Small Cap Value Report (28 Jul 2014) - MTC, TSTL, EAH, FTC, GBO, ZZZ, WTL

Monday, Jul 28 2014 by

Good morning!

Mothercare (LON:MTC)

Mothercare has responded to the news that American company Destination Maternity does not intend to make an offer for it after all. Surprisingly, Mothercare also notes that it "has had no contact with Destination Maternity since 3 June 2014". That is strange because news of Destination's interest in potentially buying/merging with Mothercare broke on 2 July 2014, so a month after the last contact between the companies.

As I mentioned in my report here on 2 Jul 2014, the takeover potential of Destination looked highly questionable, as it was clear from their accounts that they did not have the financial firepower to bid for Mothercare. So without explaining who was going to finance the deal & on what terms, their approach had little credibility.

I've added Mothercare to my new "Bargepole List" - companies where I feel there is far too much risk to invest. In this case Mothercare has too much debt, a horrible Balance Sheet including a pension deficit, and problems with onerous leases in the UK. Their UK operation looks very weak, although there is a decently profitable overseas operation. So it's really a question of whether the UK losses will pull down the whole group?

On balance, I suspect it probably won't, but certainly a rights issue (possibly deeply discounted) is looking increasingly likely - if I were their bankers I would insist on it. Banks don't like providing risk capital, that's the job of equity investors. So when Banks find themselves in a position where their lending has become risk capital, they look for a way out. Or at least that's how it's meant to work, but things have gone topsy-turvy in the last few years.

On the positive side, the prelims for y/e 29 Mar 2014 were not as bad as I expected, where in my review here, I concluded that the company probably wouldn't go bust, and it looked like management have stabilised the position. But who knows what will happen? It's too risky for me to even consider a long position. I'm not negative enough to risk a short position either, so will watch from the sidelines.

Here's the two year chart, with the beige line being the FTSE Smallcap Ex Investment Trusts Index (FTSE:SMXX) comparison…

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Mothercare plc is a retailer for parents and young children. The principal activity of the Company is to operate as a specialist omni-channel retailer, franchisor and wholesaler of products for mothers-to-be, babies and children under the Mothercare and Early Learning Centre brands. The Company's operating segments include the UK business and the International business. The UK business segment includes the United Kingdom store and wholesale operations, catalogue and Web sales. The International business segment includes the Company's franchise and wholesale revenues outside the United Kingdom. Its clothing and footwear product includes ranges for babies, children and maternity wear; home and travel includes pushchairs, car seats, furniture, bedding, feeding and bathing equipment, and toys are mainly for babies. It operates in the United Kingdom through its stores and direct business, and across the world in over 60 countries through its international network. more »

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Tristel Plc is a United Kingdom-based manufacturer of infection prevention and contamination control products. The Company's technology is a chlorine dioxide formulation. The Company operates through three segments: Human Healthcare, Animal Healthcare and Contamination Control. The Human Healthcare segment is engaged in the manufacture, development and sale of infection control and hygiene products, which include products that are used primarily for infection control in hospitals. The segments products are marketed under the brand, Tristel. The Animal Healthcare segment relates to manufacture and sale of disinfection and cleaning products into veterinary and animal welfare sectors. The segments products are marketed under the brand, Anistel. The Contamination Control segment addresses the pharmaceutical and personal care product manufacturing industries. The segments products are marketed under the brand, Crystel. Its manufacturing facility is located in Newmarket, Cambridgeshire. more »

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Eco Animal Health Group plc is engaged in the development, registration and marketing of pharmaceutical products for global animal health markets. The Company's principal activity is the manufacture and supply of animal health products across the globe. These activities are conducted on a global scale, through a network, including both regional offices (notably in Shanghai and Princeton) and overseas subsidiaries. The Company's products include Aivlosin and Ecomectin. Aivlosin is an antibiotic that treats a range of specific enteric (gut) and respiratory diseases in pigs and poultry. Ecomectin is an endectocide that controls worms, ticks, lice and mange in grazing stock and pigs. It operates in the United Kingdom and Europe, the Far East, Latin America, North America, and the Middle East and Africa. Its subsidiaries include Eco Animal Health Limited and ECO Animal Health do Brasil Comercio de Produtos Veterinarios Ltda. more »

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

20 Comments on this Article show/hide all

Ramridge 28th Jul '14 1 of 20

Hi Paul.
Re. MTC. The interesting thing about MTC is that their international operations , over 65% of total sales, are profitable and growing. And they are making inroads with online and mobile sales. As it stands I would probably agree it is a basket case. However a break up by a predator would unlock value and move the price north substantially.
Regards. Ram

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Paul Scott 28th Jul '14 2 of 20

In reply to post #84987

Morning Ram,

Indeed I mentioned the "decently profitable overseas operation" at Mothercare (LON:MTC) in the article above. It would make a very nice standalone business. So perhaps the logical thing would be to do a pre-pack Administration of the UK business, and thereby ditch all the onerous leases in one fell swoop?

Although I don't know whether their group structure is set up in such a way that that is possible - ideally you would want the group holding company owning UK and overseas as two separate subsidiaries, and with no cross guarantees on bank debt or property, etc. The pension fund further complicates things.

I've never understood how it is that Mothercare can trade so profitably overseas, but not in its home market of the UK. It's usually the other way around for UK retailers. Very strange.

Regards, Paul.

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lucien2k 28th Jul '14 3 of 20

The birth rate globally is dropping, so their overseas operations may start to struggle as well.

I think they used to serve a need on the high street because parents had to buy this stuff from somewhere. Now its a market that is served very well by Amazon etc at much more competitive prices. I suspect a lot of their footfall (at least in the UK) is basically people window shopping to then buy from online retailers.

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Ramridge 28th Jul '14 4 of 20

In reply to post #84988

Hi Paul. The new CEO is still talking about turning round the UK side. That leaves me cold. As a brand in the UK it is as yesterday as HI Karate. Throwing good money after bad.

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loudenr 28th Jul '14 5 of 20

Also on Friday, there was the announcement that the CFO is resigning. Paul, in your experience is this something that should be viewed negatively or just one of those things that happens from time to time?

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emptyend 28th Jul '14 6 of 20

In reply to post #84989

I think they used to serve a need on the high street because parents had to buy this stuff from somewhere. Now its a market that is served very well by Amazon etc at much more competitive prices. I suspect a lot of their footfall (at least in the UK) is basically people window shopping to then buy from online retailers.

I think it is really interesting to ponder this question. Why are they struggling now?

IIRC 30 years ago, Mothercare was basically a core store on the High Street - and was the go-to destination for everything baby -related. How has it lost that position?

Yes the internet has certainly been a factor, but Mothercare should STILL be scoring for convenience, with "everything that any mother might want" being available in one visit.

I may be wrong, as it is hardly a store whose fortunes I have followed closely, but it seems to me that they have made some very poor decisions about store location - and some of their locations (such as Ipswich) only work if Mothercare stands up as a destination store....which (99% of the time) it doesn't! What they need is to be readily available to passing trade from young couples (or indeed grandparents) - and I think that means going back to locating in town centres - or at least near the major supermarkets!

I suspect that they may need to move a big chunk of their UK stores before they can get much improvement in trading.

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cyclist 28th Jul '14 7 of 20

You mention a Barge Pole list, would you consider sharing that with us ?

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Welshborderer 28th Jul '14 8 of 20

In reply to post #84994

Hi Cyclist, Paul has already done that...where you saw the comment it is typed in blue to indicate that it is a clickable link that will take you straight to the bargepole list

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Paul Hill 28th Jul '14 9 of 20

For what it's worth, one of the most important metrics for gauging Tristel's price/value equation, is using the PEG ratio. For the year to June 2015, this measure comes out at <0.6, with analysts typically viewing a figure of <1.0 as good value.

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Redrumtum 28th Jul '14 10 of 20

Hi Paul, I noticed you took part in the zzz placing earlier this yearbut are no longer a holder. It looks a great concept and I'm tempted but wondering why you sold up.

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Paul Scott 28th Jul '14 11 of 20

In reply to post #84997

Hi Redrumtum,

Argghh, sorry I forgot to disclose my holding in Snoozebox, apologies. I wrote the disclaimer, then added the 3 more stocks at the end & forgot to go back & amend the disclaimer. Will correct that now - I AM still a shareholder in ZZZ. Thanks for flagging.

Regards, Paul.

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cyberbub 28th Jul '14 12 of 20

Paul, I always enjoy your demolition of companies' accounts! :-) Can you clarify where you can quickly find the place in the accounts indicating how many costs/development expenses have been capitalised? Thanks.

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dasv 28th Jul '14 13 of 20

possibly because they can charge a premium for their goods (e.g. in Asia) and have lower operational costs (e.g. lower wages/rent and tax).

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Paul Scott 28th Jul '14 14 of 20

In reply to post #84999

Hi Cyberbub,

Thanks!! The easiest place to check what costs have been capitalised into intangibles is on the cashflow statement. It should be shown under purchase of tangible assets, as a separate line called something like "purchase of intangible assets".

Regards, Paul.

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rgwarner 28th Jul '14 15 of 20

In reply to post #84989

I think they used to serve a need on the high street because parents had to buy this stuff from somewhere. Now its a market that is served very well by Amazon etc at much more competitive prices. - See more at:

What I've found is that my local Mothercare story (Kingston) is reminiscent of something from the 1980s. It feels tired and isn't somewhere I'd like to spend any time in. If anything, I'd be an online buyer from Mothercare.

But then so many other stores do what Mothercare does, but better. Want more upmarket clothes? John Lewis, Jojo Maman, etc. Want bottles and stuff? Boots has you covered.

Sure, Mothercare has it all under one roof, but it's not (in my view) an attractive place to spend time. They could surely turn this around easily with an in-store makeover, but that's going to cost money.

All opinion, obviously. But with two small boys, I ought to be their target market, despite being a dad. And Mothercare would be one of the last stores I'd visit, purely because it feels as awful as Argos used to.

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Cleeve 28th Jul '14 16 of 20


Any thoughts on air partners results today

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cig 28th Jul '14 17 of 20

On Globo, Matthew Earl has entertaining coverage of their latest antics:

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Paul Scott 28th Jul '14 18 of 20

In reply to post #85003

Hi Steve,

No, Air Partner (LON:AIP) is not one I follow - good thing too, judging by the chart!


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intuitive6191 28th Jul '14 19 of 20

In reply to post #84993

Mothercare should approach Tesco about taking retail space in their supermarkets. Might help rescue two bargepole companies at a stroke.

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RichardK 28th Jul '14 20 of 20

Great article. Hope you have a good piss up tonight.



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

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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