Small Cap Value Report (4 Jan 2017) - NXT, BM, STAF, ACRL, SPSY, CAMB

Wednesday, Jan 04 2017 by

Good morning!

Thanks for all the positive feedback on yesterday's article, I'm glad people found it interesting.

Graham's having a day off today, so just one report. I intend covering the following;

Next & B&M trading updates - yes, I know they're large caps, but the idea is to get a feel for how retailer bellweathers have done over Xmas. This has read-across to smaller retailer shares - note how M&S, Debenhams & French Connection are all down c.5% this morning, in sympathy with Next's lacklustre Xmas trading.

Staffline (LON:STAF) - in line trading update

Accrol Group (LON:ACRL) - interims to 31 Oct 2016

Spectra Systems (LON:SPSY) - positive trading update

Cambria Automobiles (LON:CAMB) - AGM trading update, in line with expectations.

Large cap retailers


John Lewis Partnership

EDIT - Sorry, I dropped a massive clanger here, and accidentally did a write-up on last year's results, thinking they were this year's! Huge apologies for that. I would blame having a cold, but apparently I did the same mistake last year. Rather embarrassing, sorry.

Anyway, there's no point in having an incorrect section in here, so I've deleted it.

Next (LON:NXT)

Basically, it's not as good as expected, so the shares are down, and have pulled down other retailers too. The prior year comparatives were soft, so growth was expected, but failed to materialise.

Special divis make this a nice income stock, and it's certainly coming back into buying range for me. Although I wonder whether Next may struggle to maintain its sector-leading net profit margin?

It's remarkable to find such a high quality business on a PER of below 10, but where's the growth going to come from? It seems that Next is likely to only, at best, stand still in terms of future profitability, maybe? Hence the low rating.

The market is really only interested in online retailers at the moment, or growing, smaller retailers. Although I wonder if the pricing gap between growth & value retailers may now be getting too wide?


Very strong UK LFL sales growth of 7.2%, from this pound shop chain. Although 1.1% of that was an extra day's sales, so LFL was really 6.1%, still outstandingly good.

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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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B&M European Value Retail S.A. is a United Kingdom-based holding company of the Group. The Company is engaged in variety retailing in the United Kingdom and Germany. It operates in two segments: the UK retail segment, including grocery retailers and general merchandise retailers, and the German retail segment. It sells a range of grocery and fast moving consumer goods (FMCG) products in its B&M stores. Its FMCG products include do it yourself and decorating goods, household goods, food, confectionery, soft drinks, alcohol, and toiletries and seasonal goods. It sells non-grocery products under various categories, such as housewares, electrical, gardening, toys and pet care. Its grocery products are ambient food, drink and confectionery lines. It also operates under categories, such as sports and leisure, home and living, everyday essentials, stationery, clothing and footwear, gifts, baby and winter fuel. Its brands include Duracell, Kellogg's, Coca-Cola and Nestle, among others. more »

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Staffline Group plc is a holding company, which is engaged in the provision of recruitment and outsourced human resource services to industry and services in the welfare to work arena and skills training. The Company has two segments: Staffing Services, which includes the provision of temporary staff to customers, and PeoplePlus, which includes the provision of welfare to work and other training services. Its Staffing Services focuses on providing complete labor solutions in agriculture, food processing, manufacturing, e-retail, driving and the logistics sectors. Its recruitment business operates from well over 300 locations in the United Kingdom, Eire and Poland. The Staffing brands include Staffline OnSite, based on clients' premises providing both blue and white collar, out-sourced, temporary workforces. Its Employability includes work program, prime contractor in over nine regions and sub-contracts in approximately five regions in England. more »

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

62 Comments on this Article show/hide all

rhomboid1 5th Jan '17 43 of 62

The cars residual value (RV) is on the balance sheet of the finance company, normally owned by the manufacturer or as a JV with a bank, the dealer simply asess for anomalies in fair wear & tear terms and the finance company (up to balloon) holds the depreciation risk , or the customer (over the balloon)

Dealers love PCP

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andrea34l 5th Jan '17 44 of 62

I'd echo comments that quality of Next ladies wear has dropped - I have an Outlet store near me and the quality of their range at the mo compared to, say, only two years ago is absolutely appalling, the quality/range of the main stores is less downhill, although I notice that the sales have lasted a lot longer this year than last year; I bought a few things last year but not many.

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ds1980 5th Jan '17 45 of 62

In reply to post #165039

I reckon over 90% of new car sales are by lease if not more. Pretty astounding. PPI payments have meant lots more people have had much more disposable income. Once they've stopped paying it then you'll see a sharp drop in sales IMHO. I'm generalising but a lot of people who get PPI refunds are not really people you'd want taking out credit on high value items. It would never be worth less as there are penalties in place to protect this. I.e. damage, excess mileage and service penalties. Whether they can pay the difference is something the credit company has to worry about. The finance company is taking the risk so not sure what goes on companies accounts? The difference between the GFMV and what the dealers will give you for your car at return is the deposit for the next one and so the cycle continues. Leasing is simply financing the depreciation of the motor. A lot of people won't see it as that kind of transaction though. I'm of then same opinion as all the dealers collude and think that mis-selling will be an issue.

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Warranstar 5th Jan '17 46 of 62

Staffline (LON:STAF)
Thanks to all of you that have pointed out to me the shortcomings of my approach to the EPS figures.
I will review my process and make improvements in this area.

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TMFMayn 5th Jan '17 47 of 62


"I'd echo comments that quality of Next ladies wear has dropped - I have an Outlet store near me and the quality of their range at the mo compared to, say, only two years ago"

I wonder if events at Next have been due to the departure of Christos Angelides during 2014. Mr Angelides was  group product director for c15 years and was described by some as "the power behind the throne"

Ultimately it is people who design clothes and decide what to stock, and I wonder if Next's replacement is not as talented as Mr Angelides.

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rustle2 5th Jan '17 48 of 62

What impact do the 'we buy any car' companies have? Makes it easier and therefore more people upgrading more regularly?

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simoan 5th Jan '17 49 of 62

In reply to post #165048

Re: Cambria Automobiles (LON:CAMB), read an article in FT yesterday where Mike Hawes, CEO of SMMT (Society of Motor Manufacturers and Traders), predicts a 5% decline in new car sales in 2017 due to the UK market having reached peak demand. Food for thought.

And of course, in a low margin business even a small decrease in revenue has a magnified effect on profits. I hear what Paul is saying, and if I had to hold a car dealer it would be Cambria Automobiles (LON:CAMB) because I think it is well managed. However, even if it outperforms in a falling market there is only one direction the share price is heading.

There was an interesting interview on R4 Today this morning. It seems the manufacturers have been forcing cars for lease onto the dealers for pre-registering in order to push leases in the presence of low interest finance. It seems they are now heavily rowing back on this, particularly with the prospect of interest rate increases. The dealer interviewed reckoned that as much as 20% of the SMMT sales numbers released today are for leases and he described it as a "bubble". 

Add into the mix the high level of household indebtedness reported yesterday and the likelihood of Brexit fallout and I have no idea why anyone would want to be holding car dealerships at this stage. After all, they are just another retailer and with very much lower margins than most.

All the best, Si

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ken lowes 5th Jan '17 50 of 62

Hi Paul
You wrote in your post 13/08/15 that you were long Telecom Plus, I was researching this share when I came across the post and stopped dead when I found TEP mentioned with Camkids and Globo. As TEP is now a NAPS suggestion perhaps you could give a view as to your feelings regarding a "new leaf having been turned". Although I appreciate that if I dig further there could be many other reasons but I expect to see a standstill in profitability when turnover stalls, not an 11% increase as shown in the last update.

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herbie47 5th Jan '17 51 of 62

In reply to post #165075

Yes I have read this before about Christos Angelides and there maybe something in that but he did not last long in his next company.

So you are buying £FCUK?

It will be interesting to see what impact he does have there but I understand Stephen Marks is not easy to work with.

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xcity 5th Jan '17 52 of 62

At this point, I prefer Marks and Spencer (LON:MKS) to Next (LON:NXT), although I do not aniticpate their results being good. I have been impressed by the statements from the new CEO who sounds like a genuine technical, handson retailer who has an understanding of Marks UPS. May not work in turning it around - nothing else has - but there's a lot of gain if he can manage it and their most direct competitors (BHS, Next) aren't as tough as they were a few years ago.
I haven't bought anything in Next for a few years. They seem to expect a 'premium(ish)' price for goods that don't have the quality. Last year I bought some stuff from Marks for the first time in quite a few years; the prices were at about the right level for the quality and the stores felt OK and were quite busy.
Apart from quality, I have a concern that Next have been underinvesting in their business generally; they seemed very focused on EPS and shareholder image rather than their customers. More needed to be spent on their Directory and online offer which is not as easy to navigate as it should be. Their shops are overcrowded and a bit dowdy (at least the ones I have been in); overcrowded with clothes, but not people any more. The Directory credit business was high return, but is gradually reducing - maybe because they were taking too high a return? Could be a cash cow with a long expiry date but it had attracted a premium rating because of its steady 'growth' which was always supplemented by their share buybacks. There will be a good price for the cash cow side (although they will probably be tempted to start spending bigger, but not necessarily cleverer, if they keep losing market share) but I'm finding it hard to work out what I think it is because margins and profitability could fall heavily as turnover drops.

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ds1980 5th Jan '17 53 of 62

In reply to post #165084

None really. People sell cars because they want a new/newer/different one not because it's any easier elsewhere. Dealers make changing your car much easier. Drive in hand keys over get new one. People will rather do this than make a couple of hundred more but potentially being motorless for a few days. Plus you never hardly get what they advertise as they'll say an alloy is scuffed or the tyres are too worn etc. What it has done is makes some people more aware of what they 'could' get for their car in pet ex and use it to negotiate a slightly better deal but as said above any savvy dealer will use that rhetoric to put people off.

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WhaleHQ 5th Jan '17 54 of 62

RE: Staf CEO seeming downbeat.

That’s strange really didn’t think he seemed all that downbeat and actually topped up based on that interview. Strange thing perception but I suppose as the interviewer you're in a much better place to gauge his mood. Thanks for the report and the interview BTW.

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TMFMayn 5th Jan '17 55 of 62

In reply to post #165105

Yes, he did not last long at Abercrombie. He was only there for 18 months. Could he have made a complete hash of things in that time? Especially as it would have taken a few months before any of his own work/ideas filtered through into the stores. I don;t know. Perhaps his face simply did not fit.

On FCCN -- ha ha :-) I was a FCCN shareholder for five years until I gave in last year. I met Mr Angelides at the AGM and while he admitted he was working the occasional afternoon with FCCN's designers, I did not get the impression he was looking for a full-time exec job with Mr Marks.

And even if he was looking for a full-time exec role, I doubt FCCN could afford him. I have been told Mr Angelides is doing similar 'consultancy' work for other, larger retailers, which I guess is where he could resurface.

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herbie47 5th Jan '17 56 of 62

In reply to post #165189

I see, thanks for the information. Yes seems he was ousted by the new president, he did not do too badly out of it. I also sold my £FCUK last year, just too uncertain for me and retail is not a sector I want too much exposure to at the moment.

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janebolacha 7th Jan '17 57 of 62

I came across the news that The Limited in the US is closing all its 250 physical stores:

The store closures there in women's apparel seem to be coming thick and fast.

The UK is surely likely to follow the same path.
Perhaps the tipping point is already here.

So does NEXT actually have a future on the high street and, if not, is it able to compete online with operators such as BooHoo or Light in the Box?
Does NEXT even have a future or is it the next Marks & Spencer?

Will Primark be the next to be threatened?

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underscored 8th Jan '17 58 of 62

In reply to post #165039

Inflation only works if there is wage inflation.

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FREng 8th Jan '17 59 of 62

In reply to post #165690

"Inflation only works if there is wage inflation."

Agreed. There seems to be some sign of wage inflation starting in the USA, which is one reason why US interest rates are set to rise.

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Paul Scott 8th Jan '17 60 of 62

In reply to post #165099

Hi Ken,

I only held Telecom Plus (LON:TEP) briefly, a while back.
I deepened my research, and just decided that I wasn't so keen on it after all, so dumped them.

Having a quick look at its StockReport today, it looks very expensive to me. Earnings forecasts have come down in the last 12 months, but the fwd PER is still 20.7 times this year's forecast EPS. That seems very high to me.

It's not one that I plan on revisiting.

Regards, Paul.

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gus 1065 8th Jan '17 61 of 62

In reply to post #165708

Hi Paul.

In the interests of balance, possibly worth noting that Telecom Plus (LON:TEP) has the highest stock rank (of 84) in the Telecoms Service sector peer group of about 20 companies or so. Decent Q and M scores although I accept that the V score in the low 40's suggests it is looking a bit expensive.

I think Robbie Burns/the Naked Trader is a big fan (possibly due to the bias of being a sales agent for them in the past) and topped up his holding as recently as November 2016. Recent trading update was quite upbeat (full year profits expected to be at the top end of forecast) and pays a decent running dividend (although dividend cover is a bit on the low side).  They're also due to pick up a windfall of c.£70m (vs book value of £7m)  from the sale of their 20% minority stake in Opus Energy which is being acquired by Drax Q1 2017



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ken lowes 8th Jan '17 62 of 62

In reply to post #165708

Thanks Paul/Gus for info

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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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