Small Cap Value Report (9 May 2016) - GRG, BHS, FRP, PVG, RSTR

Monday, May 09 2016 by

Good morning from Abu Dhabi!

So far so good, on my holiday. The hotel is absolutely wonderful - it's called the Viceroy, on Yas Island. There's lots to see & do here, including a gigantic shopping & leisure mall, attached to Ferrari World. Although of course it's quite a conservative, Muslim country, so one has to respect the local customs & laws whilst here.

Although I've been pleasantly surprised at how Westernised it seems in the tourist areas anyway. They even sell Yorkshire Tea in the hypermarket here! Although at £6 for 80 bags, I had to resist the temptation. I'm sticking instead to the hotel's perfectly satisfactory English Breakfast Tea.

The staff at the Viceroy are amazingly courteous & helpful. They're nearly all from third world countries, and apparently there can be exploitation here of foreign workers. Although I haven't detected any of the tell-tale signs of maltreatment & overwork that you see etched in the faces of staff on cruise liners for example. It's great to see their faces light up when you tip them as little as £2, which is a lot here.

Greggs (LON:GRG)

It's always interesting to look at what the larger retailers say about trading, as that often has read-across to other retailing shares which I hold. Greggs have seen an improvement in recent weeks:

Total sales for the 18 weeks to 7 May 2016 grew by 5.7 per cent and like-for-like sales in company-managed shops grew by 3.7 per cent over the same period.

As has been widely reported, conditions on the High Street were softer in March before recovering in recent weeks; these conditions were reflected in our own performance.

This reinforces my view that there are some smashing bargains available right now in this bombed-out sector. Although one has to be very careful to avoid retailers that might be in structural decline.

I believe that the outlook for the UK consumer is fairly positive. In my view, Brexit doesn't make the slightest difference to how much people spend in the shops, so that's a red herring. Disposable income has risen quite nicely in the last couple of years, if you look up the economic statistics.

The issue is that there is so much competition in retailing. Just think about how many new shops have opened in the last few years. They are taking market share away from other existing retailers.


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Greggs plc is a United Kingdom-based bakery food on-the-go retailer. The Company's products and services consist of a range of fresh bakery goods, sandwiches and drinks in its shop. The Company also provides frozen bakery products to its wholesale customers. The Company owns approximately 1,698 shops, 12 regional bakeries, one distribution center and one manufacturing center. The Company has approximately 105 franchised shops operating in travel and other convenience locations. The Company offers pastries and bakes, sandwiches, breakfast, sweets, pastas, salads and soups, bread, platters, drinks and snacks. The Company's Balanced Choice products offer choices, which have approximately 400 calories. The Company's sales are made to the general public, as well as to certain organizations. more »

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Fairpoint Group plc is a United Kingdom-based company, which provides consumer professional services, including legal services, claims management services and debt solutions. The Company has four segments: claims management, legal services, individual voluntary arrangements (IVA) and debt management plans (DMP). The IVA segment consists of the subsidiary company, Debt Free Direct Limited, which is an IVA that consists of a managed payment plan providing both interest and capital forgiveness. DMP services segment consists of the Company's subsidiary, Lawrence Charlton Limited, which provides DMP for consumers. Claims management segment provides a range of claims management services, including reclaiming payment protection insurance (PPI). The legal services segment provides a range of consumer-focused legal services with lines, such as family law, complex personal injury, personal legal services, and a legal processing center focused on both personal injury and conveyancing work. more »

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Premier Veterinary Group plc, formerly Ark Therapeutics Group plc, operates various veterinary practices and provides non-medical services to other veterinary practices. The Company operates through segments, including Vets Business, Pet Care Plan and Pet Care Plan overseas. The Vets Business segment is engaged in day to day running of veterinary practices. Its Pet Care Plan is the fees received for the collection and management of direct debits on behalf of veterinary practices external to the Company. The Company's Pet Care Plan is divided into the United Kingdom and overseas. The Company, through its subsidiary, Premier Vet Alliance Limited (PVA), is a provider of services to veterinary practices, including the administration of a preventative healthcare program for pets branded Pet Care Plan. more »

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

26 Comments on this Article show/hide all

Paul Scott 9th May '16 7 of 26

In reply to post #130607


You're a long-standing and highly regarded commenter here, so I will never fall out with you for long!
Thank you for clarifying your definition of profit - it might have been best to have stated that at the outset, to make it clear what you meant. So it's a misunderstanding, let's move on.

As I pointed out in my article last week, the divis paid out in 2002-4 were paid from distributable reserves, and NTAV at BHS by 2008 was strong. So it's hindsight to say that, post the 2008 financial crisis, BHS probably shouldn't have paid out divis to its group holding company 4-6 years earlier.

We have to remember that at any point in time, nobody knows what the future holds.

Regards, Paul.

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Ramridge 9th May '16 8 of 26

Hi Paul -

Yep. Let's just shake hands over the digital space and move on. You will find over the past years a number of occasions where I have spoken out in your defence when others have questioned your integrity and honesty.
Regards, Ram

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Graham Fraser 9th May '16 9 of 26

Hi Paul,regardless of whether or not SPG took too much out of the business in the early years or not. He surely was responsible to his employees` pension fund and can`t just walk away from a pension fund liability as he tried to do by selling the company to a thrice bankrupt crook.

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andrewdb 9th May '16 10 of 26

Heading slightly off topic but still on piste, the real problem here imo is Defined Benefit pensions.

Marvellous things set up that pay a predictable income to the employee from retirement to death.
Much loved by employees.
The trouble is that the value of these things goes up when interest rates go down (as they are effectively annuities) and so there are a number of companies out there that are currently paying most of their profits to fill the deficit in the pension scheme.
This has led to a number of increasingly baroque maneuvers that attempt to prise the pension fund liability away from the company (and pass it onto the state).
The Pensions Registrar has very wide ranging powers in this area and does have international reach.
There is a complex legal process that determines if the assets/ liabilities were improperly 'moved' (IANAL)

In other words I am sure there will be some fireworks when SPG meets Frank Field, then it will all go quiet - probably for years.

That the BBC has not been able to dig up an obliging pensions lawyer and get them to say 'SPG is on a sticky wicket imo' on R4 Today (so far) may be an indication of the boring truth.

Whatever happens the state (us) is suddenly a few hundred million out of pocket and a lot of pensioners will get a lot less pension than they thought they should.

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xcity 9th May '16 11 of 26

Actually the state is probably up overall because it's the one getting away with paying a very low rate of interest. And pension funds can be up on valuations if they hold mostly bonds and gilts.

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purpleski 9th May '16 12 of 26

In reply to post #130607


I might agree about treating tax as an expense in the same way as say audit fees but surely not dividends?

I own a company that for the past two years has made each year a profit of £100.

In year one it retains the profit and pays no dividend. The value of the company has increased by £100.

In year two it pays a dividend of £100.00. The value of the company declines by £100 and my bank balance goes up by £100. My personal balance sheet is unchanged.

I really dont think that divis can be treated as an expense but I am more than happy to stand corrected. Or am I getting the wrong end of the stick?

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purpleski 9th May '16 13 of 26

In reply to post #130619

Hi Graham

But surely the pension fund is primarily in deficit because of the crazy monetary policies of central bankers and politicians? As and when the pension goes back into surplus, when normal monetary service is resumed, does SPG get to take the surplus back?

I dont know the fund size of the BHS pension fund but Paul's figures indicate a deficit of £101.1m or £5,055.00 per member (20,000 according to the Guardian and we always believe The Guardian!:-)) or £168 per year per member based on HL annuity tables.

Or maybe I have this wrong?


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purpleski 9th May '16 14 of 26

In reply to post #130628

Hi Andrew

Is it a lot less? I know £3 a weeks (see my calculations above) but I really dont think that is a lot less.

People might think I am having some sort of love in with SPG; I am not it is just that I think that the UK needs entrepeneurs like him and I can not stand the way in the UK we attack successful people.

Branson was expelled from school (after "he was caught leaving the bedroom of the headmaster’s daughter"), nearly went to jail for VAT fraud to name just a couple of things he got up to but now everybody loves him (including me) so I really think we should cut PG some slack!!:-)


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Zipmanpeter 9th May '16 15 of 26

Further to Paul's comment above re opportunities in retailers AND the BHS saga, the list below ranks top fashion retailers by market share (, and shows how important SMs have become. They have 4 of the top 6 places - even constant latecomer Morrisons makes 20th!)

But interesting to see BHS was still 12th biggest and (arguably) one of a small set focused on mid market (with Next at 5, Debenham, River Island, Gap). Given we all agree 'BHS must die' as dated brand, this still leaves a chunky corpse for other mid-market brands to feast on. Good news especially for Debenhams and Next I would argue since BHS's probably older, more conservative shoppers are not yet ready for online - although at the bottom end they will go to the SMs I guess.

A bit of sunshine and the end of BREXIT discussions and we might see a retailer revival. It's an ill wind that blows no good!

Top 20 Fashion Retailer brands
1. Primark
2. George
3. Marks & Spencer
4. Tesco
5. Next
6. Sainsbury’s
7. Matalan
8. New Look
9. Sports Direct
10. Debenhams
11. H&M
12. BHS
13. TK Maxx
14. Peacocks
15. Topshop/Topman
16. River Island
17. Gap
18. EBay
19. Amazon
20. Morrisons

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herbie47 9th May '16 16 of 26

In reply to post #130643

I thought ASOS would have been in the top 7 on that list, they have a market cap of £3bn and its about all they do unlike Tescos.

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rhomboid1 9th May '16 17 of 26

I think there is something very wrong with a bunch of politicians with totally unfunded and very generous public ally funded pension entitlements having a pop at the pension funding arrangements made by a businessman who kept BHS going far longer than a normal red in tooth or claw capitalist could be expected to.

He's not blameless but the double standards are eye popping

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pka 9th May '16 18 of 26

In reply to post #130607

Hi Ramridge, You wrote: "The difference is that your definition of profit is profit before tax and dividends paid, mine is net profit after tax and after dividends extracted."

With respect, I do not think your definition of profit is a sensible one to use. This is because my understanding is that corporation tax is payable on the profits of a company in the latest year of trading ignoring any dividends. Dividends are payable out of a company's profits in the latest trading year and out of any profits that have been retained in the company from previous years, both after corporation tax has been paid.

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andrewdb 9th May '16 19 of 26

In reply to post #130640

If the scheme goes into the PPF (I may well be out of date here), pensioners get 90% of what they get now up to a max of 21k pa and there are no inflation increases on that. Everyone else gets reduced by more.

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NK104 9th May '16 20 of 26

In reply to post #130682

My understanding is that under the PPF, pensioners get 100 per cent of their rights but don't get increases on pension rights accrued prior to April 1997. Active members get 90 per cent (up to a limit of about £33,000) but again no increases on pre-1997 rights. Post 1997 rights are linked to inflation capped at 2.5 per cent.

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jonesj 9th May '16 21 of 26

In reply to post #130637

 I'm agreeing with Purpleski here. The pension fund appears to be in deficit due to the ultra low yield on bonds, which are a result of current monetary policy. Not BHS management.
[Whilst it may or may not be relevant, if I go back about 25 years, I think the government of the day had some kind of upper limit on pension fund surpluses].

At least I have no trustees telling me to put my SIPP into gilts, but it must be a real pain for any company being force to pay into a pension fund & having some trustees dictating policy, combined with a low yield world due to monetary policy.

No wonder defined benefit schemes are dying out in the private sector.  

In the public sector, of course it's just fine for all political parties to run up huge unfunded future pension obligations, whilst having completely different rules for honest private companies.

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Paul Scott 9th May '16 22 of 26

In reply to post #130619

Hi Graham Fraser,

You raise an interesting question, when you asked;

Hi Paul,regardless of whether or not SPG took too much out of the business in the early years or not. He surely was responsible to his employees` pension fund and can`t just walk away from a pension fund liability as he tried to do by selling the company to a thrice bankrupt crook.

The whole principle of limited liability companies, is precisely that owners can indeed walk away from the liabilities of companies that they own.

Our entire economy is built on this key principle. Before this, business could only be operated as sole traders or partnerships, and that inhibited entrepreneurship due to making everyone personally liable for their business debts.

Commentators about BHS seem to have overlooked this vital point.

PSG clearly tried to distance himself from the inevitable collapse of BHS, by selling it for £1 to what seems like a conman. That looks a serious error of judgement, and it's backfired badly on him.

However, I would point out that Green's UK businesses paid full UK Corporation Tax for many years - something that the Private Equity scumbags have made an industry out of avoiding. So public anger is badly misdirected. PE should be hung out to dry I think, with pickets outside their Mayfair offices, for their grotesque tax avoidance. SPG cos pay full UK Corp Tax. I wish others did.


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andrewdb 10th May '16 23 of 26

In reply to post #130694

I was out of date :)
Happily, google is not, and it agrees with you.

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xcity 10th May '16 24 of 26

It's not really true to say that public defined benefit pensions are unfunded. All schemes are different, but NHS employers, for example, pay 14.3% with employees paying up to 14.5%. That's a fair whack and far more than is being paid in many private sector schemes. It's just that the money then disappears into a general pot rather than investments linked to the pensions. And some public schemes, for example local authorities, do put the money into investments.

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Graham Fraser 10th May '16 25 of 26

In reply to post #130709

Hi Paul,
Surely he had an implied if not actual liability to the pension fund which the trustees could and should have enforced thereby stopping him selling the business to an inapropriate person.
With regards to low interest rates causing the pension problem- that is trying to have your cake and eating it ! without low interest rates there would have been no punters and BHS would have gone bust log before it had a pension deficit. Regards Graham

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Trident 10th May '16 26 of 26

I agree with Paul, Green's biggest mistake was to sell this business to a manifestly unsuitable person. The Sunday Times very early after the transaction pointed out the background of the acquirer as someone with limited financial assets, and success as a businessman.
Another mistake apparently was that Green could have received advanced clearance of the transaction with the relevant pension authority, and the odium would be on them instead. However, he didn't and that has truly come back to haunt him.
Personally, I have little time for Parliamentary Committee examinations, which seem to be exercises in political grandstanding. Margaret Hodge - a star of these sort of political punch ups, in her early days ran Islington Council, and what a mess that was!

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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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