Small Cap Value Report (Fri 15 Mar 2019) - IRV, BOO, RTN

Monday, Mar 18 2019 by

Good evening/morning, it's Paul here with the usual placeholder.

I'm hoping that there won't be much news, as I have to go into the City for a lunch.

The way things are panning out with the Brexit shambles/deception, I think it's becoming pretty clear that it's likely to be deferred, perhaps indefinitely. Therefore, I'm starting to think we might see some confidence begin to return to small caps. For that reason, I'm building up a shopping list of irrationally over-sold small caps, with a view to pouncing, once buyers begin to return.

I think we might begin to see some nice uplifts, on positive newsflow from now on, as buyers return.

Offset against that, I'm worried that open-ended small caps funds might be suffering redemptions, and hence need to sell stuff even if they don't want to. Having been through several bear markets before, I've seen how funds tend to sell whatever they can, rather than what they want to sell.

Another quandary, is whether to hold on to highly-rated small caps which have avoided the sell-off so far? Or whether to ditch them, on the basis that in line results probably won't deliver any further upside, but even a slight disappointment could trigger a plunge?

Whatever you do, don't fall into the trap of thinking that your brilliant stock picks are impervious to a bear market - pride comes before a fall - as I've learned the hard way!


It's game over here. It looks as if shareholders over-played their hand, and the debt providers just wiped them out, with a pre-pack administration. Note this announcement after the market close, which starts of by saying;

Administrators have been appointed to Interserve Plc (in administration) ("Plc") and the completion of the sale of Plc's business and assets (i.e. the entire group) (the "Group") to a newly incorporated company to be controlled by the Group's lenders has occurred...

The new company is being refinanced through new equity (replacing the old debt), plus additional funding.

This looks by far the best route to take, as it avoids disruption to customers & employees. As for existing equity holders? Well, they're irrelevant. Once any company/group is overwhelmed with debt, then the equity holders rank behind debt holders. Hence shareholders lose control of the situation if they are not prepared to stump up…

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Interserve Plc is a United Kingdom-based support services and construction company that offers advice, design, construction, equipment, facilities management and frontline public services. The Company provides a range of integrated services in the outsourcing and construction markets. It operates through three segments: Support Services, Construction and Equipment Services. The Support Services segment focuses on the management and delivery of operational services to both public and private-sector clients in the United Kingdom and internationally. The Construction segment offers design, development, consultancy and construction services for building and infrastructure projects. The Equipment Services segment operates globally, designing, hiring and selling formwork and falsework solutions for use in infrastructure and building projects. It provides outsourced services in sectors, such as hospitality, leisure, education, defense, retail, and oil and gas across the Middle East region. more »

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The Restaurant Group plc is a United Kingdom-based company, which operates multi-brand casual dining restaurants, pubs and Concessions business. The Company operates over 500 restaurants and pub restaurants. The Company's principal trading brands include Frankie & Benny's, Chiquito, Coast to Coast, Brunning and Price, TRG Concessions, Firejakcs, Garfunkel’s, Joe’ Kitchen and Wagamama. The Company's Frankie & Benny's brand offers classic American and Italian style food and drinks. The Chiquito menu offers a range of authentic Mexican and Tex-Mex dishes. The Coast to Coast offers classic American food, such as double burgers, stone-baked calzones, distinctive steaks, amazing seafood dishes and South-West American specials. The Company also operates a concessions business, which trades principally at the United Kingdom airports. more »

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Boohoo Group PLC, formerly plc, is an online fashion retail group. The Company is based in the United Kingdom and has a presence in the United Kingdom, the United States, Europe and Australia, selling products to almost every country in the world. The Company owns the boohoo, boohooMAN, PrettyLittleThing, Nasty Gal, MissPap and Karen Millen and Coast brands. These brands design, source, market and sell clothing, shoes, accessories and beauty products targeted at 16-30 year old consumers in the United Kingdom and internationally. more »

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49 Comments on this Article show/hide all

sharmvr 15th Mar 30 of 49

In reply to post #458408

And unless their employees are as tax efficient as them, they are probably paying a fair was themselves, especially the top sales guys.
I try to minimise my tax bill, so I feel it a little hypocritical to criticise those that do it better!

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Trident 15th Mar 31 of 49

Re: £RGB

I wonder if Paul is averaging down his RGB holding ( I think he did suggest he would buy more)? A 14% increase in price based on a decent volume today.

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sharmvr 15th Mar 32 of 49

In reply to post #458398

Certainly not disagreeing there, although part of the special relationship is actually a special transaction when UK gave up naval bases to US to get support during WW2.
Lehman moved a few billion across to US with the UK company a creditor to US / Group.

My biggest issue with tax is deductibility of losses. Fine when you are a genuine start up, but something like Amazon with a proven model, "invests heavily" and incurs losses to gain market share and then offset profits against historic losses once they bankrupted the competition.
I don't consider this to be much fabled risk taking entrepreneurship, but rather using capital as the source of competitive advantage.

Great chat and great weekend guys.

As far as stocks are concerned, I am considering adding to Zotefoams (LON:ZTF) and Sopheon (LON:SPE) ahead of results next week - 15 mins to make a decision!

Disclosure: hold FB and Alphabet among tech behemoths

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Trident 15th Mar 33 of 49

In reply to post #458408

I agree the 'simple' argument and focus is on Corp Tax. Whilst not dismissing it, there should be some way to demonstrate the total taxes paid to Govt. by Company, to prevent a general left wing side swing at capitalism based on ignorant ranting.

This could be stated as Employers NI, Employees NI, Business taxes, Insurance premium taxes, VAT, Apprentice Levy, Pension enrollment uplifts (perhaps that one might be a bit complicated!), Capital Gains.

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simonp56 15th Mar 34 of 49

In reply to post #458448

Trident, not sure it’s correct to say companies pay VAT. They do collect it but it’s borne by us, the end consumer.
I agree with the general point though. The level of reporting on the Beeb of business matters is ridiculously populist, focussing either on the millions of profits made by big companies or on the lack of corporation tax they pay.
There is no nuance to the reporting.

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Wimbledonsprinter 15th Mar 35 of 49

In reply to post #458448

Trident I am surprised more companies do not provide total tax transparency. The only one I have seen do it is Bonmarche Holdings (LON:BON) (see p31 of 2018 annual) which with £8m of PBT paid £17.7m in tax - of which only £1.6m was corporation tax - the 4th largest tax item. The top 3 being: business rates, import duties and employer NICs. Bonmarche also discloses it collected on behalf of HMRC (but paid by others) a further £17.3m (in VAT or Employees’ PAYE/ NICS).

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clarea 15th Mar 36 of 49

In reply to post #458208

Hi see the comments bit on yesterdays report for Paul's thoughts on FCCN,

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Luthrin 15th Mar 37 of 49

The Guardian reports that a latest progress report from KPMG, the administrators of Patisserie Holdings (LON:CAKE), has concluded that the company's accounts had been overstated by approximately £94m, more than twice the previous estimate.

The breakdown of the new sum: cash overstated by £54m, payables understated and receivables overstated by an aggregate £17m, and a £23m discrepancy in asset valuation.

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Aislabie 15th Mar 38 of 49

In reply to post #458463

While you are correct that the eventual buyer pays the VAT without any offsetting input, companies are of course liable to remit the VAT that is relevant to the uplift in value they have created. The creation of this uplift is what companies must achieve to survive and - as we know - is no small effort.
The payment of corporation tax and whether it is “fair” is not really the right starting point for this important debate. We have to ask what we want companies to do for us.
Is it to :
- create jobs?
- raise pay?
- pay for the use of space?
- buy local goods and services?
- build the capital wealth of its owners?
- provide a source of our security?
And so on and so on.... and then give us some of it’s remaining annual profits in Corporation tax?

This gets us into arguments such as - if a company pays its staff more but then cannot pay so much corporation tax, is this good or bad?
When a company pays for acres of space, spends deeply in the local community and acts with transparent corporate governance are these expenses ones we approve of or would we rather they paid corporation tax?

As you will gather I believe that CT is a helpful tax which comes down - very well down - my list of what I would want companies to spend money on. I think it should be scrapped.

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DJCP 15th Mar 39 of 49

In reply to post #458493

@Luthrin (#37) re Patisserie Holdings (LON:CAKE)

I've not read the article yet, but £94m overstated !.

PBT For last 4 years (since IPO?) 2014-17 = £10.4m, £14.6m, £17.2m and £20.1m
Total = £62.3m
(Not checked against ARs)

So, have they ever been profitable post-IPO ?

Not only are the sums involved now quite astounding and the way they've increased since the £10m black-hole days, but the length of time it has (probably) been going on, with little, or no hint of anything this drastic.

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xcity 15th Mar 40 of 49

In reply to post #458518

We have no idea what the timescales are. They may not have been profitable for a long time OR the money may have been sucked out - and recently. At this stage we don't know.
Seems discovery started with the unpaid tax notice, quickly followed by finding no cash and later by finding unknown overdrafts.
And now it seems that virtually everything was wrong. The accounts are false because the balance sheet isn't what was stated. Nothing yet to suggest that they have been able to track back through prior year P&L.
If current owners are saying that they are trading profitably now (and that's with most of the stores remaining) then that seems to point to money leaking out somewhere before.

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Nick Ray 15th Mar 41 of 49

In reply to post #458528

If current owners are saying that they are trading profitably now (and that's with most of the stores remaining) then that seems to point to money leaking out somewhere before.

Don't know about the other parts of Patisserie Holdings (LON:CAKE) but Philpotts is a fantastically successful business. I'd be happy to buy that one myself!

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Richard Goodwin 16th Mar 42 of 49

In reply to post #458448

Although) Apprenticship levy is technically a tax the firm can get back more than they are taxed so really you would need sufficient transparency to get a net figure.

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hayashi22 16th Mar 43 of 49

In reply to post #458518

Re Patisserie Holdings (LON:CAKE):.surely the auditor Grant Thornton must face consequences for their failed audit process. The senior people should be having their collars felt.

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Trident 16th Mar 44 of 49

Other technical, but non-tax obligations, Maternity Pay, Paternity Pay, Sickness Pay. All have some measure of offset against tax, arguably, so it becomes a messy discussion, but Govt's see companies as increasing vehicles for social support, and these non tax obligations take their toll on organisations.

Also, with labour laws despite the fact that we may mutually agree 1 months notice on our contracts, after two years employment, only one side can really give 1 months notice, the other has to prepare the ground to dismiss fairly, which can means months of faffing around. Now, where there's a will, there is a way to get there in the end, but this is at least fiscal drag. Then there may be redundancy payments etc.

Increasingly with a massive growth of compliance and GDPR related matters,companies are spending quite a bit of time. responding to lawyers queries etc,

This is really the bit of the iceberg that is fiscal drag that doesn't get seen by the public, and the truth is that the bigger you are the more resources you have to respond, but for small companies it is impactive.

Next small companies will face issue about sub-contractors, and another bucketload of potential liabilities coming down the tax pipe.

It is really all very wearing, and disheartening. So tax is an important element but it isn't the only element and the Govt legislation machine keeps churning stuff out without pause.

Sorry if this has veered off topic, but its cheap therapy!

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Richard Goodwin 18th Mar 45 of 49

In reply to post #458463

Re VAT - that all depends upon whether firms have sufficient VATable costs to offset the VATable sales. Service-based firms for example often do not as their main costs are people. Hence my company  (vocational training and apprenticeships) is a net payer of VAT to a degree which significantly impacts profitability.

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Laughton 18th Mar 46 of 49

In reply to post #458998

"is a net payer of VAT to a degree which significantly impacts profitability"

Not sure I understand how that can be the case. You're only paying to HMRC that VAT which you have collected and which you wouldn't have collected had you not been VAT registered. How can that have any impact on your company's profitablility?

Only possible way I can think it makes a difference is if you are in competition with companies that are not VAT registered and therefore can charge 20% less than you but if everyone is making supplies to VAT registered entities then those entities don't care as they simply reclaim the VAT they are paying to you.

Or have I got it all wrong (in which case please don't report me to my local HMRC inspector)?

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grishas 18th Mar 47 of 49

Thanks, Paul. love reading your column! Will you be sharing your shopping list here at all?

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nquaile875 18th Mar 48 of 49

Many thanks Paul and hope you're feeling a lot better!

Good call on the whole facilities management, outsourcing sector, and especially those that chase government contracts. I think we all should have learnt this lesson after Carillion but of course I got caught out with the whole Bilby (LON:BILB) debacle!! I paid well for that lesson!

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Fangorn 18th Mar 49 of 49

"The special relationship exists only because the US needed entry to Europe"

Find that claim a tad dubious given the amount of two way investment/trade that occurs between US and UK absent Europe. That's before the Security/Defence links, FiveEyes etc.

Suspect you're reaching with your claim

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About Paul Scott

Paul Scott

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »


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