Small Cap Value Report (26 Nov 2015) - new version - LTHM, CTO

Thursday, Nov 26 2015 by

Good afternoon!

Our old friend the software bug has made an unwelcome reappearance today, after a long slumber. So I've had to re-create today's report, as the original corrupted. Sorry about that.

I haven't been through the detail yet, from yesterday's Autumn Statement from the Chancellor of the Exchequer. However, the bits I have seen seem to possibly impact shares in ambulance-chasing companies, with a clampdown on the widespread misuse of whiplash claims.

£NHL has put out a response today, saying that the proposals might affect them, but there's not enough clarity yet. I see that shares in Slater + Gordon, the hapless Aussies who foolishly overpaid for Quindell's main business, are collapsing, they're currently down 51% to only A$0.94. Just a few months ago when they were doing the Quindell deal, their shares were between $6-8. What a complete disaster. What on earth were they thinking?

Other companies that might be impacted that I can think of, are £FRP which does some personal injury legal cases, and perhaps £REDD ? Another one which might be affected is £GTLY as it is another legal services business.

All in all, I shall be avoiding the legal services sector for the foreseeable future, until it becomes clearer what the impact of these changes is likely to be.

Another area hit by the Autumn Statement is buy-to-let, where (quite rightly in my view) the Chancellor is concerned that buy-to-let landlords are hoovering up properties, and crowding out first time buyers. So Stamp Duty is being hiked on properties not bought by owner-occupiers. I bet plenty of landlords will find a way round that, by putting properties in relatives names, and claiming they live there, that already goes on a lot to avoid tax, I believe.

So £ALD is one company that might be harmed by a reduction in buy to let mortgages, and I'm sure there are others. If you can think of other companies and sectors affected by the changes announced yesterday, then please do post comments below.

Another key focus for the Govt seems to be increased housebuilding, so that should generally stimulate companies in the construction sector - not just builders, but building supplies.

The deferral of cuts to so-called tax credits, and increased spending on police & defence, should also boost aggregate demand…

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James Latham plc is a timber and panel products distributor. The Company is engaged in timber importing and distribution, carried out in approximately 10 locations. The Company offers a range of wood-based panel products, natural acrylic stone, hardwoods, high grade softwoods, flooring, cladding, decking and plastics. The Company also supplies commodity and specialist products to timber and builders' merchants. The Company offers a range of product categories, such as panels, solid surface, door blanks, hardwoods, softwoods, engineered timber, flooring, decking, cladding, modified timber and panels, fire retardant panels and technical panels. The Company caters to door and kitchen manufacturers, shop fitters and other market sectors. The Company's subsidiaries include Lathams Limited and James Latham Trustee Limited. Lathams Limited is engaged in importing and distribution of timber and panel products. James Latham Trustee Limited is a corporate trustee company. more »

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TClarke plc is a United Kingdom-based building services company, which delivers electrical, mechanical, and information and communications technology (ICT) services. The Company provides electrical and mechanical contracting and related services to the construction industry and end users. Its geographical segments include London and South East, Central and South West, the North and Scotland. The Company's businesses include Intelligent Buildings Green Technologies, Facilities Management, Transport, Mission Critical, Manufacturing Services, Residential & Hotels, M&E Contracting and Design & Build. The Company within its M&E contracting business has capabilities in sectors, including commercial offices, retail, education, healthcare, financial services and media. Its Manufacturing Services business includes in-house precision prefabrication and engineering services. Its projects include Beckley Court, Chiswick Park, Kettering Hospital, Project Nova, Mitie Care Home and Rathbone Square. more »

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27 Comments on this Article show/hide all

paraic84 26th Nov '15 8 of 27

In reply to post #113082

Fairpoint does cover road traffic accidents. However, I am not clear on what proportion this covers - will look into this. I haven't sensed from releases that it's a major part of their legal services offering and on the Simpson Millar website it just lists it as one of a number of services they offer rather than drawing it out.

"This division provides a range of consumer based legal services covering areas
such as family law, clinical negligence, commercial, education and community
care, immigration, professional negligence, conveyance, employment, industrial
disease, road traffic accidents and holiday claims."

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herbie47 26th Nov '15 9 of 27

Yes Fairpoint (LON:FRP) do do PI claims, not sure of the proportion of their income. I see the share price has suddenly fallen, surprising what a comment can do. I do hold a long position in Fairpoint (LON:FRP).

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jpsc01 26th Nov '15 10 of 27

Most of the BTL changes, both in this stmt and the budget hit private landlords, but not corporates. Likely result the single premises owner will get hit but those with a few properties will corporatise. I believe PAG has stated that most of its landlords have in excess of 5 properties so it would seem that once the dust settles PAG will be in a strong position.

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troytea 26th Nov '15 11 of 27

In reply to post #113094

Forming a company for BTL purposes does seem the way to go although BTL appears to be in the chancellors sights so I can imagine that these will be targeted at some point too.

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d40eq6 26th Nov '15 12 of 27

GTLY will be unaffected. They operate in totally different market sectors to PI. Indeed they act for most of the top fifteen house builders, so if anything yesterday should have been good news for their share price. For the avoidance of doubt I have no position in them.

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imranawan 26th Nov '15 13 of 27

In reply to post #113139

Agree that Gateley Holdings (LON:GTLY) should be unaffected. Note 2 of their accounts provides a segmental breakdown of revenue. Property and Banking are there largest divisions so they don't exposure to this segment of the market.

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John Eustace 26th Nov '15 14 of 27

In reply to post #113121

It's OK to go the BTL company route if you're starting from fresh, but I would think it would be difficult and expensive for those already holding properties in their own names to make the switch. They would have to sell the properties to their new company, with the company paying stamp duty and they themselves would then face Capital Gains tax liabilities.
A lot of people will surely quit the game and sell up when the tax changes hit. It will be interesting to see what happens to the values of all those blocks of 2 bed flats.

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BlueFrew 26th Nov '15 15 of 27

In reply to post #113121

I think that is to misunderstand who Osborne has targeted in his last 2 announcements. They've been aimed at highly leveraged landlords.

This stamp duty change might only be an extra 3%, but if you're only putting down 25% it's really 12%. Clause 24 specifically targeted landlords who use leverage.

Yes these landlords might be able to incorporate. But they'll need to find money for Capital Gains, since moving the property into a company is a disposal.

Basically the highly leveraged BTL model has been destroyed. Woe betide any bank that has a large exposure to highly leveraged landlords.

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kenobi 26th Nov '15 16 of 27

In reply to post #113130

Yes indeed, having a btl company has it's shortcomings, getting a mortgage is very much more expensive with only one or two suppliers in the market. It will make no difference with the stamp duty as companies are liable for this, there are other taxes for companies holding property and at about 500k additional taxes kick in 15%, which effectively kills btl in properties over that value I assume that 15% won't have the new 3% added to it, but if you need a mortgage, you'll probably need 25% deposit, plus, a big fee to the mortgage company, 3-5 %, So the amount of cash you need to find is eyewatering.
I accept most buy to lets aren't at this level, but I would also bet that these price levels don't change for years to come. I understand that landlords might be pipping to the post first time buyers sometimes, but they also create supply of properties and in my experience good quality supply. These costs will severely restrict this, pushing up letting costs, and then when rents are higher only then will it be viable to buy more btl with all these additional costs.
It seems to me that higher rents will only lead to higher property prices, and surely that would hurt first time buyers as much as anything.

I found it astounding that the government is lending people 20% deposits for properties interest free, and now 40% in london, for 4 or 5 years. That will just pump the market up, it's ridiculous, I understand doing this at the bottom of the cycle to help people get on the ladder, but to do it now ? and in the biggest bubble we've ever seen in london, it's insanity.

What will happen to prices when this is taken away ? quiet.

This government has completely lost it on the property front, so much for rebalancing the economy. Pump up the housing bubble again more like !!!


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Cisk 26th Nov '15 17 of 27

In reply to post #113160

Personally I think the government absolutely supports the craziness of (esp London) high property prices. It's the biggest ponzi scheme out there.

It's a mirage that people think they own their own home. Unless you're retired, or wealthy, the banks own your home. You're just a slave to the bank to work to keep on upgrading your property until you downsize - only then do you see the actual cash.

So extending the BTL scheme is just a vote catcher.

Prices will come down - maybe even collapse - just when everyone thinks it won't happen and that low interest rates will last forever.

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kenobi 26th Nov '15 18 of 27

In reply to post #113157

wouldn't it have been better to legislate or have rules about loan to value than to create all these extra costs and taxes ? Seems to me there's 15% stamp duty on btl properties in companies since last year regardless of whether you have high leverage or not.

who is going to provide low cost good quality accomodation with this level of costs ? either the government has to, which seems unlikely, or the costs will have to be passed on to the tenants. Not everyone wants to buy, not everyone is able to buy at any point in time. Of course it's popular to bash landlords stopping ftb's getting on the market, just remind me who you rented from while you were saving up, or when you moved somewhere for a short while ? or when you moved somewhere to get to know the area before buying ?

Unless we're going back to bulk builidng of social housing, (presumably housing associations will be immune from these costs ? Is that the next move for professional property investors ? forming a housing association ?)

Property is a long term game, all this messing in the market (large deposits interest free to buyers), has long term and not always forseen consequences. The more costs in buying and selling properties the less transactions there will be. For example it has become common for people to buy a new home and let their old home, even if that's not the ideal property, but to sell that and buy something else would be very expensive, it's just got even more expensive.

Obviously its popular to bash landlords,

BTW I don't want anyone to assume I'm a big landlord, I own a couple of properties, have been thinking of buying another, but prices are so high now I was planning to leave it until the next buying opportunity, not sure there will be another opportunity now, until some clever accountant finds a way around some of these rules,

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kenobi 26th Nov '15 19 of 27

In reply to post #113163

Completely agree, have we learnt nothing ? Making houses more affordable by giving 20% deposits free, just pushes prices up, until they're less affordable, and are you going to provide these deposits free for ever going forward ??? what will that cost ?? If not what will happen to prices when you take this away, like you say a ponzi scheme, 40% interest free deposits in london, but no child benefit if you earn over 60k !! yes we need the money to fund 240k interest free deposits for people buying new homes for 600k !!

They're the builders ! building the next bubble, then they'll say who would have know ? it just crept up on us !


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BlueFrew 26th Nov '15 20 of 27

In reply to post #113169

The only slight hope is that the 40% help to buy is only on new builds. The take up of the other help to buy schemes has been very low. I think a good percentage of the population are starting to wake up to the house price con.

It's still an utterly insane policy, but I think we'll find it's really been buy to let driving up prices. I don't think help to buy can hold prices up on its own.

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kenobi 26th Nov '15 21 of 27

In reply to post #113172

not sure the 40% is only on new properties

"Equity Loan will be now available until 2021. And, to reflect the current property market in London, from early 2016 the government will increase the upper limit for the equity loan it gives new buyers within Greater London from 20% to 40%."

point two on this page,


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cig 26th Nov '15 22 of 27

In reply to post #113175

It is new homes: "You must buy your home from a registered Help to Buy builder"

What is not quite clear is what happens to those "equity loans" if the price goes down. If you sell the property for say the buyback value of the mortgage (or less), does that simply cancel the loan? That could make a nice little hole in public finances during the next housing bust... (and is nicely pro-cyclical as the hole will no doubt make whoever is then cancellor cancel the programme, thus accelerating the bust in the short term.)

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underscored 26th Nov '15 23 of 27

In reply to post #113175

Equity loans were HTB1 and for new build only.

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underscored 26th Nov '15 24 of 27

In reply to post #113181

No the risk (negative equity) is carried by the mug punter. Also the 0% rate reverts after a short period.

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JollyBiologist 26th Nov '15 25 of 27

Many thanks for T Clarke interview, Paul. I really like this company so it was very interesting and useful to listen to the people in charge. Much appreciated.

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rhomboid1 26th Nov '15 26 of 27

Thanks Paul , an interesting interview with Thorpe, CTO, they seemed least comfortable when discussing their low shareholding but otherwise made a strong case, their London centric business also makes them unique.

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Larbert 3rd Dec '15 27 of 27

James Lathom is a highly regarded company within the UK timber trade. The Stockopedia page is a delight to read - not least for the comforting match of Reported and Normalised EPS.
A disturbing feature, however, is the op cash flow per share as the earnings fail to come through as cash year after year. Do I need to worry about this? Jim Slater would.

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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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