Small Cap Value Report (5 Jan 2017) - CHH, COST, SIS, ZYT, FJET, LDSG, IGR, JSG, IMO

Thursday, Jan 05 2017 by

Good morning everyone,

Paul is off today, so I'll be adding various updates below.

It's a quiet day for results but there are quite a few trading updates and smaller announcements, I'll see how many I can get through!

Churchill China (LON:CHH)

Share price: 945p (+11%)
No. shares: 11m
Market cap: £104m

Full Year Trading Update

This is a very old family business which has crossed my radar once before - last summer, when I thought the valuation multiple was a bit too hot to buy into.

The shares are up by 30% since then and today's full-year trading update explains why:

Trading in the final quarter of the year has been ahead of earlier expectations. Performance in export markets has remained strong reflecting continued progress with new products and more favourable exchange rates. The Board now expects that operating performance will be ahead of current market estimates and well ahead of 2015. Additionally, cash and deposit balances are also expected to exceed current market estimates.

2016 was a brutal year for exchange rate risk. Some people (e.g. myself) were caught on the wrong side of the investment outcome, and found ourselves too heavily invested in importers. Exporters had a much better time.

That's not to take anything away from a company like Churchill, however, which is a very good business in its own right - cash rich, prudently managed, reasonable returns on capital, and a respected name in the industry.

It's the sort of stock you might have in a "buy-and-forget" portfolio, though I'd probably still be a little bit fussier on entry price than to buy into it here. It might be suitable for those running more diversified portfolios.

The StockRank sums it up: super-high quality, rather expensive.


Costain (LON:COST)

Share price: 370p (+4%)
No. shares: 104m
Market cap: £385m

Year End Trading Update


Appointment to £500m Major Projects Framework

Encouraging noises from Costain:

Since the announcement of its interim results on 24 August 2016, the Group has continued to perform well and expects to deliver full-year results in line with the Board's expectations...

As a result, the Group's order book at the year-end was maintained at the record level of £3.9 billion (31 December 2015: £3.9 billion).  The Group…

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All my own views. I am not regulated by the FSA. No advice.

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Churchill China plc is a United Kingdom-based manufacturer and distributor of tabletop products to the hospitality and retail sectors across the world. The Company's customers include pub, restaurant and hotel chains, sports and conference venues, health and education establishments, and contract caterers. The Company's segments include Hospitality and Retail. The Company primarily offers ceramic tableware. The Company also manufactures and sources product sold through Retail customers for consumer use in the home, in various markets across the world. The Company offers Churchill branded manufactured products. The Company offers various types of products, such as accessories, beverage pots, bowls and dishes, cake stands, cookware, cups, mugs, cutlery, dip pots and sauce dishes, glassware, jugs, melamine items, plate towers, plates, saucers and wooden items. Its collections include Alchemy Fine China, Churchill Super Vitrified, Art de Cuisine, Sola Cutlery and Lucaris Glassware. more »

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Costain Group PLC is a technology-based engineering solutions provider. The Company offers consulting, project delivery, and operations and maintenance services. The Company operates through two segments: Natural Resources and Infrastructure plus Alcaidesa in Spain. The Infrastructure segment operates in the highways, rail and nuclear markets. The Natural Resources segment includes the Company's activities in water, power, and oil & gas markets. The Company offers a range of services, including advisory and concept development, specialist design, program management, project delivery, technology integration, and asset optimization and support. The Company offers services across whole life cycle of its customers assets in energy, water and transportation business areas focused on the United Kingdom market. more »

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Science in Sport plc is engaged in developing, manufacturing and marketing sports nutrition products for professional athletes and sports enthusiasts. The Company's product lines include SiS GO isotonic powders and gels, which are digestible carbohydrates for use during exercise; SiS hydration products, which include SiS GO Hydro tablets and SiS GO Electrolyte powders; SiS GO Bars, which include cereal-based food bars; SiS REGO range, which includes drinks and protein bars for recovery after training, and SiS Protein, which is a whey protein range for lean muscle development. The Company offers products in sport categories, including cycling, running, gym, team sports, triathlon and rowing. The Company's products include SiS GO Energy, SiS REGO Rapid Recovery, SiS WHEY20, SiS Whey Protein, SiS GO Isotonic Energy Gel, SiS Elite Team SKY and GO Energy Bar. The Company's subsidiaries include SiS (Science in Sport) Limited, SiS APAC Pty Limited and Science in Sport Inc. more »

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  Is Churchill China fundamentally strong or weak? Find out More »

38 Comments on this Article show/hide all

bestace 5th Jan 19 of 38

In reply to Dennis Ayling, post #18

I actually find that statement from Stadium (LON:SDM) far more understandable than the one today from Zytronic (LON:ZYT), because SDM have provided far more details on the background to the proposal.

In short, their ability to pay dividends is threatened by the impact that low corporate bonds are having on their pension scheme deficit (low corporate bonds = higher pension deficit = lower remaining reserves available to pay dividends). They are therefore proposing to do what Graham outlined above in relation to ZYT, i.e. reduce the share premium account with a corresponding increase in their distributable reserves, which should preserve their ability to continue dividend payments. They are not proposing to cut pension benefits, indeed there is no impact on the pension scheme or any pensioner benefits at all.

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Wimbledonsprinter 5th Jan 20 of 38

In reply to tabhair, post #5

I also think Leeds Group £LGG is very cheap but Also not cheap enough to buy. With no dividends, seemingly no immediate propsect of future dividends, almost no liquidity, and a hugely concentrated shareholder base (many insiders), it is not clear to me why this company is listed. In my opinion the shares will stay very cheap, until the management shows some sign returning capital to shareholders. i do not hod but it is on my "watch list".

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andrea34l 5th Jan 21 of 38

I find it a total farce why anyone is still pumping money into FJET - it is almost as though the people concerned are amateur investors following the principle of catching a falling dagger... except that this one is a plane, and it just keeps going down and down and down. Totally ridiculous... I just hope none of the fund managers are ones I hold trusts in... oh crumbs, I checked some of the 'Holding' announcements, Pru, M&G, JO Hambro, Henderson, just what are they doing!

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tabhair 5th Jan 22 of 38

In reply to Wimbledonsprinter, post #20

Management have actually returned some capital to shareholders through the share buyback. Share count down from 36M shares to 28M in the last ten years. Probably won't continue into the future as there is just a lack of free floating shares available to buy these days.

I always assumed the intention here was to keep bleeding the business and not put a dime into capex, but this has obviously changed in the last year. I guess it's the uncertainty of the new businesses that they've been investing into has put me off.

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peterthegreat 5th Jan 23 of 38

In reply to andrea34l, post #21

I must admit I would not touch the great majority of funds managed by lumbering giant fund managers such as Pru, M&G and Henderson. Take a look at the likes of Fundsmith, Lindsell Train and Crux where the strategies are original and the managers have a huge amount of their own money in their funds.

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Graham N 5th Jan 24 of 38

In reply to TerryQ, post #9

You could be right on that front Terry, I find the industry a bit difficult so perhaps I'm just too instinctively cautious on something going wrong a bit further down the line. Risk-reward might be good at these levels for those with more insights.

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Graham N 5th Jan 25 of 38

In reply to catalogue, post #17

Hi catalogue, thanks for the request but I'm out of time for today. Also I can't see any news flow for £STCK? Anyway, I'll put it on the to-do list. Cheers

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Richard Goodwin 5th Jan 26 of 38

In reply to AlanJenkins2, post #8

Leeds (LON:LDSG) have moved into debt from previous net cash primarily because they are bought the freehold of their warehouse. In addition they are spending on developing it, buying double folding equipment etc. Hopefully the reduction in sales is mainly due to warehouse disruption through this process rather than long term price/volume decline in their product markets.
Much of the debt is therefore 'good' debt ie the swapping of future rent payments for a freehold asset and mortgage, the rest should reduce cost, increase capacity and provide a showroom area, hence drive longer term sales.
In addition a smaller amount was indeed spent in recent years on purchasing 50% of the chain of shops and on injecting investment capital for its expansion. It is early days and again hopefully as the sites mature they will reach a decent level of profitability. Perhaps a reader could pop over to Germany and review one of the stores?
I spoke to the Company Secretary and he thinks that the warehouse development is the most financially interesting initiative currently on the horizon. With a bit of luck it will be a catalyst for real sales growth and a re-rating over the next year or two. If it does't catalyse sales/profit growth then the company has probably run out of ideas!
Your main point about retaining cash (or paying dividends) instead of going for growth still stands of course but growth seems to be what the insiders want, so anyone buying into it at least knows what they are getting.
I hold these shares, primarily because it is the most boring company I've ever found on the LSE and Peter Lynch equates boring with good and cheap!

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tournesol 5th Jan 27 of 38

content deleted

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Graham N 5th Jan 28 of 38

In reply to tournesol, post #27

Hi tournesol, thanks for letting me know. I'm using a very good list service, so that really shouldn't be happening - I assume you've checked your spam box? If you want to DM me your email address then I can manually add you to the list.

On your China question - I was living there last year but have recently moved back, and simply haven't updated my mailing address yet.



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tournesol 5th Jan 29 of 38

In reply to Graham N, post #28


thanks - have done so.


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Fegger 5th Jan 30 of 38

In reply to Richard Goodwin, post #26

The website is certainly very boring and totally basic! I note that Peter Gyllenhammer holds over 20% also and the Chairman works with him in other companies.

The one surprising aspect to me is that there is no move to selling fabric online. A lot of people I know buy fabric online and indeed many from the States so selling across Europe is possible. I am surprised that the big move is to open physical shops. This would seem counter to how retail overall is developing.

WIth the lack of dividend this is'nt for me at present but will put on watch list.

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underscored 5th Jan 31 of 38

In reply to Graham N, post #12

Thanks, perfect!

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Aislabie 5th Jan 32 of 38

In reply to Richard Goodwin, post #26

For LDSG I don't believe that taking on debt to buy a warehouse is "good debt". This a company with a significant operating working capital so that any growth requires investment in receivables and inventory that has only minimal financing from payables. So any funds diverted into a building that was probably only 50% financed is going into a real estate asset when it could have been getting over a 7% return in their own business.
In these circumstances companies should be sparing on using any cash that will limit their growth. A warehouse is simply a standard real estate investment and although new folding equipment is good it quite probably did not need to be in an owned warehouse.
LDSG now has the further problem that managing one of its largest assets is all tangled up with managing their real business. Companies make this mistake all the time and yet are complimented for doing it.
If they feel a desperate need to own a building (a trait often seen in family controlled companies) then buy one down the street and rent it out, in that way they can manage their two businesses (property and cloth) to maximum advantage.
Of course none of this applies if there is something unique to their business in the way the warehouse is built.

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Paul Scott 5th Jan 33 of 38


Thanks for another excellent report, Graham!

I've added comments on 3 more companies to your report, at the end. It's easier to keep it in one report, rather than me creating a supplementary report.

Regards, Paul.

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Midnight25 6th Jan 34 of 38

Leeds (LON:LDSG). Maybe a boring company but the problem as I see it is that it's free cash flow is in decline and now negative and doesn't pay a dividend, I can't see the trigger that will turn this around and as such I so can't see as an investor why i'd tie up my cash in this stock. would happily listen to anyone's view on "reasons to believe".

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Howard Adams 6th Jan 35 of 38

Graham & Paul

Graham, thank you so much for taking the time to explain the Capital Reduction event at Zytronic (LON:ZYT) I found that to be very instructive. (I hold)

Paul, I look forward to reading any comments offered by Mark the CEO, thank you for using your contact with him to explore the event.

Graham & Paul, for my part (and I'm sure others will concur), in addition to your excellent analyses of companies, it is these really insightful market activities that you comment on and better still offer your own experiences of which are of great value. I akin these explanations to be a Masterclass into activities which occur in companies and the market in general.

Many thanks for taking time to write these enhanced explanations.


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jason nightingale 6th Jan 36 of 38

IGR - Related

Highly influential holder, Miton Group, has been seen to be reducing its holding through a series of disclosures since December 2015, taking its over 20% down now to below 16%. The Diverse Income Trust, a 3.88% shareholder, has also been selling down their position recently. Until investors are convinced these exercises have been completed, the shares are likely to be held back.

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Richard Goodwin 6th Jan 37 of 38

In reply to Midnight25, post #34

Leeds (LON:LDSG) I do agree with you. If the warehouse development doesn't drive profit and sales the they are pretty much out of ideas for now.

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Richard Goodwin 6th Jan 38 of 38

In reply to Midnight25, post #34

Oh and the FCF reduction presumably relates to the capex although on issue with the business model as a whole is of course that as a wholesaler sales increases generally mean stock increases.

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About Graham N

Graham N

Full-time investor and independent analyst. Prior to this, I spent seven years in the financial markets as an analyst and institutional fund manager. I'm CFA-qualified and hold an audited, FTSE-beating investment track record.  Away from finance, my main interests are recreational poker and everything to do with China, especially Mandarin Chinese. more »


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