Small Cap Value Report (29 Mar 2016) - SAL, QTX, HAYT

Tuesday, Mar 29 2016 by

Good morning!

Hopefully a relaxing long weekend was had by all. The very changeable, and at times stormy weather over Easter won't have helped clothing retailers - as footfall on the High Street tends to be lower when the weather is inclement.

Although things are not so straightforward now, as retailers also sell online - in some cases it's a highly significant part of overall sales. So quieter shops may at least be partially offset by busier websites. The pure play online retailers, such as ASOS (LON:ASC) and Boohoo.Com (LON:BOO) should do considerably better when the weather hurts physical stores.

I have to say though, the best retailers tend to do well, whatever the weather. It's often used as an excuse by retailers who don't want to admit, even to themselves, that their products are not up to scratch.

Also, bear in mind that a lot of retailers' shares have already dropped a considerable amount - e.g. look at Next (LON:NXT) (in which I hold a long position) which is down 30% since December. Has the business really fallen in value by 30% in 4 months? I don't think so.

Similarly with Sports Direct (LON:SPD) (in which I also currently hold a long position) which has dropped a considerable amount as a result of various problems. However, as with Next, it's still a hugely cash generative business, and maybe "Mad Mike" is happy for there to be as much gloom as possible, in order to buy it back on the cheap? Of course I'm just speculating, but stranger things have happened.

So I think bombed-out retail shares are a good place to go hunting for value, and divis, at the moment. The macro picture is positive for consumer spending, with Living Wage, and pension drawdowns injecting progressively more cash into the pockets of consumers (although offset with cuts to state benefits).

Spaceandpeople (LON:SAL)

Share price: 60p (unchanged today)
No. shares: 19.5m
Market cap: £11.7m

(at the time of writing, I hold a long position in this share)

Results y/e 31 Dec 2015 - no surprises today, as the results for 2015 published today are consistent with the update given by the company on 1 Feb 2016, which I reported on here.

Revenue fell from £15.4m in…

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NEXT plc is a United Kingdom-based retailer offering clothing, footwear, accessories and home products. The Company's segments include NEXT Retail, a chain of over 500 stores in the United Kingdom and Eire; NEXT Directory, an online and catalogue shopping business with over four million active customers and international Websites serving approximately 70 countries; NEXT International Retail, with approximately 200 mainly franchised stores; NEXT Sourcing, which designs and sources NEXT branded products; Lipsy, which designs and sells Lipsy branded younger women's fashion products, and Property Management, which holds properties and property leases which are sub-let to other segments and external parties. Lipsy also sells directly through its own stores and Website, to wholesale customers and to franchise partners. The Company's franchise partners operate approximately 180 stores in over 30 countries. more »

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Sports Direct International plc is a sporting goods retailer, and it operates a portfolio of sports, fitness, fashion and lifestyle fascias, and brands. The Company's segments include Sports Retail, Brands and Premium Lifestyle. Its Sports Retail segment includes the results of the United Kingdom and international retail network of sports stores along with related Websites. Its Brands segment includes portfolio of various brands, such as Everlast, Lonsdale and Dunlop. Its Premium Lifestyle segment includes the retail businesses, such as Cruise, Flannels and USC. In Sports Retail, it offers a range of sporting apparel, footwear and equipment through Its Fitness Division comprises over 30 gyms located across the United Kingdom. Its channels include standalone stores and multi-fascia retail spaces, concessions within department stores and online. Across its Sports Retail fascias, it has over 700 stores, and across Premium Lifestyle fascias, it has over 83 stores. more »

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SpaceandPeople plc is a United Kingdom-based media specialist company. The Company is engaged in marketing and selling of promotional and retail licensing space on behalf of shopping centers and other venues throughout the United Kingdom, Germany, France and India. The Company's segments include Promotional Sales, Retail, Head Office and Other. The Company markets, sells and administers promotional space in a range of footfall venues across the United Kingdom, including shopping centers, theme parks, garden centers, retail parks and airports. The Company offers a service covering from consultancy services to the provision and management of retail merchandising units in shopping centers. It enables venues to market, administer, promote and sell their promotional space. Its subsidiaries include MacPherson & Valentine Limited, SpaceandPeople GmbH, Retail Profile Holdings Limited, POP Retail Limited, Retail Profile GmbH, SpaceandPeople India Pvt Limited and S&P+ Limited. more »

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

25 Comments on this Article show/hide all

Paul Scott 29th Mar '16 6 of 25

In reply to post #125509


I've not looked at Premier Foods (LON:PFD) before, and I see that it's in a bid situation now, so don't think there's any value in me doing lots of research on it to get up to speed. Also the mkt cap is now over £400m, which is above my top end of c.£300m mkt cap.

Sorry I couldn't help on this one. I'm surprised it's got into a bid situation, given how highly indebted it is. Good luck if you hold.

Regards, Paul.

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OsullivanB 29th Mar '16 7 of 25

Hi Paul!

When you last commented on Stadium (SDM) on 20th January 2016 you wrote: "I'll reserve judgement until the full year figures are out."

They were published today and I would welcome your current view.

Every best wish


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Ramridge 29th Mar '16 8 of 25

In reply to post #125539

Re. Stadium (LON:SDM) the results were actually published on 15/16 March. Today's announcement is the standard RNS saying they have now published and posted the accounts to shareholders and it gives notice of AGM date.

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OsullivanB 29th Mar '16 9 of 25

In reply to post #125542

Thanks, Ramridge.

I would, of course, still welcome Paul's thoughts.


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simoan 29th Mar '16 10 of 25

Hi Paul,

Mgt of Spaceandpeople (LON:SAL) have said before in meetings that clients come & go. Sometimes they make a policy decision to manage kiosks in-house. However, parting is always on amicable terms - SAL send a bottle of champagne or flowers to the departing former client, and a thank you note for their business, and a prompt to give SAL a call if they can ever help them in the future. Very often clients do indeed give them a call c.2 years later, saying it's too much hassle managing the kiosks themselves, and can they get SAL back in to do it for them.

Whilst this is very commendable and shows an enlightened approach by management, this kind of issue is merely the sign of a low quality business IMHO - you want to existing customers to stick around and spend more whilst you add others, so if I held I would share the reservations of Laughton and Ben1. It's OK to under promise and over deliver in the next results but the outlook statement does come across as particularly down beat - who would want to buy in after reading that outlook? Not me :-)

All the best, Si

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FREng 29th Mar '16 11 of 25

In reply to post #125551

As Paul said above, the mgt of Spaceandpeople (LON:SAL) are giving a webinar tomorrow at 1.15. Link above. If anyone here logs in, please ask these questions and post the answers here.

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Laughton 29th Mar '16 12 of 25

In reply to post #125554

OK - I have registered for the webinar and have emailed my question so wait to find out if the question features in the webinar and if so what kind of response I get.

Will report back, either way. - Do I do that in the Comments section of today's SCVR or tomorrow's?

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herbie47 29th Mar '16 13 of 25

Paul, I think you right about Quartix Holdings (LON:QTX), similar to Trakm8 Holdings (LON:TRAK) in many ways, both peaked around 380p. I see the price is now down 10% so looks like the market agrees with you.

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kevinsamvance 29th Mar '16 14 of 25

Re SAL; I think the issue of falling revenues is being dismissed too lightly. Here is a company that has increased revenues every year for 12 years until today. Even through 2007/8/9 they increased revenues. This loss of revenue is a red flag for me and suggests the possibility that its best period of growth is in years past.

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rhomboid1 29th Mar '16 15 of 25

Hi Paul

Re Hayward Tyler (LON:HAYT) the acq. of Peter Brotherwood was an opportunistic move when It became apparent that Dresser Rand were prepared to offload it at basically NAV as it had become non core and sub scale for them. HAYT had identified it as an excellent fit years ago but hadn't been in a position to do anything about it . Timing last year wasn't ideal either as they were midway through the complete rebuilding of their Luton facility but they raised over £8m in fresh equity at 90p a share and put in place bank funding of £11m , £5m of which was repaid from the placing. The debt was not cheap at 3.75 over Libor so the intent was always to do a S&L and use the proceeds to repay this debt and further invest in upgrading the Brotherwood operation.

My concern with this company was a low ball opportunistic bid from Harwood Capital who hold 20 % here and have form in such matters. This deal makes that less likely as the bank will be more comfortable as a result of this. Fwiw They also own the Luton freehold, (encumbered,) but there is a chunk of extra value there IMHO for part of the site they may not require going forward, the site is near Luton Station and towards Luton Airport so alternate uses are quite high value.

I like the company a lot as they are fast moving and entrepreneurial as well as totally fixated on creating a world class high end engineering group with state of the art nuclear certified facilities.

As you may have guessed I hold a fair few ..

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blondeamon 29th Mar '16 16 of 25

TRAK the best alternative right now for telematics, said they are ahead and multiple new contracts signed but SP is still 35% below its highs because of an unjustified short attack by the troll master himself.

Update in 3 weeks, should barge higher after that.

Biased here as invested heavily so DYOR.

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FREng 29th Mar '16 17 of 25

In reply to post #125557

Thanks! Post the info wherever seems most convenient. We'll find it!

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herbie47 29th Mar '16 18 of 25

In reply to post #125572

I'm invested also but looking on Stockrankings Quartix Holdings (LON:QTX) still seems ahead?

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blondeamon 29th Mar '16 19 of 25

In reply to post #125581

That's because all the new contracts and news for TRAK are not in the price.

Since those exceptional half year results in November where SP was at 400p TRAK has secured the following:

- AA expansion to their business fleet - our biggest contract yet
- RouteMonkey acquisition
-- RouteMonkey extension of Iceland foods contract for 3 years
-- New contract with Avanti Gas
-- New contract with GSG
- New US contract for 25,000 devices in next 2 years (that's a +20% on existing devices from one contract alone!!)
- Direct Line doubling telematics devices with us in past year, biggest margins here
- Marmalade seeing exceptional growth
- CEO saying H2 will be substantially better than H1

I think come April and with results out, TRAK can easily jump back to 4£

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Paul Scott 29th Mar '16 20 of 25

In reply to post #125569

Hi Rhomboid,

That's a terrific post, giving lots of useful extra info on Hayward Tyler (LON:HAYT), so thank you!

I can only cover things in a fairly superficial way, given that I have to report on over 500 companies, so it's great when readers add or correct points (or give an alternative view to mine) in the comments section - as I always say, investing is a team sport, and we're building up a smashing team of competent players here!

Best wishes, Paul.

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ridavies 29th Mar '16 21 of 25

Hi Paul
Re your introductory comments and reference to Sports Direct, I see that by means of a CFD for over 12% of the shares, their action today takes the corporate holding to near the key 30% figure - or am I reading something into it that is not there. Do you see some significance in this move?

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xcity 29th Mar '16 22 of 25

Pretty demoralised set of comments from SAL holders. If they are representative, it'll be quite a wait for a rerating and any mild bad news could cause a sharp derating.
I will still have a closer look to see if I might want to buy a few at some point. Never having held them means I have no unpleasant memories of being burnt by them.
I'd echo Paul's thanks to Rhomboid. Seems to be another for me to do a bit of research on.

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Laughton 30th Mar '16 23 of 25

Re SpaceandPeople (SAL) - OK have just finished with today's webinar. At least "our" question was asked - although not the bit where I asked about number of customers that left last year and what turnover that represented or how many customers returned last year and what turnover that represented.

However they cited British Land as a cutomer who had left (not specified when) but who returned last year. If my notes are correct, when they left it was with just the one shopping centre (Leeds) and they have now returned with their whole portfolio of properties. So that's a pretty big vote of confidence and a positive for me.

When customers leave then SAL monitors what they are doing and continually presents to them about how SAL could do a better job.

The British Land deal sounded to me as though it will take some time to get fully up to speed - mention was made of planning permission being needed in some circumstances such as for eco car washes etc.

I may have got this wrong but they seemed to say that there were a number of venues which were going from year round kiosks to pop up shops based just around Christmas and Easter. That seemed to be a bit negative to me - maybe 10 weeks in-situ as opposed to 52 weeks but then maybe the other 42 weeks weren't all that profitable for SAL so might not be significant - although that wasn't said.

From what I understand, we were told that "no major deals are up for grabs this year" - maybe that's how the system works but hopefully they do continue pitching their system to venue operators.

Overall I'll continue to hold for another year but not add and reassess when next results come around.

Having written the above my estimation of Paul has just shot up immeasurably - how does he do what he does 52 weeks of the year???

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JASPERTHEDOG 30th Mar '16 24 of 25

As a former surveyor specialising in commercial property, I would take issue with your oft repeated preference for companies with freeholds on the balance sheet.
As a former FD for a woman's fashion house I would guess that the bulk of your trading properties were leased. One of the metrics you used was, no doubt, the sales-to-rent ratio which made sure the occupied properties kept up to date with turn-over and profitability. A successful site being regularly refreshed with a new look and revised merchandise, a failing site that did not respond to change would have been axed. The rent commitment meant that a relaxed attitude to site profitability was not tolerated.
The same attitude should be applied to manufacturing and storage units.
Perhaps it would be instructive to apply a notional current market rent charge to those company accounts that have substantial freehold properties on the balance sheet. This would have the effect of levelling the playing field with those companies that rent their facilities.
A 'profit rent', the difference between what a company's premises cost and the open market cost of those premises, can be a life-line for a lazy board of directors of a 'Zombie' company. I knew of more than one instance of a company where it would have been better for the shareholders if they had sold up or redeveloped the land. Instead they were ploughing on, just turning a profit which was in fact the 'profit rent' and had little to do with the business.
While the freeholds would seem to provide a back-stop in the event of financial difficulties, in reality they will have been mortgaged up to the hilt long before the company goes into receivership. Shareholders will only have benefited by the prolonging of the agony giving them a bit of time to get out of the share.
I always look at the ROCE for an investment, and anything low enough to be approaching a profit rental situation I leave alone.

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Paul Scott 31st Mar '16 25 of 25

In reply to post #125764


There are many ways to skin a cat.

If your approach works for you, then keep doing it!

For me, I love inefficient balance sheets, stuffed full of freeholds. Why? Because it's free money for me, when I buy the shares. That works for me - it skews risk/reward in my favour, and I make a profit from this approach.

Regards, Paul.

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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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