Small Cap Value Report (Fri 10 August 2018) - House Of Fraser/SPD, FLTA, FAN, LDSG

10th Aug '18 by Graham Neary

40 comments 9771 reads

Good morning!

There's not a whole lot to report on today.

Filta Group (LON:FLTA) is in line with expectations for H1.
Volution (LON:FAN) is in line with expectations for FY 2018.
Leeds (LON:LDSG) results are out for FY 2018 and the outlook for FY 2019 is in line with expectations.

House of Fraser is entering administration, after no solvent conclusion to negotiations could be reached.

While reading around the story, I ended up reading the Wiki biography of Philip Day, one of the businessmen who has been mentioned as a potential buyer.

It's fascinating to see how he has built an empire by buying up a long list of companies out of administration.

It goes to show how well someone can do by being opportunistic and waiting for the right time to pounce.

Mike Ashley of Sports Direct International (LON:SPD) is another astute businessman rumoured to be in the fray for House of Fraser.

He also has a track record of buying stakes in troubled businesses. Rather than buying them out of administration, he has been buying shares in fellow high street names at depressed prices, in the open market.

The names in his portfolio include Debenhams (LON:DEB) (where he is the top shareholder), Findel (LON:FDL) (again, top shareholder), GAME Digital (LON:GMD) and French Connection (LON:FCCN).

While the ultimate success of his stake-building in these enterprises is yet to be seen, it's been very interesting to see him build the portfolio.

What we can learn from these two men? Few people will have their business insights, but I suppose we should also try to be opportunistic, to be patient, and to stick to the sectors we understand best. That's what they've done, and it seems to be working out pretty well for them so far!

I would say that their specific investment styles would best be classified as value investing - they are buying up companies where the existing equity is worthless or at a much lower value than it was before. We don't have to mimic them precisely, but it's worth noting that…

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Graham Neary

10th Aug '18

Yes, there's a great discount to tangible NAV available. I have found waiting for that sort of value to be realised has been frustrating with other companies, but who knows what Leeds might have in store. G

Thanks for the views as always, Gus! G

Hi andrea, I've never looked at Vitec (LON:VTC) before so I don't feel able to say anything insightful about it yet. Apologies! Have a good weekend too. G

Hi, I've not studied this one before (£IBPO).

You mean the AGM was today, yes?

G

sharw

I had a look at iEnergizer (LON:IBPO) the other day as it was so high in the rankings (currently 21st) but then discovered, as you did, the 82% holder (CEO). That explained the low trading (none in the past week, average over last 3 months 5,058) and spread 50-60. Throw in that the parent company in Guernsey holds the main operating company registered in Mauritius and this is one that I see no point, from my personal investment view, in further investigation as to what it actually does!

RichardK

Filta Group (LON:FLTA) looks expensive on a P/E of 26 for cleaning out fish and chip shops.

Richard

Vsihv

Hi Graham - yes it was the AGM today.
Came on my radar courtesy of matylda and I read the news.
My comments are based on a brief review of their results statement, annonounced 25 June.

LeoInvestorUK

RE: House of Fraser / Sports Direct. It has been widely reported that Sports Direct have bought HoF in the sense of the company in administration that Sports Direct owned 11% of. However it seems much more likely they have in fact bought selected assets / taken on selected liabilities from the administrators.

My primary evidence for this claim is the consideration of £90m - if the company as a whole had positive value surely it would have been sold before administration? Note that the CVA was sorted out at the weekend - well before administration. Cherry picking is also consistent with the official statement:
http://otp.investis.com/clients/uk/sports_direct1/rns/regulatory-story.aspx?cid=723&newsid=1142693

Given the above statement seems fairly clear that they have bought the UK stores, brand and stock, this leaves the question of which liabilities Sports Direct have not taken on. The pension fund was in accounting surplus (and reportedly only a few tens of millions deficit on a buy-out basis), so it isn't really material whether they took it on or bought it out. I think that leaves bond holders, suppliers and concession holders.

The read-across for British Retail seems very positive to me: even department stores (surely the format closest to obsolescence) has significant value when not encumbered by debt, rents above market value and pensions.

Tend to agree - as a general rule, I'm not a fan of companies where I feel the need to look up several years of statements / notes and understand capital structure, let alone what they actually do.
Thanks for the post

cholertonandrew

Re Intercede,

I hold shares in Intercede. They currently mostly serve government and large enterprise markets with their multi-factor authentication solutions. These are based on public key infrastructure (PKI) methods where digital credentials are issued to users (employees or supply chain) and stored on the user’s device. Authentication keys are stored alongside the credential that a user has to unlock- a PIN or fingerprint. Finally there are encryption keys. Thus when a user logs into a network, they first unlock their credential and then that is read at the other end. A network can therefore check that it is the right device and right user at the device. The encryption keys also allow for sensitive data to be encrypted when passing over a network.

They seem to have a good business in the large enterprise and government space. They are however also targeting the wider markets of consumer use and employee use at smaller firms and that is where the upside would come from if they’re successful. I believe they are engaging with potential partners who could scale them up.

I feel it’s one to watch. The upside could be strong but it’s as yet unclear whether they can step into those wider markets. They have missed their targets for a number of years and there are competing methods which I believe have been getting good traction in the space that Intercede is also targeting. One such method is push notifications to a smartphone over a mobile network. That goes to your registered phone and your fingerprint can be verified when you accept the push notification. Thus, another way of checking right device, right person at the device.

It is speculative as Paul Scott said but perhaps asymmetric in that the upside could be very good whilst hopefully not as much downside.

Regards
Andrew

rambutan2

Re Intercede, Jacques Tredoux, yesterday's big buyer, has backed the company since pre listing days. Richard Parris, the other large holder, is of course the founder, recently ousted/stepped down boss and now ned. Having met them a few times over the years, I know they would believe the company to be horribly undervalued currently, but I doubt they would do anything like attempting to delist etc.

It really is worth reading back through a good few year's worth of annual reports (they are not large tomes!) to get a flavour of what IGP has been up to and who it has worked with. For example, Microsoft, ARM and most recently Intel, who actually approached them for their expertise. Unfortunately, as of yet, and for unclear reasons, none of this work has really turned into sales.

However, MyID sales for US Homeland depts, 5 of the 6 largest global defence contractors, UK and other govts etc has gradually ticked up, albeit in a lumpy way. Over a third of this rev is recurring. And customers don't leave. This is a field in which it would be virtually impossible for a new entrant to get access ie there is a very large moat. That said, growth has been frustratingly slow.

The recent management changes have put a sales guy in charge, so it will be interesting to see what effect this has. At the same time, costs are being cut back in line with rev. The FD can run a tight ship, as can be seen by how little equity issuance there has been over the years.

On 99% gross margins and fairly fixed costs, it's easy to see how IGP's fortunes could turn quickly IF they can win some new business.

Thanks, really good to see some other comments on Intercede. It’s not discussed much on this site.

Regards
Andrew

abtan

Thank you for taking the time to reply Andrew - very informative and much appreciated.
A

Hi Rambutan2

Thank you also for your in-depth reply re Intercede (LON:IGP)

Yes, I noticed the large number of director buys over the years. I actually found this off-putting - that they found so much value in the company that they always thought it was undervalued, even as the share price kept dropping. A sign of conviction or denial? Based on the comments today and what I've read about the company, one would assume it was the former.
It reminds me of the recent purchases by the UP Global Sourcing Holdings (LON:UPGS) directors, albeit with a rapidly falling share price.

Thanks for your thoughts on delisting - I guess it's always a worry, especially if management think so highly of their own company. I haven't looked at the finances in enough detail, but I wonder how profit would look without the listing fees?

You mentioned recurring revenue. Interestingly that's one of the words I looked for in the last Final Results RNS ("recurring"). There was no mention of it (with regards to revenue), but presumably you've taken your figure from previous announcements. I recall seeing something about licensing revenues, but these looked lumpy and not at all recurring.

Definitely a special situation. It's on the watch list for now.

Thank again
A

Richard Goodwin

Leeds (LON:LDSG) A decent proportion of the profits fall is simply due to exchange rate translation. GM in the main business in Germany is up (as one would hope as they have invested heavily in plant and machinery in recent years with cost reduction as one of the justifications. The chain of shops (management now changed) and Chinese operation have been squeezed.
The company has been cheap for a v long time. The freehold property has been in part occupied by the company for years and is partially rented to a third party although they only took ownership of it in the last couple years so the accounting valuation is likely to be close to reality.

There was a mini share price boom a few years ago when Sunningdale investments bought a large slug of equity but last time I spoke with the Company Secretary Sunningdale had been so passive that they hadn't even made contact. After Sunningdale stopped buying the share price fell back.
Peter Gyllenhammer has been a shareholder for I think 2 decades now and would probably struggle to sell given the lack of liquidity, so I wouldn't see his presence on the shareholder register as a catalyst for change.
I Hold, in part on the logic that it is very cheap and boring, the share price however hasn't really achieved much in the past 5 years so it has been a lesson in why one should pay attention to quality and momentum ranks.

If you are looking for 96% non-sterling-related revenues then this could be a go to stock but I suspect it won't be going to very fast and it doesn't pay a divi

Re Intercede

Hi Abtan, you’re welcome. It’s certainly an interesting company and I hope they prosper. I was really impressed with their client base and hope their technology can go wider.

Kind regards
Andrew

dahokolomoki

The hidden upside about Leeds (LON:LDSG) is their new customers - fashion manufacturers in Europe.

These days, all the fashion companies are using European based manufacturers for their quick turnaround time, in order to feed the consumer demand for styles just off the runway. Whoever can get the style to the shop racks quickest will be able to sell at full RRP to lots of eager fashion followers.

While the likes of H&M, Primark, etc have ridden the wave of "cheap and throw fashion", the next wave is about "fast fashion".

DJCP

As it's a Friday evening, just thought I'd put out my general view on the markets at present.

I'm not a frequent trader (monthly trades at most usually, and annual trades for Mrs), and look here, and elsewhere for ideas, as well as my own "what about that company/sector" to DYOR.

What I have noticed over the past few months, is that I'm finding less to interest me. Graham's analysis is excellent, and makes for interesting reading, but on most companies he comments on I enjoy the write up, and get to the end thinking 'Nope, not for me". Leeds (LON:LDSG) being one from today, that I put on my watchlist straight away for some more DYOR this weekend, read the comments, umm'd and ahh'd, and took it back off.

I'm sitting on a high, for me, percentage (10%) in cash, and have traded Boohoo (LON:BOO) once with some of that (in addition to my long-term holding), but can't see anything to add to my portfolio as a core holding. Maybe I should just consolidate on fewer holding that I'm more convicted to.

It's a case of itchy-fngers, and so far I'm not being tempted to buy for the sake of it. I even contemplated a punt on the GBP/EUR/USD FX this week which is totally out of my comfort zone !

What's everyone else's sentiment to the market(s) in general ? - Frantic trading, Brexit, USA trade wars, UK economy, Global meltdown, or just sit back and relax ?

Have a good weekend all, and hope that hasn't put a dampener on it ! lol
(now going out (to pub) to watch the first PL footy game of the season, so depending on that result, will decided on my grumpiness for the rest of the weekend ! lol, and if Mourinho should have gone on the Frantic Trading route !)

Wimbledonsprinter

I looked at Leeds (LON:LDSG) a couple of years ago - what put me off buying was I struggled to see any sign that the board has a motivation to increase the share price. The shares are so cheap (compared to NAV) that there is little likelihood, that they could ever be used as a currency for an acquisition. The company does not seem to be run in the interests of the minority shareholders. No dividend has been paid, even in 2014-15, when the company was profitable and net cash positive. Instead it decided to spend its resources buying a property in Jan 2016 from one of executive directors (Hemmers) and now the resulting debt is another reason for the lack of dividend.

doug2500

11th Aug '18

That's a great book by Howard Marks that Graham's recommended. Fantastic discussion about risk and one of the best books I've read.

Small Cap Value Report (Fri 10 August 2018) - House of Fraser/SPD, FLTA, FAN, LDSG

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Graham Neary

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