Small Cap Value Report (7 Oct 2016) - SHOE, BRAM, XPP, EKF, CALL

Sunday, Oct 09 2016 by

Good evening!

Firstly, my apologies for this report being late. There are some interesting things to comment on though, so I'm catching up on Sunday evening, for Friday's announcements.

Sterling flash crash

There was a strange flash crash in sterling overnight Thu/Fri last week. Sterling has already been weak of course, but it spiked down to £1 = $1.18 very briefly, before mostly recovering, with another wobble some time later in the day:


(chart courtesy of IG

So what's this got to do with small caps, you may ask? Quite a lot actually, and anyone who is not thinking about this issue, could be sleepwalking into serious losses.

We've now had a very large depreciation of sterling since the referendum, and that affects many businesses. So to recap;

Businesses hurt by weaker sterling

  • Importers - e.g. non-food retailers tend to import almost everything, and they will be forced to significantly raise prices in 2017, which will dampen demand. Many UK manufacturers will import some or all of their raw materials.
  • Overseas holidays will be noticeably more expensive for Brits in 2017.
  • Inflation is likely to rise, as businesses try to pass on higher import costs to their customers. So we're likely to see all UK businesses come under some higher input cost pressure.
  • Consumers will start to feel the pinch from higher shop prices in 2017, so may start pushing employers for higher wages.

Businesses which benefit from weaker sterling

  • Exporters - UK companies have become dramatically more competitive in recent months, so we could see something of an export boom.
  • UK producers competing in UK markets against imported goods have become much more competitive due to cheaper sterling (e.g. as noted recently by Victoria (LON:VCP) )
  • Incoming tourism - the UK is likely to be rammed with foreign visitors in 2017, and I've seen data suggesting that the numbers have already risen.
  • UK listed companies which generate a significant element of their earnings overseas. So in my portfolio for example, Somero Enterprises Inc (LON:SOM) and Avesco (LON:AVS) should see sterling earnings rise, as a result of positive currency translation from their main activities in the USA.

What action to take?

Well, that's up to each individual. Personally I'm tending to be very wary of anything in High Street retailing

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Shoe Zone plc is a footwear retailer in the United Kingdom and the Republic of Ireland. The Company offers women's shoes, men's shoes, boy's shoes and girl's shoes. The Company's online offering combined with its store network enables customers to shop through multiple channels. The Company operates from a portfolio of approximately 550 stores. Its customers purchase all of the products available in stores, as well as an additional approximately 400 product styles. The Company sells over 20 million pairs of shoes per annum. The Company has operations in various countries, including Germany, Italy, Spain and France. The Company's distribution center is located in Leicester, England. The Company's subsidiaries include Castle Acres Development Limited, Shoe Zone Retail Limited, Zone Property Limited, Zone Group Limited, Shoe Zone (Ireland) Limited, Shoe Zone Pension Trustees Limited, Stead & Simpson Limited, Zone Footwear Limited, Zone Retail and Walkright Limited. more »

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Rubix Group International Limited is a United Kingdom-based supplier of industrial maintenance, repair, and overhaul (MRO) products and services. The Company is a authorized distributor for branded MRO products and its portfolio includes transmission and automation, fluid power, machining, assembly, tools and protective equipment. The Company serves various industries, such as automotive, cements and aggregates, chemicals, glass, food and beverages, power and utilities, industrial engineering, metals, recycling, pulp, paper and packaging and transport. more »

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XP Power Limited is a United Kingdom-based developer and manufacturer of critical power control components for the electronics industry. The Company provides power solutions, including alternating current (AC)-direct current (DC) power supplies and DC-DC converters. The Company's segment include Europe, North America and Asia geographical. It designs-in power control solutions into the end products of blue chip original equipment manufacturers, with a focus on the industrial, healthcare and technology sectors. Its product categories include high efficiency/convection-cooled, chassis mount/open frame, configurable, external, encapsulated and printed circuit board (PCB) mount, DIN rail, baseplate-cooled, through hole mount, surface mount, light-emitting diode (LED) drivers and distributed power/hotswap. more »

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

20 Comments on this Article show/hide all

Sully8786 10th Oct '16 1 of 20

Interesting views about the retailers Paul.

I sold Next (LON:NXT) a while ago, though with a lot of tourism heading over this way, maybe it's still a sector to well as other areas of leisure.

I guess we'll see how Patisserie Holdings (LON:CAKE) is going in November I guess.



Company: Dave Sullivan - Talking Stocks
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snickers 10th Oct '16 2 of 20

I heard Christopher Mills talk at the UKIP conference - some kind of economic spokesman. Spoke really interestingly about housing (hes on the board at Gleeson) amongst other things. The other firms at which he sits looked speculative, on stockopedia's pages at least, but that's interesting to hear that he has a reputatoin for astuteness.

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Paul Scott 10th Oct '16 3 of 20

In reply to post #153557

Hi Snickers,

Perhaps about year ago, I did a search for all the companies where Christopher Mills was involved, and I thought they all looked good. I recall Bioquell (LON:BQE) being one, Journey (LON:JNY) another, and of course Essenden, which he launched a bid for. They all had some kind of hidden value and/or turnaround activity in them, so I came to the conclusion that Mills looks highly astute.

He also seems to actively push for change to unlock shareholder value. Unfortunately, that sometimes means takeovers by him, at a modest premium. So outside shareholders don't necessarily get as much upside as he does! But definitely a very interesting "shrewdie" to follow, in my view.

Regards, Paul.

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BahrainChris 10th Oct '16 4 of 20

What about tourism putting money into UK retailers?

Perhaps the effect isn't big enough to be meaningful but I walk down Oxford Street a couple of times a week and am amazed at the number of "foreign" (or people not speaking English at least) people weighed down with shopping bags. Bizarrely, for me at least, Primark seems to be a big beneficiary of this.

(I appreciate that Oxford Street is probably not representative of the UK high street as a whole)

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Paul Scott 10th Oct '16 5 of 20

In reply to post #153563

Hi BahrainChris,

Yes, you're right that more tourists in London, is likely to be good news for retailers with stores there. However, I doubt that's going to move the dial much when absorbed within a national chain, where most of the stores outside London are going to be suffering considerably.

There's also an issue that business rates for prime London sites are going up hugely, apparently, according to recent press reports.

Regards, Paul.

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rhomboid1 10th Oct '16 6 of 20

Another Chris Mills Harwood Capital holding is Hayward Tyler (LON:HAYT) , from memory they are c90% exports , mostly in USD and have dominant niche positions in mission critical high tech engineering markets. I'm not aware of how far forward they're hedged but their AR says "
The Group’s policy is to hedge its transaction exposures (i.e. cash ows) on a rolling 12 month basis and build a foundation of cover for non-contracted ows in the 12 to 24 month period. As at 31 March 2016 94% of estimated USD net in ows into the UK over the following 12 months were hedged."

But as the hedges unwind there'll be a very significant boost to profitability as over 90% of their business is outside Europe , their order book was already growing fast , up 47% at the full year so a lot to look forward to imho!

I'm a happy holder and amazed at how cheaply one can buy shares in a global market leader with huge barriers to entry and a transformed production & cost base !

I don't really need to say it but I hold lots from just above current levels.

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rhomboid1 10th Oct '16 7 of 20

In reply to post #153569

A further reading of the AR says that a 10% drop in GBP vs USD is worth £667k in profits, so they've had that and more at current levels, At 31 march 2016the rate was 1.44 , so over a million bottom line benefit at current levels.

"Foreign currency sensitivity
The Group operates in overseas markets and is subject to currency exposures of transactions undertaken during the period. Management’s overarching objective is to minimise the extent of the Group’s exposure to currency risk. In respect of transactional foreign currency risk the Group maintains a policy that all exposures on material committed transactions should be economically hedged as far as possible. The Group prepares rolling 12 month currency cash ow forecasts to enable currency exposures to be identi ed and then subsequently hedged.
The Group uses forward exchange contracts to hedge the impact on receipts and payments of the volatility in exchange rates of US Dollar and Euro to Pound Sterling. The notional principal amounts of the outstanding forward foreign exchange contracts at 31 March 2016 were £5.9 million (FY2015: £4.8 million). Hedge accounting is not applied in respect of these hedged transactions.
Derivative contracts are measured at fair value in the statement of nancial position with movements in that fair value being recognised in pro t or loss.
Currency exposures comprise the monetary assets and monetary liabilities of the Group that are not denominated in the functional currency of the operating unit involved. The signi cant currency risk arises from contracts raised in US Dollars.
The following table illustrates the sensitivity of pro t and equity to a reasonably possible change in the US Dollar/Pound Sterling exchange rate of +/-10%. These changes are considered to be reasonably possible based on observation of recent volatility in the currency markets. The calculations are based on a change in average US Dollar/Pound Sterling exchange rate for each period and the foreign currency denominated nancial instruments held at each reporting date that are sensitive to changes in the US Dollar/Pound Sterling exchange rate. All other variables are held constant.

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ericb 10th Oct '16 8 of 20

HAYT services the energy sector - so explains the apparent lack of interest in the stock

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Firtashia 10th Oct '16 9 of 20

Christopher Mills was recently (May) appointed to the board of Goals Soccer Centre. Potentially a turnaround situation with a very interesting managerial line up. I remember that Paul has written an article about the recent placing there.

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hayashi22 10th Oct '16 10 of 20

The other point to make about transactional exposure is that companies may cover forward at rates which don't look that clever. When £/$ was 1.45 it might have looked a good idea to cover forward at $1.35 but that would not now look great. This forward cover is also not cheap -there is a cost. Still we are all wise with hindsight.

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FREng 10th Oct '16 11 of 20

I have been burnt in the past by companies that have a high dependence on a single customer, which Cloudcall (LON:CALL) seems to have from Paul's comments above.

If the PE owners of Bullhorn want to take over Cloudcall (LON:CALL) then they only have to withdraw their business and it will rapidly become much cheaper to buy.

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rhomboid1 10th Oct '16 12 of 20

In reply to post #153599

It does indeed and is prospering in the worst market conditions in a generation, however their main business area is in power generation both nuclear and conventional @ 72% of revenues. So any resurgent oil price will transform an already healthy business. This presentation puts it well ;


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herbie47 10th Oct '16 13 of 20

In reply to post #153569

Had a quick look at Hayward Tyler (LON:HAYT), why is the est. EPS for 2017 -14%, also profits fell in 2016, is this all due to hedging? Debt is a bit on the high side for me.

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JohnEustace 10th Oct '16 14 of 20

In reply to post #153563

It's a pity that Bicester Village is privately owned - four out of every five Chinese tourists go there.

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rhomboid1 10th Oct '16 15 of 20

In reply to post #153626

Hi Herbie47

The 2016 result was distorted by the acq. of Peter Brotherood underlying EPS were up 37%, the debt is 1.2 times normalised ebitda so actually dropped after a canny but big acq.

So it's all in the detail but I like it a lot & im waiting for the market to agree..

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BrileyLoucan 10th Oct '16 16 of 20

SPD had traded an "exploding" or "knock-out" option. This is an option with a built-in mechanism to expire worthless if a specified price level is exceeded. A knock-out option sets a cap to the level an option can reach in the holder's favor. As knock-out options limit the profit potential for the option buyer, they can be purchased for a smaller premium than an equivalent option without a knock-out stipulation.

In other words SPD tried to limit their hedging costs by taking a bet that Cable wouldn't fall below 1.20. It did and they lost the bet.

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rhomboid1 11th Oct '16 17 of 20

In reply to post #153788

But surely if it was a vanilla knockout option then the effect would be to remove forward hedge cover rather crystalise the hedging loss at a point in time? I know nothing about such things but it seems very poorly thought through by Secured Property Developments (OFEX:SPD)

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gus 1065 23rd Nov '16 18 of 20

Recommended cash bid at 165p per share just announced for Brammer (LON:BRAM) .



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steviej 23rd Nov '16 19 of 20

In reply to post #159347

Falling like flies.

I really do wonder how may FTSE boards are talking to potential acquirers.

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andyhorton 26th Nov '16 20 of 20

In reply to post #153617

Of all the information I can find on Bullhorn - much Googling - there seems to be one theme promoted consistently. They seem to be dead set on an IPO at some point in the near future. 2016 has been touted around in most reports although we are pretty much finished with that so 2017 could be the timescale more likely.
My humble opinion, and it is only mine, will be that Bullhorn goes public absorbing Cloudcall shortly after, as they already have done with several CRM software companies that have produced products that integrate with the Bullhorn interface. Alternatively, Cloudcall will become the UK arm for distributing Bullhorn's products throughout Europe. Either way is beneficial to Cloudcall.
I will continue to hold this stock for the time being despite somewhat agreeing with your comment about withdrawing business bringing down the price. That is the risk I'm willing to take while I wait for the Bullhorn IPO.

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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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