Small Cap Value Report (7 Jul 2015) - CHH, SOM, GBO, CMS, CNCT, SOLI, MCB

Tuesday, Jul 07 2015 by

Good morning!

A couple of things to note. Firstly, the market crash in China is continuing apace - I'm not sure which Index is the main one, but currently the China 300 Index is at 3,660, which is down c.32% from the peak less than a month ago. It doesn't seem to be having any impact on our markets though, thankfully.

The second striking thing was the big drop in the price of oil yesterday. Looking at the chart of US Light Crude, it was trading in a range of $58-62 in May-Jun 2015, but suddenly lurched down to $53.18 over the last week. I don't know why, just the forces of supply and demand I suppose. It's making me wonder whether I should defer any further attempts at bargain hunting in the oil, and oil services sectors?

Right, quite a few interesting trading updates this morning, so let's get cracking!

Churchill China (LON:CHH)

Share price: 554p (price unchanged today)
No. shares: 11.0m
Market cap: £60.9m

Trading update - today's update is reassuring:


Valuation - I last looked at this company at 595p per share in Jan 2015, and concluded that it was rather too pricey. It's drifted down about 7% in share price since then, combined with broker estimates having edged up, so a double positive there.

The fwd PER is now 16.2, and the dividend yield is 3.2%.

Combined with a strong balance sheet, I think the shares look fairly priced.

My opinion - I like this company, its sound finances, and the valuation has come down from a touch expensive, to reasonable now, in my view.

There seem to be new restaurants and cafes popping up all over the place (in the South anyway), so I expect CHH will continue to enjoy buoyant trading for some time to come. Although it's important to remember that demand is cyclical, so profits are likely to drop when the next recession comes along.

I wonder if they are likely to be impacted by the strength of sterling? I've just checked the last Annual Report (page 57), and 60% of turnover is UK, with Europe being the next largest region, at 23%, N.America 8%, and RoW 9%. No mention is made about currency in today's update, so presumably the company must have either hedged, or absorbed the impact itself.

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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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Somero Enterprises, Inc. is a manufacturer of laser-guided equipment. The Company's equipment automates the process of spreading and leveling volumes of concrete for commercial flooring and other horizontal surfaces, such as paved parking lots in North America. The Company's products include S-22E, S-15R, S-15M, STS-11M, S-840, S-485, CopperHead XD 3.0, Mini Screed C, PowerRake 3.0, 3-D Profiler and SiteShape. Its Somero Floor Levelness System monitors Laser Screed performance, operator performance and reports alert percentages of issues. The Somero SiteShape System allows for grade shaping automatically using users' motor grader, dozer or other grading machine. The Somero 3-D Profiler System allows automatic paving of contoured sites using a Somero Laser Screed equipment. The CopperHead XD machine encounters applications, such as chaired rebar, low slump and poor subgrades. The Somero eXtreme Platform (SXP) allows users use their Laser Screed equipment. more »

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

29 Comments on this Article show/hide all

herbie47 7th Jul '15 10 of 29

Yes many people in China trade on the stock market but they seem to treat like gambling. It seems with the rise in market in the last year, it has sucked in a lot of new traders. Don't they say when everyone is talking about a share its time to sell.

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mrwhits 7th Jul '15 11 of 29

In reply to post #102454

hi jraitt,

I think Paul was short ASC.L so wont comment here, try his twitter feed for possible feedback.


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jamesdougal 7th Jul '15 12 of 29

Paul, any thoughts on the SUS disposal today?

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rmillaree 7th Jul '15 13 of 29

In reply to post #102451

Hello Herbie

Ref the senior secured loan notes - that's a whole new "War Chest" of cash(via debt) for possible acquisitions - the consensus on ADV.. was that it was probably the best route of raising the additional War Chest that Costis felt was needed again for future expansion.

The Danger here is that they will spend this all on businesses that has good potential but haven't proven themselves profit wise - so there may be diluting the cheap p/e somewhat - but as its all done via borrowings it shouldn't really be dilutive in that no extra shares need to be issues.

Presumably it should be taken as a positive in that they were able to go down this route at all, as presumably there are some reasonable (non foolproof) checks that go on before the notes are agreed and the appropriate credit rating issued. Bods lending cash are much more likely to ask questions than those buying shares in a company i would guess ????

The ultimate would be a largeish proven US company with Blue Chip clients where the there is cross selling opportunities - the more the company morphs into a US based business the more likely it it that they can list fully in US and have a stock price similar to what would be expected from a similar business that had always been US listed.

So bad news is that its more costs, more risks , more unknowns - less clarity - but the potential is also much higher in that they may be able to increase earnings by 30-50%+ simply by using the warchest - taking on net debt and not diluting shareholders.

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Glaws2 7th Jul '15 14 of 29

In reply to post #102433

Herbie - the revenues from the MoJ contract are yet to kick in - extract from the August 2014 RNS - "The contract is not expected to have a significant impact in the current financial year as most deliveries are expected to take place in financial years ending 31 March 2016 and 2017. The final deliveries will fall in the first half of financial year ending 31 March 2018."

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Ramridge 7th Jul '15 15 of 29

In reply to post #102436

Peter -
I can attest that Paul's forensic share analysis and red flagging has saved me from my own stupidity a number of times and in the process saved me a bundle. More power to his elbow.

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herbie47 7th Jul '15 16 of 29

In reply to post #102461

Thanks I understand that but do you know if they have managed to issue any? Its seems to be for US acquisitions, which is maybe not the best time to do this, due to current high market values? It does seem strange to keep raising money when you have money already.

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herbie47 7th Jul '15 17 of 29

In reply to post #102463

I see thanks, that is interesting news, so there is more revenue/profits to come.

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herbie47 7th Jul '15 18 of 29

In reply to post #102458

Yes I believe that is so, so he can't comment on here. Had a quick look at the trading statement, looks ok but the slowdown continues, down from 40% sales growth in 2013 to about 16% now, some due to currency. I think the problem is the valuation, PE is about 74, PEG is 4.1

Boohoo in comparison looks much better value, PE 23 and PEG 1.05. Operating margin about 2x ASC's. BOO last trading sales were up 35%.

I should declare I sold out of ASOS (LON:ASC) and hold Boohoo.Com (LON:BOO) long. Believe Paul is short in ASC and long in BOO.

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fifthcolumn 7th Jul '15 19 of 29

In reply to post #102439


Re: Globo and many others......Keep shouting from the rooftops! I'm one who appreciates your unbalanced but in depth personal view.

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Paul Scott 7th Jul '15 20 of 29

In reply to post #102481

Hi fifthcolumn,

You're not the first person to describe me as unbalanced lol!

Cheers, Paul.

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Roger Lawson 7th Jul '15 21 of 29

Those who attended the Globo AGM, or read my report on it (available from the ShareSoc Members Network), will know why Globo is running with high levels of debt, and even trying to increase it. They are taking a very aggressive approach to capturing the US mid-market for their GO-Enterprise product - spending cash to increase their sales and marketing efforts and investing in R&D in effect. Now that might be a risky strategy, and some might not like it, but it is very much the strategy that many California based software companies would take. You either grab a major share of the market while it is still in its early phases (and compete head-on with your competitors in terms of investment in R&D), or you get left as a tertiary or worse player. They are using debt rather than equity to fund this expansion because their equity is so lowly rated (for a number of reasons) that it makes more sense to use debt. That was the explanation given. The strategy is perfectly understandable and makes sense in many ways to me but the bean counters won't like it no doubt. You can decide for yourselves whether you want to bet on the strategy working and whether you like debt in companies.

Website: Roliscon
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Paul Scott 7th Jul '15 22 of 29

In reply to post #102487


Thanks for that explanation, but I think it rather misses the point.

I can understand why a company might want to borrow to expand, in the way you explain. However, that's not the issue with Globo. The issue is rather that they already held large cash reserves, but then inexplicably took out large (and apparently unnecessary) bank loans too.

I can't remember ever seeing any other company do this, because it's completely illogical, and involves wasting millions of pounds in unnecessary interest payments - because they are earning next to nothing on their credit balances, whilst paying E4m in interest on their unnecessary borrowings.

That is the specific point that I was querying, and to date I've not heard any credible explanation for why the company has gone down this bizarre route. It therefore remains a major red flag unless & until a logical explanation can be provided.

Regards, Paul.

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Roger Lawson 7th Jul '15 23 of 29

Sometimes one takes on debt even when it is not immediately needed. From my experience of the funding tactics of many US software companies, they often way over-capitalise themselves in their growth phases and debt is of course now relatively cheap. But it was also obvious from the AGM that they are taking on more debt to finance some very specific acquisitions that they have already lined up. Read the report!
Incidentally a lot of the information re their exposure to Greece in the announcement today was also given in the AGM. It is always good to attend AGMs as you will learn things others do not know until later.

Website: Roliscon
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Paul Scott 7th Jul '15 24 of 29

In reply to post #102490

It still sounds very far-fetched to me Roger, but you're the expert at analysing software companies, so you keep telling us!

In my experience companies line up financing facilities, then draw them down when an acquisition is done. To draw the money down, start paying interest on it, then not use it, is clearly not logical, nor in shareholders' interests, due to all the wasted interest payments.


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Roger Lawson 7th Jul '15 25 of 29

There is more than one way to do it and it depends on the circumstances. You are jumping to conclusions about the future while having even less knowledge of the company than me. It was not practical to delve further into their future plans for obvious reasons.

Website: Roliscon
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rhomboid1 7th Jul '15 26 of 29

In reply to post #102494

Good Evening Roger

You're right many companies do put in place debt finance to support potential acquisitions even if they are holding sizeable cash balances.

However they pay a facility fee only and drawdown the funds when a deal is done. Only then is interest payable.

I'd be fascinated if you can find an example to the contrary.

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Roger Lawson 7th Jul '15 27 of 29

Only some of the debt is likely to be used for acquisitions - that was made clear in my report. And I suggest we all wait and see what actually transpires in due course.

Website: Roliscon
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rhomboid1 7th Jul '15 28 of 29

In reply to post #102499


The whole point of discussing these topics is to try and get ahead of events!

As to your report I don't see a way of accessing it without joining sharesoc , do you have a link?

Anyhow an example or two of something similar would speak volumes!

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Roger Lawson 8th Jul '15 29 of 29

You do have to be a member of ShareSoc to read our AGM reports. We don't generally publish them and they are copyright material. But membership is only £45 per year.

Website: Roliscon
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 Are LON:CHH's fundamentals sound as an investment? Find out More »

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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