Small Cap Value Report (30 Mar 2016) - LTHM, HRN, BON, TAST, IMO

Wednesday, Mar 30 2016 by

Good morning!

New transcript - for anyone interested in my latest audio interview with renowned investor/trader Richard Crow, I published a transcript last night - which I know that several hard-of-hearing investors very much appreciate. Thank you to the kind readers who donated funds to enable me to pay a typist to produce it. Even then, it's time-consuming to edit, but worth it - and I usually sit down with a glass (or three) of fizz, to edit them in the evening, so the time flies!

James Latham (LON:LTHM)

Share price: 680p (up 0.4% today)
No. shares: 19.6m
Market cap: £133.3m

Trading update - for the year ending 31 Mar 2015. Short & sweet:

Revenue for the year ending 31 March 2016 is expected to be broadly in line with market expectations and profit before tax is likely to be higher than expected.

The Board anticipates releasing the Company's preliminary results on 23 June 2016.

It's unusual to see revenue a bit below expectations, but profit above. This suggests to me that either gross margins have improved, and/or that overheads have come in lower than expected.

Valuation - bear in mind that the company has a strong balance sheet with plenty of cash too, so it's actually better value than the PER suggests;


My opinion - I reported here on 26 Nov 2015 when Lathams released its interim results. My conclusion at the time was that the forecasts for 44p EPS this full year looked light, and that 47-50p EPS would be my personal estimate, based on strong interims & reasonable outlook statement back then.I'm sticking with that view, which is reinforced by today's update.

This is a well-run company, with very sound finances, that looks priced sensibly. It's cyclical, but I don't see housebuilding, on which it heavily relies, slowing down any time soon - do you? We clearly need so much more housing in the South, that I imagine production is probably going to be increasing, if anything.

So there could be another leg up in Latham's share price building up, perhaps? It looks quite tempting to me at the current price, but bear in mind that it's a tricky share to trade, as so tightly held. The 2% divi yield looks surprisingly mean - the company could easily afford to pay…

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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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Hornby Plc is a holding company. The Company is engaged in developing, designing, sourcing and distribution of hobby and interactive products. The Company distributes its products through a network of specialists through its online activities and various retailers throughout the United Kingdom and overseas. The Company has operations in the United Kingdom, the United States, Spain, Italy and the rest of Europe. The Company offers its products under various brands, such as Hornby, Scalextric, Airfix, Humbrol and Corgi. Its subsidiary, Hornby Hobbies Limited, offers products under various categories, which include Train Sets, Locomotives, Train Packs, Tracks and Extras, Wagons and Coaches, and Spares and Accessories. Its subsidiaries include Hornby Espana S.A., which is engaged in the development, design, sourcing and distribution of models, and Hornby America Inc., Hornby Italia s.r.l, Hornby France S.A.S and Hornby Deutschland GmbH, which are distributors of models. more »

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Bonmarche Holdings plc is a multi-channel retailer of womenswear and accessories. The Company offers clothing and accessories in a range of sizes for women through its own store portfolio, Website, mail order catalogues and through the Ideal World TV shopping channel. The Company's subsidiaries include Bluebird UK Topco, Bluebird UK Holdco and Bonmarch Limited. The Company has approximately 310 stores across the United Kingdom. more »

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

30 Comments on this Article show/hide all

BlueFrew 30th Mar '16 11 of 30

In reply to post #125752

Correct. See data on table 615:

610,123 vacant dwellings in England as at 6th October 2014. 205,821 long term vacant.

Much greater than the number of people who are classified as homeless which is around 50,000 and far, far greater than the number who actually sleep on the streets, estimated to average around 500 every night across England.

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ridavies 30th Mar '16 12 of 30

Hi Paul
I dont know whether it is within your area of interest but XLM reported today. The results are very good. they are even better than the Tradin Update in Nov prior to the end of year end December. I would be interested if you have anything to add on what I think is a very good company, but the SP is not demonstrating this. Perhaps the so called Strategic Review announced earlier in the year is putting people off, though the CEO did go a long way to say what the strategy is and how it is being achieved in the Finals today. I guess the aspects of the strategic review whiuch are up for grabs are even bigger than that - merge, sell, take private etc and that could be concerning. I dont know whether you regard this as a foreign company and which you would view with some suspicion - Jersey based, Israeli management with a lot of their market penetration outside the UK (though this balance is changing, and the rest is principally in other 'respectable' parts of Europe - ie Scandinavia. Your thoughts please?

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ADY 30th Mar '16 13 of 30

Hi Paul
Re: Tasty
Has the restaurant sector reached excess capacity?
It will be interesting to see the impact of the living wage on the operating costs on the menus in the sector versus the 'expected' increase in sales from people having more free cash . Maybe there will be a move towards takeaways?. I've seen some fairly aggressive mark ups from service charges being applied in some outlets in anticipation of the living wage. Any thoughts?

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xcity 30th Mar '16 14 of 30

In reply to post #125758

A Channel Island registered, Israeli company, traded on AIM, which generates traffic for online gaming sites doesn't really sound like Paul's thing. And the prospect of major changes from a strategic review doesn't help unless you know and trust the directors. And the last 4 major holdings announcements have been reductions - Investec, River and Mercantile, Hargreave Hale, Inflection Point.
I agree that the numbers look good and the cash generation seems huge, but didn't see any hints about the Strategic Review. Majority of shares not in public hands - 2, presumably Israeli, partnerships have over 50%; unsurprising with a recent IPO, but presume that their dissatisfaction with share price progress was cause of Strategic Review. I doubt if the outcome will be to their disadvantage.

Also seems unusual to have announced and paid the final dividend before the results are out. 

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iwright7 30th Mar '16 15 of 30

In reply to post #125776

Paul has commented on XLMedia (LON:XLM) in the past and yes concern about non EU management, but the risk/reward numbers look very good to me. Leon Boros has met and was very impressed with smart management which is an added bonus. Ian

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underscored 30th Mar '16 16 of 30

In reply to post #125692

Hi Paul,

Thank you for taking the time to reply. I am very familiar with both Hove and Central London, and am now living just outside of Cambridge. Along with Oxford these are hotspots where housing is being sub divided, HMO’s beds in sheds etc.
I don’t think that the entire market can be condensed either into a homogenised single entity, or have a single factor driving it.
However, I think the data are very clear. Credit and access to it are driving the housing market. The more that people can borrow, the more that prices go up, stimulating further demand, stimulating extra borrowing, in the anticipation of future increase in borrowing. Classic speculative bubble stuff.
Furthermore as per the English Housing Survey 2014-2015 (
• Rates of overcrowding remained low but under-occupation increased, driven by an increase in the proportion of under-occupied homes in the owner occupied sector
• While social rents increased between 2013-14 and 2014-15, private rents remained stable. Although this was not the case in London.
These two points are not consistent with a shortage of housing. Indeed there is an additional factor at work as illustrated in Figure 1.1 and Figure 1.3. The displacement of owner occupiers with private renters. Primarily amongst the young (without prior bubble equity), and here from the BOE Financial Stability Report 2015:56fc1ebf35356Pic1.gif

This is interesting, because clearly 4/5 private renters (less the 18% receiving housing benefit) can pay the rent, but their salaries cannot stretch to meet the mortgage affordability that the BTL borrower can (see mortgage market review).
The BOE provides us with an explanation into how BTL borrowing is achieving that feat.
SUBPRIME LENDING. Interest only mortgages, with no repayment plan other than the sale of the property itself, where no assessment has been made of the borrower’s ability to afford the loan, especially in changing circumstances (eg rates).
2.5 When assessing the minimum ICR threshold, consideration should be given to the following costs where the borrower is responsible for payment: management and letting fees, council tax, service charge, insurance, repairs, voids, utilities, gas and electrical certificates, licence fee, ground rent and any other costs associated with renting out the property.
2.6 The PRA also expects firms to take into account any tax liability that is associated with the property. For the avoidance of doubt, this should include the tax changes announced by HM Government in the Summer Budget 2015 with respect to mortgage interest tax relief.

Currently this does not seem to have been previously included.
I am out of steam after a long day, but I think this is the gist of my argument.

Although I can't resist linking this, where the house building industry met the speculative "demand" with actual real world supply...

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paraic84 30th Mar '16 17 of 30

I've eaten at the Wildwood restaurant in Covent Garden. Their restaurants, London ones anyway, are quite smart looking and that branch has quite a novel downstairs seating area in the form of theatre-style seats. However, I cannot remember if I liked the food or not and I have never been back there so that's probably not a great sign! As you say, there are tonnes of pizza and pasta places already. Their USP seems to be that they do burgers alongside pizza and their restaurants are a bit smarter than some of their rivals.

In London there is growing popularity for restaurants that focus on only a small number of dishes and do them really well. Like Honest Burger or Franco Manca. As these chains grow I think they will eat into (sorry!) the profits of these "we do everything" chains.

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jonesj 30th Mar '16 18 of 30

In reply to post #125761

A few weeks ago the FT magazine run an article claiming a large number of curry houses were shutting down, as all the customers were going to Nandos and other chain restaurants.
Think they reported the number of curry houses in Stevenage had shrank from 28 to 17 or, something like that. If that is extrapolated nationally, well I see how the restaurant chains can survive.
I made a modest top up to my holding of Tasty this morning, although at 1.2% of the portfolio, this is hardly conviction.

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JDW72 30th Mar '16 19 of 30

It's so hard to work out how this is going to unwind.

There are lots of hotspots as has been identified where demand will remain high (university towns, young professionals etc. etc.) and in these places, as and when new properties are built or come on the market they get snapped up by investors. A lot of those investors are buying with cash to augment their income in the absence of meaningful investment income from elsewhere. Some are old-hand BTL investors who have paid down their existing BTL mortgages from 15 years ago (more in this category than you might think and some of them at scale too) and are looking for something to do with the money that's accumulating (I know one personally who buys a new flat every 2 months using his property portfolio income alone) or boomers who have downsized and have more than a few hundred k to derive some income from. Again, there are a considerable number of these around too. So, if the cost of borrowing does rise and force some landlords out, there will be a willing set of buyers who aren't struggling with interest payments. The third factor is foreign money looking for a safe haven. The view from these people is that rental property in the right places in the UK is a great place to store money and derive some income from it. Again, not taking on debt, just a load of money looking for income and thinking long term. I know an Indian guy who is buying rental properties regularly (he must have 15 - 20 2/3 bed flats in and around Guildford town centre so he's not poor) for cash for his grandchildren's futures. He is in his 30's....

On the flipside, there are also areas that aren't hotspots where the demand is less consistently strong and maybe if interest rates rise and rental demand dries up a bit and the banks get a bit stricter about affordability there might be sudden and sharp price drops. But it will be localised. Let's be realistic about this. Is the % of new BTL mortgages currently taken out that would be affected by the tighter rules actually significant? I'm not sure it is.

And what of all that pent up demand? All those kids in their 30's living with their parents.. They'll snap up flats at the slightest hint of a price drop as well.

Perhaps a sustained period of high interest rates might deter new money and tempt people who have flats to switch out of property into a different asset class but given the hassle, I'm not sure it will though.

Don't get me wrong, I'm not saying this won't unwind somehow, but BTL isn't the same as the subprime debacle. There might be the odd nutter out there who is overleveraged and will struggle with higher interest rates but unlike subprime, there are plenty more who will be happy to step in and pick up the pieces, with cash.

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JDW72 30th Mar '16 20 of 30

I've had the chance to read the PRA's condoc now. They estimate that this will affect 10-20% of BTL mortgages. I don't know the % of rental flats bought with a BTL mortgage as opposed to for cash but will guess at 75% (although in my network it's more like 25%). So this will take 7.5 - 15% of new money out of the market.

The banks will still want to lend though so will drop their fees and rates and attract a slightly better funded applicant (with lower LTV) who can pass the new tests so the actually impact will be watered down to probably 5% or so.

It's pissing in the wind I'm afraid. I support the move - anything that reduces risk on debt has to be a good thing but it ain't going to take the heat out of the market any more than the 3% tax did.

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Paul Scott 31st Mar '16 21 of 30

In reply to post #125779

I don't like XLMedia (LON:XLM)

The starting point for any investment has to be an understanding of where their profits come from. XLM has obscured this. That tells me, that it's probably something which is not sustainable.

Therefore, it's not an investment which would interest me.

Regards, Paul.

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iwright7 31st Mar '16 22 of 30


My understanding is that XLMedia (LON:XLM) has created software and protocols which direct (mug) internet punters to particular gambling websites in return for a cut of the house winnings. Online gambling companies need ongoing new customers for their survival and growth, so XL have an important role in what is admittedly a grubby, but lucrative sector. Its not really surprising that XL don't want to spell out how they do things, for fear of attracting additional competitors. I personnally view this as a trading opportunity rather than a long term hold. Ian

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ridavies 31st Mar '16 23 of 30

In reply to post #125776

Hi xcity
Thanks for that. Not a long way from where I come from. I wasn’t aware of the reduced shareholdings of the major institutions you quoted. When did they take place if you have that information to hand?

As for Paul, he has commented on several occasions in the past and usually does with XLM, but not this time for some reason. I thought these results would have led to a comment of more of the same from his point of view, or that XLM is starting to behave more openly and deserves credit for it.

For example, a presentation given by their CEO recently seems to have been well received from PIs attending according to the bulletin boards I cover. Also, although the strategic review is ongoing, the CEO in the finals clearly stated what the strategy for the company is and that it is being consistently and successfully pursued.

So yes, I would have expected a comment from Paul, on past experience and the results. I would have welcomed his very searching approach to the balance sheet and to the detailed analysis of the links between ERITDA and diluted earnings which he does so well…..and yes, I would have thought that this is one of the companies he normally covers.

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ridavies 31st Mar '16 24 of 30

In reply to post #125821

Thanks for that Paul. Disappointed in the absence of your very valuable detailed analysis which breaks down balance sheets and especially the difference between EBITDA and clean earnings. This is such a valuable aspect of what you do and why I and my friends are so appreciative of your insight and analytical skills which help us all invest more competently, even in grubby areas - and there are plenty of those!

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xcity 31st Mar '16 25 of 30

In reply to post #125845

AFAICS, in the finals the CEO was talking about successful implementation of the business strategy but made no reference at all to the Strategic Review (sell, merge, etc). The original statement about the strategic review (ie about the failure of SP to reflect successful earnings figures) suggests to me that the underlying issue is the major holders wanting to get money out, and it is not at all clear what precise options are being considered (it seemed to be an invitation for people/companies to approach them) or where it will end up. Everything seems very positive if you trust the management and directors and the PIs who attended the presentation may feel they are able to do that. A longer track record would also help.
The reductions in major shareholdings are all in the RNS. Nothing major but, given how well the company appears to be going and how relatively cheap it looks, I would have expected them to be holding on if they were confident. It is 4 of the 5 significant shareholders mentioned on their website.

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BlueFrew 31st Mar '16 26 of 30

In reply to post #125818

I find it is generally better to actually read documents before speculating on what they may or may not contain.

I've read the PRA proposals. I'm not a banker, however I am interested Aldermore and/or Paragon as potential shorts at some point in the future as the various BTL changes start to bite.

Assuming these proposals come in pretty much as is, it looks to me as though any new BTL lending will be demanding either a yield before cost in double figures or something like a 50% deposit from the borrower.

There are exemptions for existing borrowers, however those exemptions only apply as long as the amount borrowed will be no more than existing borrowings.

That will kill one of the most popular BTL models stone dead. Buy a house with a 25% deposit. Wait. Re-mortgage using the rise in price using the extra borrowing for a 25% deposit (spending most of your potential CGT liability at the same time) on another place. Most of the recent changes (Clause 24, 3% extra stamp duty, PRA proposals) specifically target this model. Clause 24, for example, is business as usual for LL who have bought with cash. It is only the highly leveraged who are targeted by Clause 24.

So the question is, just how many BTLers have seen their business model completely destroyed? I'm not sure the data available is that great. However we do know that around 60,000 people are sufficiently concerned that they've signed an online petition against the changes. OK, some of those might be family and friends of over leveraged BTLers, but equally how many don't understand Clause 24 or don't know about the petition? It's hard to say exactly, but it does look like quite a significant number of potential buyers are going to be removed from the market.

It would be hard for the 3% extra stamp duty on purchases to take the heat out of the market. It doesn't start being applied until tomorrow. If it's done anything so far it's been to bring demand forward. Let's see what happens in the months ahead.

My best guess from now is a few months of stagnation as the market dries up completely. Estate Agents, who need sales to survive, encourage motivated sellers to drop prices. The indexes start to show falling prices and people who've been expecting capital gains and not bothered about yield begin to think about selling. 2017 starts to see meaty price falls as Clause 24 starts to loom large.

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cig 1st Apr '16 27 of 30

In reply to post #125710

Surely most overseas speculators have a tenant in their laudromat, it's free money for them, and reduces the risk of having to deal with squatters.

Table 615 here shows 20k vacant dwellings in London which is nothing to write home about, and steadily declining.

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xcity 1st Apr '16 28 of 30

I made a decision quite a while ago to avoid investments with a heavy BTL component, and not to do it myself either. Seemed to me that it had got too big and, at best, margins would come under pressure and risks would rise. And at worst that lenders and the government would target it. Latter seems to have started. House prices usually defy gravity but it's not a sector I want to get further into atm.

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gus 1065 8th Apr '16 29 of 30

Bonmarche Holdings (LON:BON) trading update RNS just posted with a bit of tweaking to the NEDs.

LFL sales are slightly ahead but indicating PBT will be at lower end of the revised (downwards) forecast range given in December (£10.5 to 12m I recall). Current trading OK but still bemoaning "the wrong sort of weather" and pretty downbeat view on consumer confidence. Following recent appointment of new CEO and apparent stabilisation of business might be scope for clawing back the 30%+ sell off after December 15 profit warning although may still be an overhang from the original IPO investors following the ex-CEO out of the door.

Hopefully Paul can comment later.



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gus 1065 8th Apr '16 30 of 30

Then again, maybe not. Bonmarche Holdings (LON:BON) Shares down 20% in early trade!

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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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