Small Cap Value Report (30 Nov 2015) - REDD, FCCN, AXS, SOLI

Monday, Nov 30 2015 by

Good afternoon.

It's been a rather difficult morning here, we had a medical emergency, so I've been looking after the patient, and had to go into hospital with her, after the Doctor called an ambulance, due to some worrying signs.

Unfortunately, the impact of 50 years smoking is now making itself known. What an absolute scourge on humanity tobacco is - I've never bought shares in any tobacco company, nor will I ever do so.

So somewhat belatedly, here is today's report. Sorry for the delay.

Redde (LON:REDD)

Share price: 177p (up 8.4% today)
No. shares: 302.2m
Market cap: £534.9m

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

News release - the company issued a statement last week, on Fri afternoon, in response to the Govt's Autumn Statement, which included action to be taken to rein in the compensation culture, in particular in relation to (often false) whiplash claims after car accidents.

Shares in REDD fell in sympathy with other companies involved in personal injury claims. Although reading through REDD's statement on Friday, it seems that very little of their business is likely to be affected by the changes. Therefore it's looking increasingly likely that the sharp fall in share price last week might have been unjustified.

This last sentence from REDD's announcement in particular, suggests that the group appears to have little exposure to problems in this area;

Redde further notes that the activities of the Group which would be covered by legislation of the sort proposed by the Chancellor contribute less than 2.5% of the Group’s revenue.

This set me thinking that 2.5% of group revenues isn't much, but what if it's a lot more profitable than the other group activities? So for this reason, I downloaded the accounts for every group company within REDD, from Companies House (which is now free) and had a quick look, to get a better feel for where the group's main activities and profits come from.

In this case, the main activity seems to be replacement vehicles for accident victims, which has always been the case with this company, from when it was HelpHire, although for some reason I thought it had broadened out much more into other areas, such as whiplash. That doesn't seem to be the case particularly, so it looks like I made a mistake by opening a short position on this share late last…

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Redde plc is a holding company. The Company is engaged in providing non-fault accident management assistance and related services, fleet management and legal services. The Company offers a range of motor claims accident management services, including vehicle replacement and repair management together with full claims-handling assistance, as well as legal and other personalized services. The Company manages its own fleet of approximately 7,000 vehicles and has access to over 50,000 vehicles through selected rental partnerships. It also provides specialized large fleet accident and incident management services through the FMG group of companies with over 300,000 fleet vehicles under management. It provides accident management services from operational call center sites in Peterlee, County Durham, Huddersfield and Croydon, as well as solicitors' services through Principia Law Limited from Northwich and NewLaw Legal Limited from Bristol, Cardiff and an associated office in Glasgow. more »

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French Connection Group PLC designs and supplies branded fashion clothing and accessories for men and women. The Company operates retail stores and concessions in the United Kingdom, Europe, the United States and Canada and also operates e-commerce businesses in each of those territories. Its principal brand is French Connection, which designs, produces and distributes branded fashion clothing, accessories, such as toiletries and fragrances, shoes, watches, jewelry, eyewear, furniture and homeware through its distribution channels: retail stores, e-commerce, wholesale and licensing. Its other brands include, Great Plains and YMC. The Company operates in approximately 50 countries around the world. The Company's subsidiaries include French Connection Limited, French Connection UK Limited, French Connection (London) Limited, Contracts Limited, French Connection Group Inc., French Connection (Hong Kong) Limited, French Connection (Canada) Limited and YMC Limited. more »

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Accsys Technologies PLC is a chemical technology company. The Company is focused on the development and commercialization of a range of transformational technologies based upon the acetylation of solid wood and wood elements (wood chips, fibers and particles) for use as construction materials. Its segments include Licensing, Management and Business Development; Manufacturing, and Research and Development. It is engaged in the production and sale of Accoya solid wood, and licensing of technology for the production and sale of Accoya wood and Tricoya wood elements through its subsidiaries. The Accoya solid wood and Tricoya wood elements technologies are manufactured through the Company's acetylation wood modification process. Accoya wood is used for windows, external doors, siding, decking, structural and civil engineering projects. Tricoya Wood Elements are used in Facade cladding/siding and other secondary exterior applications; window components, and door skins and wet interiors. more »

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

19 Comments on this Article show/hide all

Amanda Heron 30th Nov '15 1 of 19

No apology needed. Hope the patient is ok.

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purpleski 30th Nov '15 2 of 19

Thanks for this Paul. Amazing how you get these reports out even in the most difficult of circumstances.

Completely agree about tobacco and there is no investment that can be made for investing in tobacco stocks and I find it extraordinary a. that anybody does and b. anybody ever tries to make the investment case for them. I will never invest regardless of the yield offered.

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garbetklb 30th Nov '15 3 of 19

Hope all turns out well Paul.

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Paul Scott 1st Dec '15 4 of 19

I can't complain though - at the age of 14 I took up smoking, as a rebellion against my tyrant of a father, and the world generally, as you do at 14! Trouble is, by 16 I was badly addicted to nicotine. By 34, and smoking 60 cigs a day, I woke up one morning and thought to myself that this is killing me, so I just stopped there and then. The recovery process was immediate. But as with any drug withdrawal, very difficult.

Now I'm older, and seeing the next generation actually dying from cigs, and how awful it is, the only thing I can say to anyone younger who smokes, who thinks they are gonna be fine - you're not. Stop now. It's madness. The makers of this product should be lined up against a wall & shot, as far as I am concerned.

Regards, Paul.

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Glaws2 1st Dec '15 5 of 19

Paul - sorry to hear that you had such a difficult day.

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Camtab 1st Dec '15 6 of 19

It always amazes me (but then I don't smoke) how you can sell something which has "Smoking Kills" stamped across the packets in large letters. I guess that is why investors like these cos, respectable(?) drug dealing.
It strikes me Paul that generalisations within investment can be extremely dangerous or at least limit opportunity. I think a key to "falling knives" is your view of the sector. Specific company issues can often be corrected within an improving sector quite quickly (the wonders of beta in a stock portfolio). On the other hand DX the other day are in a difficult sector with questionable margins above the industry average if it is too good to be true it probably isn't. So the second consideration is do you have time to wait for recovery and thirdly are you going to panic sell which normally occurs right at the bottom. If anybody is doing the analysis from a company perspective would be interested to see it.
Thanks for all your efforts Paul and I hope things sort themselves out soon.

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herbie47 1st Dec '15 7 of 19

Paul, hope everything works out. I totally agree about tobacco, one reason I never invested in a certain fund manager. Re Solid State (LON:SOLI) I'm a long holder so its been an interesting ride and very surprising recovery, over 50% in 2 weeks, I should have sold out yesterday I feel. Yes agree the biggest fallers can be some of the best investments. I also hold Accsys Technologies (LON:AXS) thought the figures were good, hopefully into profit next year.

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andrea34l 1st Dec '15 8 of 19

Sorry to hear of the emergency, best wishes to patient and thanks for still posting. I echo your sentiments on tobacco in all respects, have seen it's effects myself on a now-ex family member, very unpleasant.

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BlueFrew 1st Dec '15 9 of 19

As a non smoker who is perfectly happy to invest in tobacco companies I'll stick my head above the parapet.

I'm aware of a couple of people I knew in my schooldays who didn't even manage 30 years on this planet as they took what they thought were safe drugs. Since what they were buying was not controlled or regulated they ended up paying a high price for that mistaken belief. Prohibition makes taking drugs a far riskier activity than it needs to be. Prohibition made alcohol far riskier than it otherwise would have been when the USA tried it. So I think we can safely say that prohibition would not improve the risk profile for smoking in any way. So that's why I'd argue that tobacco companies are necessary. It would also be my argument for the legalisation and control of all drugs.

Next, nobody is forced to buy tobacco products. While there is an argument that tobacco companies in the past were complicit in trying to suppress information about the harm smoking does, that doesn't apply these days. Since there is no coercion involved and the health effects are known, then I've no qualms about making a profit from tobacco.

But then the ethics involved in investing are unique to each individual. I personally try and avoid investing in companies who make money from selling armaments. No matter how accurate manufacturers claim weapons are, innocent civilians are killed in all conflicts. The innocents who are killed have no choice. So I'll invest in Imperial Tobacco (I hold) but I wouldn't buy BAE Systems. Others may disagree, but that is what makes a market.

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Splode 1st Dec '15 10 of 19

Paul - concerning your remark about catching falling knives :    

It would be interesting to do some statistical analysis of profit warnings, and work out the optimum type of companies, type of profit warnings, and timing of when to buy, which might give good overall results?

Ed wrote about this earlier this year after receiving some research by Michael Mauboussin of Credit Suisse. He included Mauboussin's decision tree which I have referred to several times since but I have not yet accumulated enough experience to form an opinion on its utility. Ed's article is at

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Catstycam 1st Dec '15 11 of 19

Paul, I hope all turns out well for the patient. It will be a worry for you I am sure so for you to go to the effort of reporting on any company must be quite an effort and it is appreciated. We all need to get our priorities right, so if you were not to report for a while then it would be fully justified. If some folk aren't happy with that then so be it. We will just have to do our own research just that little bit more.

Bluefew, you are entitled to your opinion. It may not be the most popular, but hey, that is democracy isn't it. And I would like to think that this site is mature enough to let each of us have our say without others screeming at us and calling us names etc. which seems to be the case on many bulletin boards. So, good luck to you.

Paul, regarding REDD. Yes, you may have called it wrong by going short this time, but I understand why you took that position. I sold out of the share on Friday, only to see the price recover - such is life. I could be tempted to buy back in, but if it wasn't for the high yield dividend would I be in such a hurry?. On a PEG basis it may be argued it is getting a little expensive now, although any expensive looking share can still get more expensive of course. The other thing which is making me hesitate is that I am not sure I would not be investing further due to emotion. A share which has performed well in the past is very easy to invest in again and that is not always wise. Sometimes it is just better to walk away, say thank you and move on. Not easy though.

Good luck Paul.


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dahokolomoki 2nd Dec '15 12 of 19

The problem with French Connection (LON:FCCN) is that while its wholesale business is still printing money, its probably in its sunset era. The brand itself, while still having a cache amongst a customer segment, is losing its lustre. Due to tight costs and a declining celebrity endorsement, its only a matter of time as the brand fades away, in which case licencees will just stock using FCUK and stick another brand on their perfume/umbrellas/tat.

So buying French Connection (LON:FCCN) is really a bet that they can turn their retail operation into cash flow positive before the wholesale/licensing business starts to contract. All about timing.

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PhilH 2nd Dec '15 13 of 19

In reply to post #113580

Hi Bluefrew,

I respect your honesty and your willingness to put your head above the parapet. You said ...

"Next, nobody is forced to buy tobacco products. While there is an argument that tobacco companies in the past were complicit in trying to suppress information about the harm smoking does, that doesn't apply these days. Since there is no coercion involved and the health effects are known, then I've no qualms about making a profit from tobacco."


"But then the ethics involved in investing are unique to each individual. I personally try and avoid investing in companies who make money from selling armaments. No matter how accurate manufacturers claim weapons are, innocent civilians are killed in all conflicts."

The comparison with between weapon systems and tobacco is an interesting one. Your reason for avoiding weapon systems is that they often produce 'collateral damage'. Anyone who has witnessed the death of a loved one to lung cancer might argue that there is significant collateral damage in relation to smoking.

Also the argument about the quality of the product versus the black market is exactly the argument that the character Heisenberg in Breaking Bad used to justify his production of high quality meth amphetamine ... "I'm doing them a favour!"

I'd encourage people to consider this scenario ... If you had an 11 year old child sat in front of you that had just witnessed their parent die as a result of lung cancer and they asked you "What part have you played in this series of events?" would you be comfortable with your position of "I supplied a quality product and prevented your parent from dieing earlier as a result of smoking some other product"

I for one am not comfortable with that position.

Warm regards

Professional Services: Sunflower Counselling
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cig 2nd Dec '15 14 of 19

In reply to post #113730

The metaphor would work better if tobacco companies were focused on supplying quality product. Real world tobacco companies though actively promote the thing (in your metaphor "I convinced your parent to take up smoking with as much advertising and PR as I was allowed to, and then supplied quality product..."), which seems significantly harder to justify ethically.

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herbie47 2nd Dec '15 15 of 19

I agree about advertising, if there was no advertising of tobacco products I wonder how many people would smoke? I know advertising works as I saw what happened to the beer industry in the 70/80s with lagers and then more recently cider. The only good thing I would say is some people are switching to e cigs, which seem to be less harmful. The other thing is how many people would there be in this country if no one smoked? As smokers tend to live less then imagine the number of retired would be considerably higher. Also you have the tax revenue from smokers.

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underscored 2nd Dec '15 16 of 19

In reply to post #113742

??? Perhaps we could arrange mandatory culling of those over 65-75 (dependant on life time tax contribution) instead?

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BlueFrew 2nd Dec '15 17 of 19

In reply to post #113730

Hi Phil,

To me the difference in the two scenarios is that somebody at say a wedding party in Afghanistan who is killed by a mis-targeted bomb has no choice in the matter. Whereas somebody who smokes can stop at any point that they wish.

It was also fortuitous timing that the BBC published this story today:

It reminds of the stark contrast between legal drugs like nicotine and alcohol and illegal drugs like cocaine and heroin. Countries where tobacco is grown or alcohol produced are in general peaceful and well ordered. Whereas places where illegal drugs dominate, like Columbia or Afghanistan, you generally have violence and corruption aplenty.

Of course tobacco companies are far from perfect, but we live in an imperfect world.

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herbie47 2nd Dec '15 18 of 19

In reply to post #113748

I did not mean anything like that, just my opinion that without smoking there would more elderly people, maybe we would be more like Japan with their problems.

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PhilH 2nd Dec '15 19 of 19

In reply to post #113751

Hi BlueFrew,

Wouldn't a far more ethical approach be an investment in tackling that causes of addiction?

Whenever I meet/work with someone who is struggling with the scourge of addiction it is often a self-medicating process of some underlying and unresolved pain/trauma.

Work with the pain/trauma and the 'addiction' can be addressed and resolved.

But of course there's not much profit in truely solving the causes of addiction or meeting the pain and suffering of others because that means sitting with these individuals for hours listening intently to them. It's far easier to give them a pill and take a nice profit. Of course pharma's want to legalise drugs. It's another gold mine for them.

If there's no market for illegal drugs then production stops. Capitalism at it's best no? Supply & demand. We have to work harder as a society to build relationships that prize individuals and their suffering rather than fobbing problems off with drugs.

If it was your son or daughter struggling with addiction would you want them to be given a ready supply of a legalised drug of choice or would you wan them to escape their addiction? I'm suggesting that a long lasting solution is to help them understand their pain and their unhelpful coping mechanisms.

In my work as a counsellor, I'm ethically bound to be working towards an ending with my clients so as not to build a dependency. In effect I'm constantly looking to make myself redundant. I have little faith that pharma's work to the same model and in fact I think investors would be horrified to hear that sentiment.

I'm challenging investors to be part of the solution not to simply change the dynamics of the problem.

Warm regards

Professional Services: Sunflower Counselling
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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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