Small Cap Value Report (Fri 10 Sep 2021) - FUL, MTC

10th Sep '21 by Paul Scott

56 comments 7026 reads

Good morning, it's just Paul here with the SCVR for Friday, thankfully a quieter day for news, in a very busy week.

Today's report is now finished, because it's quiet, and I want to spend the afternoon visiting the Malta At War Museum!

Agenda -

Paul's Section:

Fulham Shore (LON:FUL) - a positive trading update, with recent sales showing a strong trend. Ambitious expansion plans are underway. Shares look pricey, but that reflects the growth in the pipeline, with many new sites being offered by landlords on attractive terms, hence an excellent time to be expanding.

Mothercare (LON:MTC) (I hold) - a strangely worded trading update, but seems to be saying that trading is improving. Remember it's a franchise businss now, so much simpler. However, the pension scheme deficit recovery schedule looks set to absorb all the profit & cashflow. Hence it's questionable whether the equity has an value at all?

Explanatory notes -

A quick reminder that we don’t recommend any stocks. We aim to cover trading updates & results of the day and offer our opinions on them as possible candidates for further research if they interest you. Our opinions will sometimes turn out to be right, and sometimes wrong, because it's anybody's guess what direction market sentiment will take & nobody can predict the future with certainty.

We stick to companies that have issued news on the day, with market caps up to about £700m. We avoid the smallest, and most speculative companies, and also avoid a few specialist sectors (e.g. natural resources, pharma/biotech).

A key assumption is that readers DYOR (do your own research), and make your own investment decisions. Reader comments are welcomed - please be civil, rational, and include the company name/ticker, otherwise people won't necessarily know what company you are referring to.

Paul's Section

Fulham Shore (LON:FUL)

18.15p (last night’s close) - mkt cap £113m

Jack published an excellent, and thorough review of the FY 03/2021 results from this casual dining chain(s), here in August. I’ve just read that, to get up to speed.

Trading Update

Accelerating momentum and continued expansion

Revenue growth is accelerating, which is clearly good news -

Since the Group's Final Results announced on 17th August 2021 Group revenues have continued to grow. In the three completed weeks since…

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ken mitchell

10th Sep '21

TGI and Hotter listing was expected in 3rd quarter which ends soon. It seems Hotter is now not until 4th quarter. No news on TGI by now is surprising. The sooner they do it the better imo. Current headwinds like wage increases, staff shortages, supply issues etc could get worse. The Electra Private Equity (LON:ELTA) share price has fallen back. Isn’t an update on this well overdue?

Surrey Steve

Hi Shamusj

I note below Paul's comments on Burford Capital (LON:BUR) but I have just completed my review (I hold).

H1 to 6/21. Key features from financial statement review:
1. BUR only capital provision income $68.5m (H1.20 $251.1m) as a result of lower activity in the period due to Covid leading to lower levels of realised and unrealised gains in the period. The unpredictable and irregular pattern of income is part of what enables BUR to earn outsized long term returns. Appears that all of the consolidated capital provision income in the period was realised [Financial Review]
2. Non-cash accrual of "carry" compensation $84.9m includes historic catch up; without this would have been a very small profit reported for H1 (EPS c$0.03). Unclear how much of the total accrual relates to H1.21, [Appears that the previous non-accrual of this cost is a mistake which has come to light as part of the evaluation of the switch to US Gaap]
3. Fully diluted NAV $7.22 /share
4 ROIC quoted at 95% on concluded capital provision cases since inception. Financial Review gives further analysis: Adjudication Gains $939m recoveries 49% IRR 248% ROIC; Adjudication Losses $17m recoveries -81% ROIC; Settlements $782m recoveries 31% IRR 46% ROIC; giving overall $1,738m recoveries 49% IRR 30% ROIC;
5. Covid has imposed timing delays which will likely benefit BUR in long term
6. New records for capital commitments totalling $503m consolidated & capital deployments totalling $398m consolidated in H1.21
7. Akmedov case settled yielding a July 2021 cash payment to BUR of $103 million (in addition to the more than $5 million already collected) and a realized gain of $73 million, a 233% ROIC and a 71% IRR on a USD basis. This income included in income statement net of costs incurred ($30m) as a realised gain with the reversal of previously recognised unrealised gains ($24m). Not explicitly stated but appears to account for the bulk of the H1.21 capital provision income (49v69).
8. Own capital targets c25-35% IRR with 2-5 year weighted average case length; external fund capital targets c15-20% IRR with 1 year weighted average case length
9. Liquidity - $1bn of unfunded capital commitments are disclosed but stated as being discretionary $0.5bn and $0.4m definitive with $0.1bn being legal risk management (drawn over time). These should be balance by future realisations and $430m of cash management resources at 30/6 together with additional capital sources (debt and potentially equity)
10. Little mention of Petersen other than "our capital provision-direct ROIC since inception would have been 70% and our IRR 25%" excluding the YPF-related assets and that $775m is their 30/6 carrying value
11. Of the 30/6 settlement receivables of $131 million, $103m was Akmedov which was collected in July
12. Interim dividend of 6.25c is expected to be half of the total for the year

As always, I will be interested to hear the views of others

turbo

Mothercare most 'underappreciated' opportunity in UK retail - Shore Capital

** Shore Capital reinitiates coverage of Mothercare Plc with 'Buy' rating and fair value of 23 pence; adds MTC is most underappreciated opportunity within brokerage's UK retail coverage

** Over next year, brokerage expects baby products retailer to return to high single-digit EBITDA margin

** "The value in MTC equity is not in the rear-view mirror, it is very much in the windscreen," says Shore Capital; adds they believe MTC's brand position will help its franchisees

** Brokerage says co's 15 mln pounds ($20.81 mln) EBITDA target is achievable by 2024 and expects MTC to be debt-free business within 5 years

** YTD, MTC is up ~51%, outpacing UK mid-cap index's .FTMC 16.40% gain

garbetklb

Electra Private Equity (LON:ELTA) - there's due to be a Capital Markets Day on 15th Sept (Wednesday next week), focussed on Unbound (Hotter Shoes). So wouldn't be a surprise if Hostmore (Friday's) float is imminent.

Mothercare (LON:MTC) - "debt free". Suppose it depends how you define the pension deficit........

mojomogoz

Pcf (LON:PCF) - endgame -> the Caribbean based family office that is majority holder of the shares will take private and refinance. So PIs have plugged in the cash to create the business growth and now the owners who lent it out to PIs for a bit of fun take it back and keep all the value created. Did the old CEO know the endgame? Ummm...he's been there a long time (associated with prior mistakes too). And seemed ready to make a sharp getaway too (I believe he literally flew the coup). Where is he now?

They will offer some pennies for your shares.

If the scenario above occurs (I've been predicting for at least couple of years) then the FCA should investigate. But they wont.

PCFs approach to growth and lending has been clearly reckless for a while

anothersaxman58

sh*t job but someone's got to do it.

rmillaree

Burford Capital (LON:BUR)

2. Non-cash accrual of "carry" compensation $84.9m includes historic catch up; without this would have been a very small profit reported for H1 (EPS c$0.03). Unclear how much of the total accrual relates to H1.21, [Appears that the previous non-accrual of this cost is a mistake which has come to light as part of the evaluation of the switch to US Gaap]

Does it not bother you that they can suddenly find huge adjustmemts for such large sums - do you realy think its a "genuine mistake" that previous profits have presumably been overstated to this sum total? It either suggests they have an aggressive revenue booking philosophy which is starting to catch up with them or they have poor internal controls. They are meant to be a bunch of smart bods here - getting silly stuff like this "wrong" while at the same time being flagged up as "dodgy" by people like muddy waters must perhaps make one wander if there may be other similar "issues" that have not come to light yet.

Note if we look at the balance sheet and look at the "Capital Provision Asset" which i am presuming is their wip/debtors/ stuff that is valued at $2.4 billion - opk say 20%$ of this turns out to be stuff they never get due to "aggressive acounting" and thats $500 mill - add the catch up w/off and thats probably $600 mill which is probably over half the profits they have booked to date. Lets be frank here they are internally booking what they see fit as profit and that amount is stacking up to a huge sum on thebalance sheet that they "prey" will be turned into cash later. I have no reason to believe everything isnt tickety boo but the history of companies "capitalising" similar stuff whilst saying "it will be all right on the night" when its not is probably quite a long list and therefore some decent "risk discount" must be applied here if one is taking the punt. Strangely i have been tempted acouple of times when it has looked like it was at or below asset value - but if i took a punt here and lost my shirt the only place i would be pointing blame is in the mirror.

Pcf (LON:PCF)

You have certainly done a great job at pointing out the dangers here mojomogoz - hopefully one or two bods more sensible that me paid heed to your warnings!

shamusj

The non-cash accruals are most from the carry value of the large YPF asset. Remember, that this is only realised if the cash is realised which is currently estimated to be over 700m (i.e. greater than 10X the expense).

The addition of the non-cash accrual for US GAAP reporting gives the illusion that they have suffered from some new additional expense which is not the case.

Hi rmillaree

I do agree that 'getting silly stuff like this "wrong" ' is disconcerting and rather than brush it off, I personally would have felt happier if they had admitted a mistake or at least a revision to best practice

Having said that, given that there have now been 3 CFOs since the Muddy Waters report and I'm sure that the external audit team has been refocussed as a result, I do feel reasonably confident that the accounting is now up to scratch.

Burford Capital (LON:BUR) is I suspect not managed according to its published financials but on a case by case basis. The aggregate of the concluded cases gives an encouraging picture and until the Petersen case falls into this category there is going to be a high level of subjectivity.

Burford Capital (LON:BUR) is a High risk position within my pretty well diversified portfolio but I continue to hold in the hope that it will also be a big gain.

Steve

Paul Scott

I'm never envious of superyachts! The annual maintenance costs are typically 10% of the purchase price. So whoever owns that gin palace (probably a Russian or Saudi crook!) is bleeding cash, which creates work for plenty of other people. All good! :-)

Hi Zipmanpeter,

Have a look at the Friday's CMD presentation slides & video (apologies if you have already), there's a lot more to it. I think we might have discussed this before, it's ringing a bell.

Anyway, I'm not looking for a "pop" as you put it - best not to put words into my mouth if you don't mind, it's a bit irritating when people do that.

I've repeatedly said that I see Electra Private Equity (LON:ELTA) (I hold) as a long-term thing - I really like both businesses - Fridays, and Hotter Shoes, and would want to buy both if they were IPOs. The fact that ELTA gives me a super-cheap (as I see it, and compared with fresh IPOs) entry price into both, is superlative.

Anyway, let's see what happens. The price of both shares this time next year, or beyond, is what interests me. I'll close my eyes & ears in between, as anything could happen!

Best wishes, Paul.

Hi Ken,

Why is everyone so short-term these days?

We're not buying this quarter's earnings, we're buying all earnings for the rest of the company's life.

Fair point Paul but I’m a very patient investor but accept that my post suggested otherwise! The key point was that investors had been told it would be in 3rd quarter and if that’s no longer the case ELTA shareholders should have said so by now. But as garbetkcb replied there may well be news on the 15th.

A reason why the sooner the better is the risk of new vaccine resistant variants and risk of market falls , and renewed lockdowns, which would make TGI a less attractive proposition.

11th Sep '21

Hi Roger,

Hi Paul, re ELTA and TGI Fridays, is your perception then that TGI Fridays is a good company? I have never been to one but my son (aged 33) and his girlfriend are both of the view that it's a tired brand. They did say, though, that they only know the London ones.

I want to anticipate every aspect of life. ZZ Top are my favourite BAND. cAN YOU sip wine, and have to cancel? I got the six!

Burgers are so obscebe, I got the six!

Cheese, Paul.

Chris HM

Love the idea of you doing this from various spots around the globe. We get a combination of financial insight and travelogue. Brilliant. Where to next?

Andrew Collier

How does one "Not get Round To Selling"

Zipmanpeter

17th Sep '21

Paul - my apologies and I fully accept your justified 'pop' at me for implying you/starting were after a 'pop' at IPO - you have been consistent that you see/want Electra Private Equity (LON:ELTA) as long term!

Sloppy writing on my part. I should generically have said "one might see" (although this makes me sound like the Queen).

Finally, thanks for writing about £ELTA - I have been through the presentation decks and I really like the look of Unbound if not Friday's.

I learn so much from this column & related discussions and I am so impressed you can write so much so well so quickly....with so few errors like mine here.

Sounds patronising (more rushed writing by me ?!?)...... but please keep up the good work - it's enjoyed and appreciated and has built such a great community blog.

gus 1065

24th Sep '21

Footnote to the Fulham Shore (LON:FUL) write up, a combination of directors and employees have exercised various share options and sold a fair chunk of these and other holdings (about 3.7% of the issued share capital) today (24/9) in a placement at 18p. Full details in this RNS which was followed up subsequently with confirmation that the placement was successfully completed.

https://www.investegate.co.uk/...

Seems to be a fairly comprehensive statement by a cross section of the company’s directors/ employees that the shares are fully priced at the moment.

Gus.

Small Cap Value Report (Fri 10 Sep 2021) - FUL, MTC

Paul's Section

Fulham Shore (LON:FUL)

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