Small Cap Value Report (Fri 10 Jan 2020) - JOUL, SDRY, De-listings, CBUY, TED, JD., BME

10th Jan '20 by Paul Scott

43 comments 8048 reads

Good morning, it's Paul here with Friday's SCVR.

It looks as if there's going to be more pain today for shareholders in retailers, as evidence gathers that only the best had an acceptable period of trading over Xmas.

Estimated timings today - I've done most of the report now, but have to pop out for a meeting. I'll be back after lunch to do some more, so final finish time today is c.4 pm.
Edit at 15:31 - today's report is now finished.

Early snippets - before 8am

I'm not sure whether it's a good idea to be doing this, as my initial reaction to MKS yesterday was not how the market saw things. But let's do it anyway.

Joules (LON:JOUL) - profit warning. 7 weeks to 5 Jan 2020 saw retail sales (stores + ecommerce) down -4.5% vs last year. That's a big step backwards from H1, which saw +3.1% retail sales.

It blames website problems. Stores & concessions are said to have traded in line with expectations. It will be interesting to see how the market reacts to this, but the only question is how big the sell-off today is going to be.

Cost headwinds - due to China-US tariffs, and logistics changes (although that should deliver longer term savings).

In conclusion -

Taking the above into account, the Board anticipates that FY20 Underlying PBT² will be significantly below market expectations³.

Brace for a nasty day, my commiserations to shareholders.

Superdry (LON:SDRY) - this looks pretty grim too, I'll elaborate once the market has opened (it's 07:58 at the time of writing this).

Joules (LON:JOUL)

Share price: 179p (down 21% today, at 09:27)
No. shares: 89.4m
Market cap: £160.0m

Trading update (profit warning)

Background - Joules is a nicely differentiated brand, with distinctive fashion products. To get up to speed, there are some useful articles in our archive, here;

Graham covered the last trading update here on 5 Dec 2019

I covered the last full year results FY 05/2019 in quite a bit of detail here.

Reading through both those articles to refresh my memory, a key point to note is that online is about half of Joules's sales -…

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Martin5760

10th Jan '20

Robbie adds a "higher risk ideas" extra bit on his email to email subscribers - you wont have seen it unless you have subscribed. SPE featured in that extra bit yesterday. He covers a few stocks each time that can be riskier then the steadier shares he otherwise buys. If you attend one of his events you can sign up - for a fee. He may sign up people if emailed.

Paul Scott

Hi cmpeckham,

I read recently that the costs of a public listing are not worth it unless you have a market cap > £100m (of course I can't find the article now).

Yes, I read that article recently, and also cannot remember where it was published, lol!

I think what that article got wrong, is that shareholders won't agree to companies de-listing on a whim, unless there's a very good reason to do so. A profitable, dividend-paying company can't just de-list because the Directors fancy doing it. Providing there's no overwhelmingly dominant shareholder or concert party, then institutional shareholders would surely block any attempt to take a company private.

In terms of liquidity, the problem is fundamentally caused by brokers being lazy when they IPO smaller companies - placing all the stock in lumps with institutions, thus creating a situation with negligible after-market liquidity in the shares. It's crazy. Companies are very naive, in paying huge fees to brokers to float them, whilst not doing anything to create an after-market!

Reversing into a cash shell is a much better way of doing it. Take Sosandar (LON:SOS) for example - it inherited a PI shareholder base, which was bolted on to the new institutions who funded it. Liquidity has been fairly good ever since if floated, because of this.

In my portfolio, I have 2 companies with very dominant (over 50%) management shareholdings - namely £BOTB and Beeks Financial Cloud (LON:BKS) . In both cases, I've carefully assessed (and asked tough questions, repeatedly) the risk of management de-listing, and concluded that it's very unlikely. William Hindmarch at BOTB is emphatic that he won't de-list, and his track record is such that minority investors are treated very well. It's ultimately down to trust in that type of situation.

Whereas, many years ago, FDM (Holdings) (LON:FDM) shafted its small shareholders by de-listing at a low price. That's why I won't touch the company since it re-listed at a much higher valuation - because I don't trust management.

Regards, Paul.

shanklin100

Hi Paul

"This is an ongoing theme, as Card Factory (LON:CARD) did something similar yesterday, by obscuring its LFL performance in Q4, providing only YTD figures instead. This is probably due to PR people trying to be clever. It doesn't work - investors see through it, and it's actually harmful, in undermining trust.

I think the best PR people understand that it's best to get bad news out immediately, truthfully, and in full. Then the share price gaps down, and everyone can move on. When bad news is obscured in announcements, it just undermines investor trust in future announcements (and management)."

Except in tru;y exceptional cicumsyances, as soon as I conclude I cannot trust a management team, I sell the company's shares as it seems deluded to me to do anything else. If JOUL and CARD aren't prepared to be honest and open with us, its a complete bargepole from me.

SDRY may turn out to be a bust but at least their management team has shown a bit of decency to investors.

Best wishes, Martin

homosap

Paul,

Thanks for an interesting list of risk factors in respect of delisting. However, delisting need not necessarily be a disaster if the management are both effective and ethical.

I failed to sell up on the delisting of Norman Hay plc. I could have sold subsequently in the matched bargain market where the price was quoted at 68p a share last year. However, I was never tempted to do so as the business was clearly well run and they continued to churn out reliable dividends.

This year the various businesses were sold on the retirement of the founding director and the initial return of capital dividend I received just before Christmas was £3.71 per share with further payments to follow in the liquidation of the company. I shall have to trawl back in my records to discover the amount I paid for the shares but I doubt it was much more than about £1 per share - so a decent return on my investment.

Of course this is not typical of delisted shares, but if you buy decent companies with decent management and are patient delisting is not necessarily a disaster.

Jeremy - caselaw

Nick Ray

I am curious about the mechanics when a company delists. If you do sell who buys the stock? Presumably there are very few buyers so most of it would end up being held by the market makers. I am sure they have no desire to take a position in an unlisted company, but they are obliged to "make a market". Do they have some kind of back-door to offload this stock or do they write it off?

wildshot

Also worth noting that in each e-mail as he begins this higher risk (exclusive) section he consistently asks for them not to be shared online/bulletin boards/forums etc so it shouldn't really be flagged here as his actions driving a share price.

I wasn't aware you could "buy" into his subscriber list. I'm subscribed through signing up as one of his Utility Warehouse customers.

ricardow

Nick,

My experience is that the shareholders get left with shares in an unlisted company, with no chance to sell them. They are pretty worthless when this happens.

Regards,

Ricardo

cmpeckham

De-listed shares can always be sold on a "matched bargain" basis. Market makers are not involved. In practice this only works if either there is a large block that is actively marketed, or if some party instigates a scheme to buy them. As I said in the comment above, this can be used by the company itself to buy back shares on the cheap, so providing an incentive to de-list.

dscollard

Re Delisters.

I did cover a bit on delisting in the IPO articles I wrote lat year

https://www.stockopedia.com/co...

There is also another study from 2019 which suggests that delisitings are on the decrease (see plot below)

5e18a721812c4aim_deslisitng_2909_to_2019

That said I am just finishing an article looking at performance in 2019: nearly 40% of AIM Stocks made 10 year or all-time-lows in 2019 . That is hopefully indicative of a turning point from a capitulation low and not the prelude to a slew of delistings

I'll post a separate article on Stocko on the above though it will be available with the 60 odd page interactive data report on runprofits.com from later today

JonBirdy

£Dis has been discussed a lot here but at a market cap of £.3.5 million it seems to me to be a delisting risk. However it has just 30% ownership amongst larger shareholders with some very recent institutional buying. Largest holder is a private investor at almost 11%.

(No personal position)

portugull

I could not listen to today's Webinar due to a prior engagement even though I registered. Does anyone know if a recording is available?

doug2500

I bought Norman Hay in 2010 for 80p and sold pre delisting 6 months later for 57p, which if I remember was quite a discount to the price pre announcement.

I've always kicked myself as I thought it was a good company and often wished I'd just held onto them. I now have my answer....at 371p 9 years later I should have held.

rmillaree

Ref delisting i have held a couple of "proper" delisting stocks that were companies making profits (blips aside) when they delisted (i have had a couple of rank cowboys too but that's another matter)

Both these companies offered a third party matching solution whereby one could advise that you wanted to sell (or buy) and then if a match was found in theory the shares could be sold. Practicably speaking i don't think there was much action going on there.

Both the companies after to de-listing subsequently did tender offers to try and buy back the shares from shareholders at a price well above the price when they dislisted. One of the companies was subsequently acquired for over 5 times the delisting price (Just car clinics) which was a nice outcome - other than the fact i had tendered a wad of my shares at a lower price. The other company touchstone group plc is paying decent dividends 10 years later - i think the de-listing price was 28p ish and the dividend in the latest year was 11p - so the dividends in the last 10 years have been a great return compared to the price at time of delisting.

To be fair to those companies it was reasonably evident the reasons for delisting were genuine and there was no specific indication that i though the main shareholders were trying to do this to screw anyone over. I probably would be less likely to hold after de-listing if i thought the main shareholders had dubious morals.

MichaelFBS

Tony

available at

https://events.genndi.com/replay/169105139238459639/b8409147e4/0/0

Top Picks at https://www.stockopedia.com/challenge/top-picks/

Slides at http://assets.stockopedia.com/webinars/2020-stock-picks-webinar-slides.pdf

Full report at https://assets.stockopedia.com/webinars/topstocks2020.pdf

SundayTrader

re Joules (LON:JOUL), I would have thought, naively, running out of stock was a better problem to have than having too much stock because no one will buy it, which is the Superdry (LON:SDRY) problem. Joules (LON:JOUL) is a fashion brand, isn't it? I thought the business model was all about holding as little stock as you can get away with. If they were running out on some items over the Christmas selling season, maybe it is a straw in the wind that the sector could be turning. I don't hold, but Joules (LON:JOUL) looks a plausible recovery bet to me.

Much appreciated purpleski.

Gromley

I think the other answers are to a slightly different question.

What I am pretty sure you are asking Nick is about transactions that happen whilst the company is still listed - ie between the announcement of the intent to de-list and the event itself actually happening.

Even after the 50%+ price collapse that often ensues most just want to sell at any price rather than be faced with a minority position in an unlisted company.

But as mentioned by others, holding shares in an unlisted company is not necessarily a disaster and some investors have an appetite for such investments (especially at such a large discount) - I'm guessing mostly institutions and funds.

If I remember correctly, you can ask a company (listed or not) to examine their shareholder register and I think the legal presumption is that they should comply unless they have very good reason not to. So if anyone was particularly interested, it might be instructive to ask to see the shareholder register of a recently de-listed company. (if my recollection that unlisted companies are covered is correct).

Yes - I meant the trading that happens between announcement and delisting. The market makers are obliged to quote a price but they are facing a point in time when the shares are no longer publically traded.

It looks though that even for private companies there are ways to trade and presumably the MMs can use these routes to slowly get rid of the shares. I guess there are worse situations where everyone is heading for the exit and the company looks to be unlikely to survive (but not yet confirmed) and the MM is bravely still offering a price (even though it will be minuscule!)

Berksbee

17th Jan '20

B&m European Value Retail Sa (LON:BME) Hi Paul, one of my holdings so would appreciate your further investigation. From everything I know the market over-reacted to the trading update. They are a bit of a Primark for Homewares if that makes sense and from everything I read pretty well managed.

Rusty2

I do visit one or 2 B&M European Value Retail SA (LON:BME) shops as close to me, some items are pretty cheap compared to some supermarkets, I don't buy very much there at all, just the odd item. They improved the stores near me, about 4 years ago, mind you they need it but since then hardly anything has changed. For homewares it's definitely at the cheap end of the market, I think they have quite a bit of competition from Dunelm (LON:DNLM) and Range which both have shops close by. I was impressed with Range some interesting items at reasonable prices. At the tills in B&M seems most people are just buying a few items. I think there is plenty of room for improvement. The shops are like a shed, ie a DIY type store, they tend to be out of town.

Small Cap Value Report (Fri 10 Jan 2020) - JOUL, SDRY, De-listings, CBUY, TED, JD., BME

Joules (LON:JOUL)

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Paul Scott

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