Small Cap Value Report (29 Sep 2016) - PTSG, CRAW, ASY, FTC

29th Sep '16 by Paul Scott

32 comments 20159 reads

Good morning!

My day started with a telephone call from the CEO & CFO of Premier Technical Services (LON:PTSG) (at the time of writing, I hold a long position in this share). I think they were a little put out by my report on Monday, flagging my concerns over high debtor days, and adjustments to the accounts. My approach is to just tell it how I see it, so if something concerns me, I'll say so - even if it's a stock I hold personally. Anyway, we ran through explanations of these points, which I'll update on below.

First though, let's have a look at the interim results from butchers & hot food chain Crawshaws, which has spectacularly fallen from grace in recent weeks.

Crawshaw (LON:CRAW)

Share price: 33p (down 7.0% today)
No. shares: 78.9m
Market cap: £26.0m

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

Interim results to 31 Jun 2016 - I last reported on this small chain of butchers here on 15 Sep 2016. The event being a bungled profit warning, which failed to quantify how much sales had fallen by. It also seemed to cast doubt on the store roll out programme. The share price has crashed from 80p to only 33p, a drop of 59%.

So the big question here is whether the company has just shuddered from a bump in the road during its expansion, or whether the wheels have come off, and it's plunged into a ditch, upside down?

Sales trend - this is rather alarming. The progression has been (for like-for-like ("LFL")) sales, as follows;

Q1 down 0.8%
Q2 down 7.8%
Q3 (first 7 weeks) down 15.8%

So what's gone wrong? It seems to boil down to Crawshaws trying to be a bit too clever by pushing up its gross margins. Customers have rebelled against this, and clearly taken their custom elsewhere. The excuses about weather, and football, are clearly nonsense.

What are they doing to fix things? Basically, lowering prices back down to where they used to be, when customers were happy to buy from Crawshaws. Also giving store managers more flexibility to tailor products & prices to what best suits their particular customers. That means giving up some margin though, and this is reflected in a full year profit warning today. It's a "materially lower" outlook…

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PJ0077

29th Sep '16

A 2.5 year payback is a phenomenal 40% return on investment.

But if new stores are earning 40% it implies the older stores are losing money given that in total the company is barely profitable.

Yet the older stores were themselves once new stores earning 40% returns. Worryingly this suggests profitability rapidly disappears as stores mature, possibly as local competition (Asda, Morrisons etc) adjust their meat prices.

Tangible book value = 11p/ share.

leyymgb

Paul,
Would be grateful for your thoughts on Harvey Nash, the financial and technology focussed recruiter, who reported interims this morning (you have covered them previously).
Shares are currently down 11% today, on c.7x earnings, yielding 6.1% (covered c. 2.5x), and a Stockrank of 90 (held back by momentum).
The sector has rightly sold off post Brexit, and their numbers this morning reflect that with permanent hiring subdued in the UK. However the UK only accounts for 34% of earnings (according to Bloomberg).
Despite this debt has been reduced by £8.9m to £6.8m and the interim dividend has been increased by 5%. Working capital has improved markedly, and they are beneficiaries of sterling’s weakness.
Concerns include that the FD is stepping down after 11 years. And as with recruitment firms, the balance sheet is loaded with intangibles.
Interesting to note, that of the last 5 years, they have beaten forecast earnings in 4 (the other was a very small miss). They are H2 focussed (worryingly), and the Chairman is confident of achieving FY expectations.
Anyhow, your thoughts would be appreciated.

Wimbledonsprinter

Andrews Sykes (LON:ASY) looks a good solid company. One thing I don't understand about it (and many other companies) is why when it has £20.5 million of cash and it has £5 million of bank loans outstanding and maturing April 2017 - it says that it "intends to finance this loan repayment with a new loan of the same amount and management has already commenced negotiations with the banks to secure this position." It does not seem to need the financial flexibility that this debt and cash position brings.

alan000@yahoo.com

CRA

" It seems to boil down to Crawshaws trying to be a bit too clever by pushing up its gross margins. Customers have rebelled against this, and clearly taken their custom elsewhere"

The old Retail "rule of thumb" for a stores based business, where most costs are "Fixed" is that 1% of margin has the same bottom line effect as 2% of Sales. In reality the Gross Margin here only increased by 0.4% points from 44.7% to 45.1%. If everything else remaining equal, it would appear that the price increases are pretty marginal, and hard to believe they are a root cause of the notable fall in LFL. By the same token, it doesn't imply the obvious solution they can simply reverse some meaty (geddit?) price increases and set the LFL's back onto a much healthier path. There is an even less edifiying possibility, that they have suffered pressures on the Cost of Goods Sold part of the margin (partly currency induced?), and have increased prices mostly to mitigate this, hence the only very small increase in margin rate? If reducing prices back down is the answer, then in this scenario the margin rate could take a significant hit from its current level.

simoan

So, as I pointed out to PTSG management (who were a bit miffed with me about my original article), I'm not the only person who would have noticed that debtor days was large. Other investors look for the same things as me. So it's good that they gave me some further colour on this issue, which I can then disseminate to others here.

Ho Paul,

I don't think you need to justify yourself on this because 120 days is really poor. In fact it's in contravention of the EU Late Payment Directive that specifies a maximum payment terms of 60 days. As a small UK company that often works with large European companies I always find it remarkable how quickly payment progresses once you mention charging interest in accordance with 2011/7/EU :-) I guess this will be one of the first casualties of Brexit!

If this is standard for the industry, then it must be a pretty crummy industry i.e. highly competitive and where the customer holds all the cards.

All the best, Si

Golspie

Paul,
I'm intrigued you describe ASY as a long term favourite given at a lower SP you have said it's too expensive. I have held for some time and am down 3.87% but the yield is sufficient compensation, with succession takeover possibilities in for free..

Rusty2

The main problem I have with Andrews Sykes (LON:ASY) is the spread is around 6%.

ridavies

Re £STAFF, and your positive comments after the shareholder meeting, what do you make of the more recent broker quote and the continued decline of the share price?
22/9 Credit Suisse today initiates coverage of Staffline Group PLC (LON:STAF) with an underperform investment rating and price target of 800p.
I have been as positive as you but I have seen my profit dwindle to nothing, and dont really understand it. You mentioned at some time a stock overhang but this looks more serious than that. The Sports Direct effect? An effect of the Labour party conference? The concern about the balance sheet? Im at a a loss.
As a fellow shareholder, thanks for any comments you may have.

TMFMayn

CRAW

This results presentation provides some details on store payback:
http://www.crawshawbutchers.com/uploads/Investor_Presentation_September_2016_Final.pdf

As far as I can tell, page 26 suggests each new high street store cost £250k via initial capex during this H1, which should return EBITDA of £70k in year 1 and £110k in year 2 as the outlet matures. So EBITDA payback is indeed 2-point-something years.

The Base Model on the same page indicates EBITDA per new store for year 1 is £120k, so the actual stores opened in this H1 are running notably below that. The EBITDA figures for the actual new stores in this H1 are also below the comparative figures shown on page 21 of the previous full-year presentation: http://www.crawshawbutchers.com/uploads/Investor_Presentation_April_2016.pdf

Anyway, what I think a few people are missing in their profit calculations is that these EBITDA/payback periods relate only to the individual store. The group also has to pay for the store network's support infrastructure, such as the warehouses, logistics, factories etc, which is why the stores can make an individual profit, but the wider group can lose money.

Looking at the latest presentation, it is clear on page 29 that the West Brom factory shop has a much shorter payback period of about a year -- and has performed well ahead of its associated Base Model.

What is a bit confusing is that if the new high street stores still have a 'great' payback period of 2-point-something years, why put a halt to their roll-out? The worry is that they no longer make enough money to cover their fair share of the store network's support infrastructure.

Also confusing in the latest presentation is page 32, where the old planned store openings chart to 2024 is still predicting 224 stores -- surely that must be be a tad ambitious given the review of the roll-out format currently underway.

Plus, page 38 claims CRAW's prices are 33% cheaper than the supermarkets, versus 32% in the annual results presentation. That wide (and slightly increased) discount seems a bit odd when the trading statement the other week cited "aggressive meat promotions" from Tesco etc for the LFL sales setback.

Main worry for me, though, is whether Mr Collett will see this recovery through. He owns no stock, his LTIP is materially underwater and I wonder what his motivation levels will be if the roll-out review suggests a smaller number of outlets.

Remember, the job ad in the FT suggested the new boss could enjoy a "significant seven (or even eight) figure wealth creation opportunity".

tads

When I spoke to Mr Collett at the AGM he certainly did not strike me as a quitter.

MichaelFBS

Crawshaw (LON:CRAW) Your last paragraph makes a good point and I will have to have a good think about what to about my holding and whether to just cut my losses. Thank you.

dmjram

"the company say today that it has "largely mitigated" this, with "flexible sourcing". Presumably that means replacing more expensive imports with UK production? Or squeezing suppliers to take some of the pain?"

UK sourcing won't much help at all in anything but the short term as the main cost of meat products is the feed made up of wheat, barley etc all commodities priced in US$. UK producers hedge this but when those hedges expire the costs are passed through and the pound if anything is going to come under further pressure as we get nearer Article 50 triggering.

As a tiny operator in the scheme of things, can't see Crawshaws having much ability to squeeze suppliers - the like of Marfrig and 2Sisters won't exactly feel the need to drop prices or lose the business. It's the supermarkets that dominate, not the likes of Crawshaws.

Paul Scott

30th Sep '16

Forget it! Thumbs down to my previous comment here, means I've now deleted it. Not going to waste my time.

narp

Lucy Wray Mercey stated:

"We are very well advanced for next April. With big name speakers such as top fund manager Mark Slater, tech queen Vin Murria, top blogger Paul Scott as well as Nigel Wray on board, interest in the show has been stunning. Already more than half of the stands have been booked by companies who know that this is THE place to engage with serious retail investors."

http://www.investegate.co.uk/uk-investor-show-ltd/rns/nigel-wray-family-buys-stake-in-uk-investor-show/201609280700110080L/

Fangorn

2nd Oct '16

Vis Crawshaws, not just the supermarkets snapping at their heels I'd suspect.

There seem tio be a plethora of Independents pushing various"meat offerings such as "Campbells, or Muscle Foods" - two that I have heard of.

Original price as per the link - £98.57 - but there is a 50% off coupon - "Best50" at cheakout making it a palatable £49.

Which seems to be pretty generous at first glance.

https://www.campbellsmeat.com/product/best-of-british-food-pack.html?utm_source=MTC&utm_medium=email&utm_content=Main%20Banner&utm_campaign=Weekend%20Offer%20October%201/2

I gather there are several such companies which offer a variety of meat deals. Perhaps they've been cutting into Crawshaws market as you can order online with these companies?

£98 is far too high that's £15 a kg. Yes 50% off is more like it but even not great value. Some of those items (burgers/sausages) I don't want. Can't see the 50% off coupon either?

I buy most of my chicken breast and fish for around £6-7 kg.

Not sure that many order meat by mail.

I don't have a Crawshaw (LON:CRAW) in this area so I can't see what they are like.

hayashi22

3rd Oct '16

I live in Mayfair and I don't believe there is a Crawshaw's shop nearby. I may have to travel to find one.............

Hi Herbie,

The 50% off coupon comes in the email - it is secured by typing BEST50 at checkout.

They,like other similar companies offer a variety of deals on different types of meat - this "meat assortment" is but one offering. One can mix &match according to ones preferences. They have chikcen/fish offerings as well I suspect.

As I said,not really gone into it in much detail..Was just interested in possible implications on Crawshaw getting squeezed. The more companies such as Campbells, the greater the likelhood of such competition adversely affecting them one suspects.

Like yourself I tend to source meat elsewhere - the fish we get from some geezer who drives down the day of the catch up in grimsby or somewhere.

In similar fashion there's an absence of a Crawshaws down South where I am thus making comparisons difficult.

Yes there are quite a few companies which do these half price deals. Donald Russell is another. I just think that the original prices are too high and even the 50% off is not actually very good. If you shop in Aldis and Morrisons I can't see you save anything and you end up with stuff you don't eat.
Yes Craw seem to be around the north Midlands between Manchester, Birmingham and Hull.

We did have a Donald Russell box once, the steaks were quite good but never order anything again mainly because you get too many other items we did not really want. £25 for a few steaks is quite a lot of money, better off just getting those from Aldi, M&S or Morrisions. Anyway I think mail order meat has limited appeal.

Yes Cambells do fish but price is far too high, I pay £6.70 kg for wild salmon in Aldi.

Yes I've come across Donald Russel as well..I don't shop at Aldi - just Sainsbury, Tesco,Morries and Waitrose.

As to their offering it's not bad - unlike yourself there's hardly ever anything in there that is unwanted not that they're used on a regular basis.

Tend to buy organic wherever possible so that counts out some automatically, and I wont buy Halal knowingly(So it's only fish from Morries,no meat)

As with anything pays to shop around these days.

Small Cap Value Report (29 Sep 2016) - PTSG, CRAW, ASY, FTC

Crawshaw (LON:CRAW)

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Paul Scott

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