Small Cap Value Report (8 Aug) - QRT

Tuesday, Aug 08 2017 by


Apologies for the late report,

This is just a placeholder to say that Paul will be along later with a few updates.

Kind regards


Thanks Graham.

Profuse apologies for being so late today. I've been running round various Doctors & Hospitals in London today, dealing with medical problems (not me personally, but someone close to my heart). Anyway, that's all under control now, so I can now sit down with a bottle of Fleurie, de-stress a bit, and write a small caps report for you.

Quarto Inc (LON:QRT)

Share price: 159p (up 14.0% today)
No. shares: 19.7m
Market cap: £31.3m

Half-year report - for the 6 months to 30 Jun 2017.

Receipt of preliminary approach - i.e. a possible takeover bid.

Quarto is mainly a publisher of illustrated books ("coffee table books" as the company describes them). For interesting background, I interviewed the CEO & CFO here, about a year ago. I'm just listening back to that now, to refresh my memory.

Note that the company has a very heavy H2 weighting to its profitability - due to a concentration of sales around Thanksgiving & Christmas.

That said, these interim results are very poor. A few key points;

H1 revenues $50.2m (H1 2016: $57.9m)

Adjusted operating profit- a loss of $7.2m in H1 2017, vs. $0.1m loss in H1 2016. That's a huge deterioration.

Outlook comments are upbeat though - healthy order book;

While we expect the soft retail environment to continue, we have an excellent publishing programme for the Autumn and the Holiday period - one of our strongest in the last few years.

Order book visibility is healthy and our sales teams have the right plans in place to capture all possible opportunities.

We have confidence throughout the Group in delivering a strong finish to the year."

Takeover approach - this sounds slightly odd to me;

The Board of The Quarto Group, Inc. (LSE: QRT) announces that it has received an approach to acquire the entire issued and to be issued share capital of the Company at a price the Board considers to be attractive and reflective of the inherent value of the business as a global publishing platform - and hence worthy of due consideration.

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

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TClarke plc is a United Kingdom-based building services company, which delivers electrical, mechanical, and information and communications technology (ICT) services. The Company provides electrical and mechanical contracting and related services to the construction industry and end users. Its geographical segments include London and South East, Central and South West, the North and Scotland. The Company's businesses include Intelligent Buildings Green Technologies, Facilities Management, Transport, Mission Critical, Manufacturing Services, Residential & Hotels, M&E Contracting and Design & Build. The Company within its M&E contracting business has capabilities in sectors, including commercial offices, retail, education, healthcare, financial services and media. Its Manufacturing Services business includes in-house precision prefabrication and engineering services. Its projects include Beckley Court, Chiswick Park, Kettering Hospital, Project Nova, Mitie Care Home and Rathbone Square. more »

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The Quarto Group, Inc. is an illustrated book publishing and distribution company. The Company is engaged in creating content and publishing books from a diverse portfolio of imprints. The Company operates through segments, including Quarto International Co-Editions Group; Quarto Publishing Group USA; Quarto Publishing Group UK, and Quarto HK. The Quarto International Co-Editions Group segment creates illustrated books that are licensed and printed for third-party publishers for publication under their own imprints. The Quarto Publishing Group USA segment creates and publishes illustrated books in North America and sells co-editions of them internationally. The Quarto Publishing Group UK segment creates and publishes general non-fiction and illustrated books in the United Kingdom market. The Company’s books are sold in approximately 50 countries and in 39 languages. more »

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

20 Comments on this Article show/hide all

brucepackard 8th Aug '17 1 of 20

Any thoughts on the approach for Quarto? Seems an odd kind of statement, no price, no mention of who the bidder might be.

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epson 8th Aug '17 2 of 20

Significant events at Quarto QRT today bad results, suspension of dividend and a separate RNS regarding the “Receipt of Preliminary Approach”

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apad 8th Aug '17 3 of 20

Any chance of a comment on the FFX placing to fund buying CardOne.

They seem to be raising a lot more money than they need.


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simoan 8th Aug '17 4 of 20

In reply to post #205941

Any thoughts on the approach for Quarto? Seems an odd kind of statement, no price, no mention of who the bidder might be.

Yes, in my experience this is pretty unusual. Would they have to declare bidder and price if it was a management buyout? That would be my guess.

All the best, Si

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ricky65 8th Aug '17 5 of 20

I'd be grateful for thoughts on new listing £GETB . Results look superficially decent.

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apad 8th Aug '17 6 of 20

I reckon FFX will become a bank after the purchase of CardOne.

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tabhair 8th Aug '17 7 of 20

From the 2016 annual report.

A direct result of our disappointing cash generation in the final quarter of 2016 was that we did not pass the cash flow after debt service (‘CFADS’) cover covenant test at 31 December 2016, contained within our banking facilities agreement. This does not constitute a breach of the Group’s banking facilities. The agreement states that if we do not pass a particular quarter’s cash flow covenant test, it does not amount to a breach provided that it is the first time we have not passed the test and that we pass the test at the end of the next quarter.

From today's 2017 interim.

The Group is in the process of agreeing amendments to its banking facilities. This will allow greater flexibility over the remaining term, particularly in light of the pronounced seasonality of the business and degree of sensitivity around working capital movements as previously reported. The level of net debt continues to be monitored and managed closely.

Are Quarto Inc (LON:QRT) in breach, or close to being in breach of their banking facilities? 

Honestly, something just does not feel right here. The sizeable and increasing debt, combined with the dividend cut and now a miraculous takeover offer that management have described as "attractive". It all suggests to me a low-ball take-out that will receive the blessing of management with little skin in the game, who are out to save their own skins.

That's the cynic in me, so maybe I am wrong. We will see!


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JohnEustace 8th Aug '17 8 of 20

In reply to post #205941

Could perhaps be the founder, Laurence Orbach? He was pushed out as CEO but still owns 15%.

I see the takeover code doesn't apply because they are incorporated in Delaware.

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barnetpeter 8th Aug '17 9 of 20

Real Good Food today "Pieter Totté, Executive Chairman of the Company, has resigned from the Company and stepped down from the Board with immediate effect". Good riddance and it seems under new management now. Complete clear out.

At multi year lows and red flags galore. A further placing may be needed I think. But a lot of business here with turnover of over 100 million and recent business has been booming it seems.

Recently raised a lot of money / finance at 35p. Very dubious things going on here and maybe not for serious investment but it is a very good business to be in and the purchase of

Brighter Foods creates and manufactures snack bars for the healthy snacking market from its factories in Tywyn, Gwynedd in Mid Wales, where it is a major local employer with some 170 full-time staff. The award-winning company produces snacks which are targeted at areas such as diet control, gluten free, lactose free, low or no added sugar, sports nutrition, organic and fair trade. Brighter Foods manufactures both partner branded products and has its own healthier brands such as Wild Trail which is stocked in major retailers and health stores.

Takes the eye. One to watch for the brave

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MrX001 8th Aug '17 10 of 20

Any view on Seeing Machines trading update?

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Beginner 9th Aug '17 11 of 20

In reply to post #205996

Very astute sir. You have kept me out. Thank you.

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matylda 9th Aug '17 12 of 20

Not sure I have missed something guys - Is there a T Clarke (CTO) update - Would be much appreciated to have a more detailed view on those numbers - Taking the basic Black & White high level figures it does seem a reasonable investment here.

Blog: Briefed Up
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Michael Billingham 9th Aug '17 13 of 20

I was expecting a trading update from Boohoo.Com (LON:BOO) this morning. Have I missed something?

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MrX001 9th Aug '17 14 of 20

I think you might find if you look 9/8/2016 was an unscheduled update which upped guidance - if you go back to c9/8/2015 there wasn't an update. Consequently we might have to wait. :0)

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MrX001 9th Aug '17 15 of 20

Think you might also find that the next scheduled announcement will be Interim Results on 27 September 2017.

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Michael Billingham 9th Aug '17 16 of 20

In reply to post #206206

Thank you, MrX001, I'll be patient!

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Richard Cockbain 9th Aug '17 17 of 20

No need to apologise Graham, some things are more important that trading updates. I hope the Fleurie did the trick.

Best wishes.

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PinkDalek 9th Aug '17 18 of 20

In reply to post #206339

First post here and in case it is not obvious, I'm replying to "No need to apologise Graham, some things are more important that trading updates. I hope the Fleurie did the trick.".

It is confusing but, although Graham provided the placeholder, the article on Quarto Inc was by Paul. Maybe he needs to sign off as such, where Graham has started a Small Cap Value Report.

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mojomogoz 10th Aug '17 19 of 20

Quarto Inc (LON:QRT) offer, whatever it is, is likely to initiate a dance down in shareprice. Whoever it is can see the business is Ina tough place and will squeeze the pips as much as it can. There's a chance that this goes for zero to whoever is willing to wear the debt.

The H1 results are even worse than talked above. There's a $1.25m gain from disposals. This is cash earnings too so sustainable cash flow is even more negative than seems.

These results are unaudited. In year end goodwill will be tested and I think there is a chance this will be impaired. I think this as results in last year plus hint at some old assets underperforming. The hint for this is that they are investing ever heavier in pre publication cost and report good first year returns from why ain't the backlist giving them free cash flow juice?

I'm on hols and doing this on iPhone so can't look at financials or my spreadsheets but the payables look potentially to have a message in them that they are holding back on paying what they owe to make cash look better.

I don't like to short sell (does not suit my temperament) but I thought Quarto Inc (LON:QRT) a short at 260p (see post I did a few months ago) and I think these results actually show it to be an even sure fire short today with these numbers AND the rather odd bid interest which is either a game by management or an outsider who knows they can bring company to its knees.

mojo out

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mojomogoz 10th Aug '17 20 of 20

PS I don't think Christopher Mills and his Harwood groups are stockholders. They were the activists that pushed Quarto Inc (LON:QRT) founder Laurence Orbach out. He understands the business for sure though so maybe he'll be willing to take on the debt if he can get the equity for close to zero.

Just read some more communication re the potential suitor and its odd stuff. Doesn't make sense for CEO to say the interest is gratifying and underpins their view of value when the share price has halved on a low multiple this year. Let's be generous and assume a bid comes in at 30% above recent lows. That's about 175p. It seems to me that the CEO is telling us that his company is in distress

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 Are LON:CTO's fundamentals sound as an investment? Find out More »

About Graham Neary

Graham Neary

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, also holding the Investment Management Certificate and the STA Diploma in Technical Analysis.Away from finance, my main interests are recreational poker and everything to do with China, especially Mandarin Chinese. more »


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