Small Cap Value Report (Fri 11 Oct 2019) - QUIZ, XAR, IFRS 16

11th Oct by Graham Neary

11 comments 4534 reads

Good morning, let's take a look at:

QUIZ (LON:QUIZ)
Xaar (LON:XAR)

Not sure if there is anything else worth covering. I might just add a few thoughts on IFRS 16.

QUIZ (LON:QUIZ)

Share price: 16.18p (-3%)
No. of shares: 124 million
Market cap: £20 million

Trading at Quiz is "broadly in line with the Board's expectations against the backdrop of a difficult UK retail environment".

This means a slight miss against expectations.

Revenue is down 5% in H1, with flat gross margin.

Online revenue is flat, but the company provides an adjusted measure which says that online revenues grew:

Online revenues grew by 7% to £20.0m (HI 2019: £18.7m), once adjusted for unprofitable revenue streams terminated during the year. Total online revenues in the previous period were £20.0m, consistent with the current year.

Store sales growth, unsurprisingly, is very poor, but at least the second derivative is ok!

Sales in the Group's UK standalone stores and concessions decreased by 11% to £31.3m in H1 2020 (H1 2019: £35.1m). The rate of decline experienced has reduced in recent weeks.

It would be nice to have clarity on whether we can use this 11% decline as a like-for-like figure.

Lease length is reported to come in at an average of 26 months, unchanged versus what the company reported in June. "Actively managing" its lease renewals is a key element of its turnaround plans.

International sales (comprising Ireland, Spain and other countries) are up 3% despite declining sales in Ireland.

Net cash is £7.1 million and cost savings of £2 million - £3 million are being pursued

My view

I still can't get over the speed and the scale of the collapse in valuation. This IPO'd at 161p a little over two years ago.

Full-year results to March 2019 confirmed that profitability had all but disappeared. Quiz reported £4 million of EBITDA and a small positive underlying PBT, but the actual PBT was only around breakeven.

With sales declining by 11% on the UK High Street, I would expect a significant deterioration in PBT in the current year.

The short average lease length offers some hope that the company can find a way out of its predicament, but this is far from guaranteed.

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MrContrarian

11th Oct

My morning smallcap tweet: Quiz still has no answers

QUIZ (LON:QUIZ), SDCL Energy Efficiency Income Trust (LON:SEIT), Amphion Innovations (LON:AMP)

Quiz (QUIZ) H1 trading broadly in line with the Board's expectations with rev down 5%, ties to sound positive in outlook. I hold.
SDCL Energy Efficiency Income Trust (SEIT) placing at 103p, a 6% discount. NABV is 99p/sh.
Amphion Innovations (AMP) lender sells AMP's Polarean Imaging to clear debt secured on such. "Directors had hoped to avoid significant sales of Polarean shares whilst Amphion considers both its short term and medium financing options...Amphion remains highly cash constrained."

Zipmanpeter

Re £QUIZ – I think H1 trading update suggests the business is slowly rediscovering its mojo, despite overall revenue down 5%.

IMHO new product on the website looks better (for its target market) and its focused back more single-mindedly on glamour for women. Financially, %GM is good at 61% with cost savings further down the income statement starting and expected to come through.

UK stores remain the obvious problem, down -11% at £31.3m. But since ave. lease is only 26months this should trade away via closures/re-locations or rent reductions. In contrast, online was claimed at £20Mn, +7% LFL on continuing lines and 12% via Quiz’s own websites. International was slightly up +3% at £12Mn. In other words, the business is pivoting to online fast. in 18months, what will be left will be mostly online plus fewer still profitable stores and some international sales.

However, IMHO (ex Mkting Dir), the real issue remains brand image and Marketing. Brutally, they need to decide if they are focused on “lamb or mutton”. Lead ambassador really sells the brand and awareness in young fast fashion. For Quiz, this remains Sam Faiers (ex TOWIE, now doing “The Mummy Years” on TV – QED!). For the young, she is too old IMHO and yesterday’s news; my fashion aware 17 year old son said: “Who” when I asked him about her.

In contrast, watch how BooHoo PR are driving last season’s Love Island stars Amber Gill (MissPap) and Molly Mae (PLT)…and how ruthlessly fast they will drop them in 2020 when new stars hit. I know they have the bigger budget but there seems little creative marketing innovation and interesting content, for example, in the QuizQueen Instagram posts. This is what drives likes and retweets . Same Marketing money could be used better.

I know Paul rates owner, Tarak Ramzan, who is still the major shareholder, as an experienced rag trader (who made a fortune floating the IPO at the right time!). However, full QUIZ recovery will require him to find and work with someone who can drive modern marketing for the business. Still waiting to see if he has this skillset.

If he does, this share could come back a long way or be taken private ! The scale and platform is there already and the business is cheap at 0.64 of Book Value, an EV/EBITA of 3.1 (Stocko figures).

sharmvr

Indeed it is a slow day.
Ideagen (LON:IDEA) announced an acquisition today so a review of that company might be interesting - perhaps it is just me, but certainly not a company I would invest in - the accounts don't make comfortable reading.
8% organic growth, actual EPS some 20% of adjusted EPS and low margins.
Receivables piling up, development costs capitalised and regular share issuance.
I am not sure why the market rates it so highly.
Probably sour grapes, since I sold it at about 85 being uncomfortable with the development of receivables profile.

Separately, the market and £ seem to have come to life - que passo??

john2

Que passo? The Irish PM and Donald Tusk are making optimistic noises about the possibility of a Brexit deal.

Lincoln Green Imp

Cantab, yesterday was interested to know what other investors are thinking about the markets. In the past few months my shares have not been doing very well at all. in fact my best investment lately is a very long, lovely green sofa from IKEA called 'the Mogg.' Relax.

I think UK shares are not overpriced and might move up if the uncertainty of Brexit is resolved. But James Bartholomew (Telegraph 5th Oct) wrote a good column suggesting if it comes to a 'No Deal', it would scare international investors. They would probably sell the pound and British shares and present a great buying opportunity.

However, Matthew Lynn (Tele 8th Oct) wrote a good article suggesting the next decade, could be poor for equities.

Guessing games. Oh well, I think I might go and have a lie down on my sofa.

psin

slow day? market rising/brexit noises? yes please.

leishylegs

Hi Lincoln Green Imp,

I think it just goes to show how no-one can accurately predict the future of the market and we should be positioned according to our own risk appetite and so forth.

The latest Hussman Funds newsletter is just out giving their take on the US markets. It makes for interesting reading, albeit a bearish take on future equity returns. For anyone interested, the link is here: https://www.hussmanfunds.com/c...

I also value Howard Marks's Investing Memos and his latest thoughts can be found here: https://www.oaktreecapital.com...

For my part, I am currently the most defensively positioned that I have been in many years - 70% cash. I recognise the opportunity cost to me but I can at least sleep easy at night and if opportunities do present themselves in due course then I will have a decent war chest to put to work.

Richard

Was being sarcastic, but I do appreciate the response - guess it is the same dopamine hit kids get when someone likes them on instatwit!
Vive le tunnel!!!

JGG

If one holds housebuilders and banks this is a spectacular day with average rises of 10% across the board - against background of FTSE100 rise of only 0.3%.

ACounsell

Hi Graham,

Good to see you comments on Xaar (LON:XAR). I posted a few thoughts during September as the 'car crash' developed! Your analysis is pretty consistent with my view and I suspect survival will be something of a miracle turnaround. Also to pick up on a favoured topic of Paul's Xaar (LON:XAR) were capitalising a significant amount of R & D relating to their Thin film printhead programme in the belief it was a technology that would generate significant future sales. Clearly this was a major strategic error by the now departed management team given the £39m they have now written off as a result of that failed programme. Would seem to demonstrate that there is a lot of subjectivity in the accounting for R & D where here it arguably inflated the P/(L) in previous years only to require a massive impairment hit when the project failed. Unfortunately I didn't get out soon enough and will now sit tight more in hope than anticipation!

steve7673

5th Nov

Graham, Your comments about lease liabilities and IFRS 16 are spot on. However, watch out for retailers such as Tesco (LON:TSCO) who have previously signed up to inflation linked leases - the expected inflation uplift is not included in the lease liability.

See https://www.footnotesanalyst.com/beware-the-ifrs-16-inflation-headwind/

Small Cap Value Report (Fri 11 Oct 2019) - QUIZ, XAR, IFRS 16

QUIZ (LON:QUIZ)

My view

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Graham Neary

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