Small Cap Value Report (9 Sep 2015) - GOAL, ALY, MONI

9th Sep '15 by Paul Scott

25 comments 25608 reads

Good morning!

Warren Buffett on CNBC

I was very disappointed with yesterday's interview with Warren Buffett by Betty Quick of CNBC - what a missed opportunity - she asked him all sorts of dumb questions about current market volatility. When anyone even vaguely acquainted with Buffett's long term approach would have known exactly how he would reply - that he has no idea what the market will do in the next 10 weeks or months, but that he believes it will be significantly higher in 10 years, and that's all he cares about.

That really annoyed me - what a squandered opportunity - to be given access to interview arguably the world's most respected investor, in his twilight years, and to not even bother preparing intelligent questions. I must email Mr Buffett, to ask if he'll do an audiocast with me instead!

Consumer cyclicals

In the short term, the main indices are starting to look as if a short term bottom has been put in. Although one does wonder how much of this recovery has been manufactured by central banks & Govt action to prop up markets? In my world of UK small caps, it feels like a bull market again. We had a bit of a wobble, but remarkably little selling volume in small caps, when the main indices were falling over recently.

Most small caps I hold, that are reporting decent results, are going up again, even reaching new highs. So it looks & feels like a bull market to me still. Remember that the big indices have taken a heavy hit from oil & other resources stocks declining. That's not relevant to small caps, where I'm mainly focusing on cyclicals, especially UK/Western consumer cyclicals - where demand is rising, due to rising real wages, and the "tax cut" of lower oil, and low to negligible inflation.

That's the most healthy macro backdrop for consumer cyclicals that we've seen since 2007, in my opinion. So I reckon there's plenty of scope for companies in this area to out-perform, if they are well managed, and have decent products. The falling big indices therefore seems a red herring to me, and a false benchmark to follow. I prefer to follow FTSE Mid 250 Index (FTSE:MCX) and FTSE Smallcap Ex Investment Trusts Index …

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pyemckay

9th Sep '15

MCO has been strong recently and it looks reasonably justified. The company has cash on its books and is clearly persuing an aquisition strategy which seems fundamental to its successs. Long term I like the franchisee model which has better margins. The results did confirm a slowdown in the housing market but the estate agency seems a very small part of the business.
Rental demand is on the rise and this is a great little company that gives me exposure to the side of the property market i prefer. Looking fully valued now but i have no intention of selling my holding yet

WDWombat

I don't get these Laura Ashley figures They state 'total Group sales decreased by 3.0% to GBP139.7m compared with the same period last year (2014: GBP144.0m). Total UK retail sales increased by 0.7%. How can this be reconciled with a 7% increase in lfl sales and a 2% decreas in floor space?
I don't buy your argument on cashflow either. Take net profits, add back depreciation and amortisation, and then deduct capex and dividends. This is the actual net amount accruing to the company and is in most common use among professional investors aka free net cash flow. I have looked at Laura Ashley a lot over the years but am just not sure thay have a real market appeal in the UK any more though I accept that the 7% lfl increase claim seems to belie that concern. I will try and visit a Japanese store in November but I do know that almost every overseas retail franchise in homeware and/or clothing retail in Japan has ended on the rocks. Though it is true that the GST increase led as usual to a massive pick-up prior to the hike followed by a massive drop-off. Next year will be informative. But I do quite like the sound of the Singapore purchase, even if it does produce a massive fcf deficit, I get the feeling he is trying to re-brand for a serious (non-Japanese) Asian drive in markets he knows. That may be the making or undoing of the company.

simoan

Final point - should this be a company to add into the "Living Wage Future Profit Warning Alert Company" - perhaps its safest out of companies like this if one is not already invested and it is known that most staff are likely to be on peanuts rather than cashews.

I've seen this a few times now and I'm not sure I really understand why there is such concern about companies that employ staff on low wages? It is very simple what will happen, especially if they are a well run, decent business that is worth investing in; they will put their prices up or increase productivity by using less people to achieve the same level of business. This is the way it should be i.e. we as consumers should pay more to ensure our fellow citizens are paid a fair and decent wage.

I have a largish position in Marston's and they and other pub groups can easily increase prices to cover the extra costs with 1p extra on a pint of beer here and there, 25p extra on the cost of a meal etc. Most people wouldn't even blink an eye at such increases. They can also easily adjust the number of bar staff working midweek etc. The Living Wage is a really great thing and a good business should have seen it coming and be elastic enough to easily cope with it, and let's face it some of the additional wages will end up back in the till at Marston's :-)

janebolacha

Paul, a couple of points:

1. The Singapore property actually cost 34.5m pounds, once S'pore GST and costs are added.

2. Your remark that, "International - as this is franchised, the sales figures don't come through, just the profit element. So it's actually a lot bigger than most people realise - at 296 franchised stores, and international actually generated 55% of PBT last year" puzzles me. I think you've picked this up from note 5 to the segmental analysis of the last full year's results (12.9 as a % 0f 23,5) but there are these notes that follow that breakdown:

"The reported segments are consistent with the Group's internal reporting for performance measurement and resources allocation. The Group does not allocate indirect overhead costs between its retail and non-retail segments. As significant elements of the indirect overhead costs arise from the retail segment, it is decided that the entire indirect costs are allocated to this segment.

Retail revenue reflects sales through Laura Ashley's Managed Stores, Mail Order, e-Commerce and Hotel. Non-retail revenue includes Licensing, Franchising and Manufacturing. Contribution is stated after deducting direct operating expenses, buying, marketing and administrative costs. "

So the "non-retail" figures actually include manufacturing so it isn't all internationally generated while a share of indirect overheads would need to come off as well. So we actually do not know how much profit comes from the international business itself, unless there's something I've missed in their RNS's.

I do remain rather sceptical about ALY. On fundamental business grounds I find the investment case unconvincing for all the reasons we have discussed previously on Stockopedia.

Best wishes,
Jane.

BlueFrew

I used to play in a GOALS league and helped make up the numbers in a group game. Good post which matches many of my own experiences.

To take part in a league you really need a core of 5 people who'll turn up almost every week. Once you drop below that it becomes more trouble than it's worth, regardless of how many occasional players you have. So in the main that will be people with no kids, regular working hours and some disposable income. In most cases it will be work colleagues who live and work in the vicinity of the GOALS site.

I wonder how much issues like high rents, insecure zero hour contracts and youth unemployment are having an affect here. Because it's people in their 20s who'll make up the bulk of the core players.

Attraction Investor

Goals - checked my local site for availability - there seems to be a good amount of pitches available even at weekends and evenings. Which is probably not a great sign.

I would also expect that the amount of football on television and how well it is spread from throughout the week would effect attendance and bookings. (upto 5 televised Premiership matches over a weekend now)

I would agree with BlueFrew - Creating a team is the easy part, but a little loss of excitement and an injury or two makes running a team week in week out a difficult proposal. From my experience in 5 a side - you get 1 good season with everyone up for it, after that it becomes a struggle and eventually there are just not enough people interested and you fold your team.

Paul Scott

Hi WDWombat,

You say;

I don't buy your argument on cashflow either. Take net profits, add back depreciation and amortisation, and then deduct capex and dividends. This is the actual net amount accruing to the company and is in most common use among professional investors aka free net cash flow.

This is wrong. You're right up until deducting capex, but you don't deduct dividends when calculating free cashflow, because the whole point of calculating free cashflow is to see how much surplus cash is available for paying sustainable dividends, reducing debt, and any other purposes.

Here is the definition of free cashflow from Investopedia, which aligns with my thinking on this;

The fact of the matter is, and this is not my opinion so you don't need to "buy it", it's just an obvious fact - Laura Ashley Holdings (LON:ALY) is a cash generative business. It uses that cash to pay very generous dividends.

I agree with your final point though - that the purchase of the large office block in Singapore signals an intent for serious expansion through franchisees into Asia. To my mind, big Malaysian shareholders/mgt are likely to be far better equipped to do this, than a British mgt.

Paul.

Hi Jane,

The interim figures contain less detail than the Annual Report unfortunately, so it wasn't entirely clear what was what in the analysis today.

I recall when I went through the last Annual Report with a fine toothcomb, I came away with the impression that profits are split roughly 50:50 between UK and overseas, although as you say there might be some muddying of the water because of shared overheads.

Given today's announcement of strong growth in UK, and struggling International, then the profit mix will have shifted more towards the UK.

I think investors are missing a trick with ALY. It's performing very well in the UK, its main market, and the website shows attractive products at reasonable prices. The valuation is much lower than many other retailers, yet it has a better brand, and is delivering stronger current trading in the UK. And the divis of course are fantastic. Plus Asia growth could really accelerate rapidly over the next few years.

It takes time for investor perceptions to change, but I suspect ALY could seriously re-rate at some point over then next couple of years. Imagine if they announce a franchise partner has been signed up to open x hundred stores in China or India, etc. There's nothing in the price currently for expansion overseas, yet it's already proven to work through a franchise & licensing model.

Regards, Paul.

Hi bicboy,

Thanks very much for your demolition of Goals Soccer Centres (LON:GOAL) from a (former!) customer's point of view. I was shuddering whilst reading your post, at how utterly ghastly it all sounds.

Thanks for scaring me off from the idea of buying any shares in it LOL!

Cehers, Paul.

You have not addressed the main point on the like for like oddity which quite clearly doesn't add up. Free cash flow as I have defined it must be taken after tax. There are different definitons, sometimes dependent on accounting regime, mine is the most conservative. A company that pays out more in capex + dividend than it makes in net profit AFTER TAX less dereciation is not building any capital strength. Its net worth is falling.

rmillaree

Hi Simoan

It's hard to know how things will pan out - i have a wad of Marstons shares too so i am hoping the change for them wont be more than 5% of current profits .

Lets look at Marstons as an example though - say £160 million of staff costs - if they had to give 20% of staff a 20% rise thats an extra £6.4 million a year in costs - over the 5% threshold. But not stupidly high. There will probably be complications at all levels - if a trained up Bar Supervisor is currently on the living wage do they need their pay bumping up too? how far up the chain does it go. How will it work with under 25's particularly if you have to be careful about being ageist. £9 an hour has been mentioned as the rate by 2020 thats quite a hike from where we are now.

With regard to passing prices on this may work but consumers can only be pushed so far and often low wage jobs are industries where spending is discretionary. I look at pubs that do well now and they tend to be the outlets that have kept their pricest keenest.

Anyway in summary it all probably depends on lost of factors - but high wage costs with low margins and low earners are the ones i would be most worried about.

I don't think there is any oddity on LFLs. As is normal practice, ALY quotes LFL figures for company-operated stores only, which is the UK stores. The UK is trading very well, as you can see from the figures. Hence it is reporting positive LFL sales growth, and UK profits rose in H1.

International is trading badly, as they also explain, but as these are operated by franchisees, they are not included in LFL sales figures, as the sales are not ALY sales. ALY just receives royalties, licensing revenues, etc, from the franchisees, which is what they book as revenue.

As regards Free Cashflow, you're right that different people work it out different ways, but the definition I use & gave above is pretty much the standard definition that most people understand as free cashflow.

The free cashflow figures on the StockReport are inconsistent with other companies, because of the way ALY presents the figures in its annual report. So Stockopedia's data provider picks up the wrong (post-dividends) free cashflow figure (unlike most other companies, where it picks up the pre-dividend free cashflow).

I delved into all this in a lot of detail a while ago, because loads of people have been put off buying shares in ALY because they think it is haemorraging cash. When actually, it's generating tons of cash, but as a matter of policy, is paying that out in divis.

This is Stockopedia's definition of Free Cashflow (below), which is clearly pre-dividends, but the figures for ALY are post-dividends, so this is an anomaly which I flagged up to the data people a while ago, but it hasn't been changed, so remains an anomaly.

Everyone I know who has checked the ALY Annual Reports for themselves has confirmed that I am right - ALY does indeed generate plenty of cashflow, which is then used to pay large dividends. As I mentioned in the main report above, I think the divis might have to be cut at some point, as may not be sustainable. There again, with a strong Balance Sheet, I don't have any problem with a fundamentally sound company paying out more in divis than it generates in free cashflow, for a few years anyway. As long as they don't accumulate too much bank debt, then it's fine.

What is the definition of FCF PS?

Free Cash Flow is calculated from the Statement of Cash Flows as Cash From Operations minus Capital Expenditures. Unlike earnings, it omits purely "paper" expenses.

Stockopedia explains FCF PS...

Free Cash Flow per share should be compared with Earnings per Share in order to understand whether a company is able to turn its earnings into cash or not! Ultimately every company needs to make cash to survive and without free cash flow a company will have to go begging to shareholders or resort to borrowing. The best companies are 'cash machines' - you should look for companies that make more free cashflow than earnings.

N.B. Cashflow can be very 'lumpy' as capital expenditures are not consistent from year to year. Also growing companies may have to invest heavily ahead of cashflow to keep up with demand.

jonesj

m reading a previous report, I think Goals were trying to get around the not paying the organiser issue with an app that allows the players to pay directly.

Here is the link to the app.
https://play.google.com/store/apps/details?id=com.adactus.GoalsMobile&hl=en_GB
A rating of 3.2 and all the people reporting problems shows very poor execution. The app needs to work. No excuses.

In comparison, the Dominos Pizza app gets a score of 4.6

I just didn't see enough upside in this stock, so it got culled as part of some rebalancing last month. Sometimes decisions work out & make up for the bad ones.
I would want to see evidence of them getting their act together and the directors making large purchases to buy back in.

Thanks for the earlier posts from people who are or know customers.

Thanks for the long reply but let's call it a day here as I have been brought up with a quite different fcf (free cash flow) definition than is the common usage here in the UK I think it is much better, you clearly have never thought of it quite in this was which is fair enough. It is another of the things which I don't like in UK analysis and account presentation. Good luck with this one but i am going to continue to leave i alone. I will let you know in the unlikely event that I find anything out in November on the Japanese business which has clearly been a drag so far this year.

Hi WDWombat,

I've done a bit more googling on the FCF issue, as it was bothering me, and I've come across an article which confirms my defiition of FCF, but also mentions that some analysts use a more stringent version, which includes dividend payments.

So we've reached a nice compromise where we can both be right! - there are alternative ways of calculating FCF, although I think my version is the more widely used in the UK.

Here is the relevant article if you're interested, although as you suggest, we've probably done this issue to death already lol!
http://www.investopedia.com/university/ratios/cash-flow-indicator/ratio2.asp

Regards, Paul.

Redrichmond

Hi Paul,you started to review AMO back in june but you ran out of time.

Any chance of finishing it off?

nehpets

10th Sep '15

With Goals Soccer Centres (LON:GOAL) as you have pointed out all those fixed assets on the balance sheet are leaseholds. I am sure it is the correct accounting treatment of leaseholds but I do find it a bit counter intuitive that they have the leaseholds as assets on the balance sheet but being operating leases, the future payments are off the balance sheet and not included as liabilities. I am probably missing something but it doesn't seem logical to me.

The Laura Ashley hotels venture in UK is something else that really puzzles me. I gather that the logic behind it is supposedly that the hotels be furnished and curtained and wallpapered with Laura Ashley products as some kind of "live showrooms". Besides it being a way of spending a lot of money to reach probably a relatively small number of people (and many of those likely to be already fans of the look, that being the reason they choose to stay there), why do all that and then lose money on it and devote management time and effort to it when the controlling shareholder, Malayan United Industries Bhd (MUIB) already has eight established hotels in UK, under the "Corus" brand, some of which (not all) look to be just right for the LA treatment? Why not simply have some of those hotels refitted?

http://www.muiglobal.com/

http://www.corushotels.com/

Anyway, enough of Laura Ashley!

MichaelFBS

Paui thanks for the analysis of Laura Ashley Holdings (LON:ALY) I am holder and find it very interesting. My pennyworth on FCF a concept that chimed with me (and I think is a variation of FCF but I am inexperienced so may have got it wrong) when I came across it reading on Buffett or his letters (can't remember which) is owner earnings.

Net Income
+ (b) depreciation, amortization
+/- (b) other non cash charges
- (c) annual maintenance capex (or the full capex)
+/- changes in working capital

kenobi

I think both these measures of fcf are useful, fcf is used to pay divis and in many companies these are a given, so it's useful to know how well the divis are covered by fcf (just as by earnings), because you get a picture of how likely they are to be cut or increased.

K

Small Cap Value Report (9 Sep 2015) - GOAL, ALY, MONI

Warren Buffett on CNBC

Consumer cyclicals

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Paul Scott

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