales are falling, the proposition is dated and the strategy is non-existent. Another profits warning could see the shares trading again at £2 something. The shares have come an awfully long way on the back of some spurious rumour from Sky News.

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PJ0077 26th May '16 39 of 55

In reply to oscar247, post #34

Good luck!

"When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact."
Warren Buffett

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JohnEustace 26th May '16 40 of 55

In reply to biloseli, post #32

Yes, it took a double take for me to believe it. I posted my concerns on their blog on August 21st last year which led to some vigorous debate. WPCT are sticking by their due diligence process.

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ray 26th May '16 41 of 55

The comment on not knowing which part of marketing spend was wasted was not made by John Wanamaker but by Lord Lever of Sunlight Port (now part of Unilever).

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Paul Scott 26th May '16 42 of 55

In reply to PJ0077, post #37


No you're wrong.

If a company has received possible takeover approaches, even if early stage, and the share price has risen considerably, then they are OBLIGED to update the market. Even if that is to just say that some preliminary approaches have been received, discussions are ongoing, which may or may not lead to a bid.


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Paul Scott 26th May '16 43 of 55

In reply to ray, post #41

Hi Ray,

"The comment on not knowing which part of marketing spend was wasted was not made by John Wanamaker but by Lord Lever of Sunlight Port (now part of Unilever)."

Tell Google, not me! ;-)

I just looks things up on t'internet.

Regards, Paul.

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jonesj 26th May '16 44 of 55

In reply to gsbmba99, post #25

So you would be suggesting this is somewhat suspicious then ? That's certainly how I would call it, based on what you wrote.

The director dealings section on Digital Look has no mention of any director dealings in the last 12 months.
Incidentally, it does show Mr Woodford's firm as by far the largest shareholder.

As a customer, I stopped using this company due to their disingenuous pricing. There I am booking a double room, then when I click through to pay, the price doubles as they price per person, rather than per room.
Most companies quote a rate per room & I would rather deal with one of them.
Perhaps the backpacker set who sleep 8 to a room have different priorities & maybe there is less competition there ?

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PJ0077 26th May '16 45 of 55

In reply to Paul Scott, post #42

Still sounds like wishful thinking Paul!

RTN are not obliged to comment on their share price appreciation.. unless they are negotiating a takeover approach.

They have yet to comment.

QED. They have yet to receive an approach.

Any other thought is misaligned with reality!

Good luck with any approach beyond today!

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pka 26th May '16 46 of 55

In reply to JohnEustace, post #18

There is no way that cold fusion could ever work. You need temperatures of millions of degrees, such as those at the centres of stars, to overcome the enormous mutual electrostatic repulsion of positively charged helium nuclei in order to start a nuclear fusion reaction.

Chemical forces at room temperature are nowhere near powerful enough. As 2% of the Woodford Patient Capital Trust is invested in a cold fusion company, that demonstrates to me that Woodford has not taken competent scientific advice on a subject he evidently knows nothing about and is a good enough reason for me to never invest in any of his funds.

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Browndog24 27th May '16 47 of 55

Hi all, first time poster. I have been traveling for extended periods and used and hostelworld to book all my accommodation. Their target market is very different to that of any other accommodation booking website. People book a hostel for the price, the facilities and the social aspect to meet people. My preference was always a hostel. Everyone you meet in a hostel will have found it on one of the hostelworld booking platforms and are generally a loyal bunch until they grow up and start using hotels! That said, I showed my girlfriend some of the hostels available and she was amazed at the quality and price of the rooms available on there. The other point to note is that a lot of hostel users are backpackers and are using for an extended period of time so it's not just people using them for a couple of nights or for a week long holiday. Airbnb is perhaps the biggest rival and a large group is more likely to find it more economical to avoid a hostel, but the hostels I've been to were mostly full of single travelers and couples. Yesterday's sell-off seems a little extreme to me. As the author confirms the company is financially sound.

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PJ0077 27th May '16 48 of 55

In reply to Paul Scott, post #42

Today's announced share dealing by a RTN director is surely evidence that they are NOT currently in takeover talks.

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Carcosa 27th May '16 49 of 55

Not a 100% evidence because it's a non-exec and he may not (amazingly) be aware of any formal negotiations. That sort of thing has happened before. Or he could be inadvertently insider trading of Restaurant (LON:RTN) ;-)

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dangersimpson 27th May '16 50 of 55

In reply to herbie47, post #17

Debenhams (LON:DEB) I have been considering but the Altman Z-Score is rather low

Z-Score is a composite of four factors that have historically indicated financial distress. if you click on the value in the StockReport you can see which values are causing the concern:


While for a lot of companies stretching their working capital is a sign of distress for many consumer facing businesses like retailers & cinemas it is just how their business works. They get paid in cash up front and pay their suppliers on 90-day terms. This obviously becomes a problem if the turnover declines significantly and the WC unwinds but not for a stable or growing business.

The negative working capital also contributes to the weak fourth metric. Combined with how some up-front lease incentives and things like that are accounted for as liabilities.

IMO the Altman-Z doesn't work particularly well for these normal negative working capital type businesses.

What these metrics do highlight is that there is no asset protection in the business if it were to be wound down. Why you would voluntarily wind down a business that consistently generates c.£200m OCF & c.£100m FCF pa I don't know. But it is a risk that is worth being aware of for the long term.

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Piecesof8 27th May '16 51 of 55

Hi All, first time poster too and as background i work in the online travel industry.

Agree with Browndog24 comments on

They are after a different audience as they are looking at engaging the millennials who are looking for social experiences when they travel hence why AirBnB is a major threat.

They will also be facing more competition from Priceline group and their global accommodation brands / who are expanding heavily from hotels into alternative accommodation which includes hostels (now have 390k alternative accommodation on top of their hotel inventory giving them 855k accommodation options).

As start to get that type of inventory then they will start to shut out out of the variable marketing channels like google SEM and price comparison sites like tripadvisor, trivago as they will be able to bid more per click and they have very high converting websites. Due to their much larger traffic will be able to test and learn to improve their site / app faster than hostelworld, so will have a massive conversion advantage in these marketing channels. Previously hostelworld could hoover up the clicks with their different brands and bid at a low cost per click as their was minimal competition.

On top of this there is a massive shift in use of mobile, and also google has made some big changes to their search results to monetise better, so more of the top search placements / maps are all paid ads (SEM), and the free listings (SEO) are now below the fold and getting much less clicks. This means that brands like will now be getting much less free google traffic, and they are competing against who are the worlds best at travel SEM so they will have to spend more to acquire customers and traffic through that channel.

After having a quick play on their websites they are not best in class responsive even though 41% of their traffic is mobile, and they will be seeing lower conversion than the desktop, hence why the google / price comparison channel costs would have also been a pain point with that customer shift.

They will be desperate to get customers moving to downloading and using their app for repeat bookings as this will give them major marketing leverage as it is a low cost marketing channel ... the app seems to have some issues according to reviews, so hope they get it working well soon. I would expect that this is the key reason for the shift of 58% of customers booking in lower cost channels. I'm sure they are also looking at the buzzfeed style content marketing model and trying to engage their customers via social channels too, but this will be nascent and will take time to scale and competition as always is moving fast and innovating too!

All in all they face some serious headwinds due to their unit economics and expansion of the big beasts into their space, but if they make a rapid shit to the mobile app / social channels as their main source of traffic they will survive and do ok.

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Maylix 27th May '16 52 of 55

In reply to Carcosa, post #49

'Or he could be inadvertently insider trading of Restaurant (LON:RTN) ;-)'

Or not, seeing as he hasn't started his job at RTN yet :-)

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Paul Scott 27th May '16 53 of 55

In reply to PJ0077, post #48

Hi PJ,

You said:

Today's announced share dealing by a RTN director is surely evidence that they are NOT currently in takeover talks.

I agree, that's how I read it too. So I've sold half my position, after a good rise in the last 3 weeks.

Although the other poster above also has a point - that a new NED coming in may have bought the shares independently, without knowing anything about possible bid talks.

Regards, Paul.

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Carcosa 27th May '16 54 of 55

Unlike the rules in America, he would not have to be employed to be an insider trader. Anyone, including contractors, staff, relatives etc are subject to insider trader rules in the UK. The big difference is that in the USA insider traders - within their narrow definition, are frequently prosecuted unlike in the UK where the definition is very broad and pitifully few insider traders are prosecuted.

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herbie47 10th Jun '16 55 of 55

I see Hostelworld (LON:HSW) shares are down again today, now under 150p does look oversold to me and is very tempting to buy, will keep an eye on it next week.

Why are the directors share buys not showing up on Stockopedia?

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About Paul Scott

Paul Scott

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »


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