Small Cap Value Report (Fri 18 May 2018) - CPR, CTO, Reforming Fundraisings, CVAs

18th May '18 by Paul Scott

25 comments 10817 reads

Good morning, it's Paul here! Graham is having the day off today.

There's not much news today.

CVAs

There seem to be lots of interesting things going on at the moment. Mothercare (LON:MTC) seems to be pressing ahead with its CVA & refinancing. I didn't get time to report on that yesterday.

Carluccios restaurants is apparently the next chain lining up a CVA.

I wonder how long landlords will tolerate this tidal wave of CVAs? There was an interesting tweet today from a leisure sector property fund manager, who pointed out that CVAs are meant to be a mechanism for saving struggling companies. Instead they are now being used as a property restructuring tool. It sounds as if attitudes are already beginning to harden.

CVAs are also a reward for failure. Poor old French Connection (LON:FCCN) (in which I have a long position) has had to soldier on with all its loss-making shops, continuing to occupy them & pay the rent, because it had a big cash pile (somewhat depleted now). Whereas financially weaker retailers can just threaten to go into Administration, and then negotiate a CVA instead, and walk away from all their problem shops - thus subsequently having a big competitive advantage.

Short squeeze

Yesterday was a good reminder of the dangers of short-selling. The price of Ocado (LON:OCDO) went through the roof, on an impressive contract win for its technology. These deals have been a long time coming, but they do seem to be happening now.

In what was a very crowded short trade, the squeeze (where shorters become forced buyers) was eye-watering just to observe. It's certainly made me think twice about whether I should be doing a relatively small amount of shorting at all? Although I wasn't short of OCDO, so it didn't affect me personally.

Carpetright (LON:CPR)

Share price: 36.7p (up 10.4% today, at 10:50)
No. shares: 71.3m before fundraising, 303.8m after fundraising
Market cap: £26.2m before fundraising, £111.5m after fundraising

Placing & Open Offer

The main points of this deal were already known, apart from the price, which has been set at 28p, a 15.8% discount to last night's price. This is a…

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Big L

18th May '18

Hi dscollard
What is the web address for that sector short data?
I searched for www.runprofits.com but cannot find it.
Thanks
L

LeoInvestorUK

To summarise the bear case for Seeing Machines (LON:SEE) : A jam tomorrow company that is continually having to raise more money and missing breakeven target dates (which a few months ago was supposed to be this year), whose share price is bid up by large numbers of unsophisticated speculators (see advfn boards) whenever some positive news or rumour goes around and is currently at another of its peaks. Yesterday's EC announcement was a vague political statement of intent and it will be years before anything of substance will come of it (if ever). Even if DMS does eventually become standard (like ABS) there is no guarantee that video will be a requirement, and if it is that Seeing Machines (LON:SEE) will be dominant, and if they are that the margins will be more than a couple of dollars a vehicle. And anyway they need to raise more money which will severely dilute current shareholders.

The bull case: This is the major breakthrough we have been looking for. Development is substantially complete and sales momentum is strong. Therefore retrofit / fleet sales will drop straight into profits from next year followed by large volumes of OEM sales from 2020. SEE are too small for the big institutions to buy in quantity or to spend the time researching and so small shareholders have a big advantage here. SEE have the best product and it has been proven over many years creating a big moat and margins.

The advfn case: Hold on to yer hats, going north big time, £10 by Christmas.

sharw

matylda - you describe S&U (LON:SUS) as being in the automobile sector but it is really in the finance sector and at the loan shark end of that:

"Car and vehicle finance for customers with previous credit problems. We can often help in cases where no-one else can".

"Representative APR 29.26%"

"For some customers who have sought to maintain living standards by taking new lines of credit, this has reduced capacity and been reflected in a rise in impairment to £19.4m this year. At 24.6% of revenue this is still relatively low versus the average for the previous 10 years of 27.2%".

doublelutz

Have often looked at Ocado without buying. We have always bought Waitrose products through them rather than from Waitrose themselves. The reasoning being that while Waitrose couldn't deliver their own goods on time Ocado could. We just thought they were such an efficient company in their deliveries that they had to succeed some way. A lesson to use our own eyes when buying shares - I certainly would never have thought of shorting it.

pwozzy

Hi Leo

Thanks for highlighting the bear case, it's easy to sometimes put on blinkhorns when long on a stock!

You were correct, Seeing Machines (LON:SEE) have released an RNS, indicating this isn't a trivial development:

"Seeing Machines is a world leader in, and one of only a few technology companies which is already reliably supplying, automotive grade DMS. This development will have a significant impact on OEMs in automotive and heavy vehicle manufacturing and the Company expects that there will be an extremely positive impact on its near and long-term business outlook as a result."

"Extremely positive impact" is bullish wording which isn't their usual style. You're correct that the suggested regulation doesn't necessarily mean video face tracking technology but its a positive regulatory tailwind nonetheless. It is interesting to see the debate over which technology should be adopted being played out in the press at the moment with the debate over whether Tesla should have adopted facial tracking rather than opting for the 'hold the steering wheel' method of checking whether a driver is paying attention. This keeps coming up because any Tesla crash that happens brings into focus their Autopilot feature, which is usually involved.

As with all blue sky stocks, the story is very compelling! But the numbers arguably matter more, which will be interesting reading when they're announced (I believe end of fiscal year is weeks away). As Paul always says, chance of a takeover isn't a good reason to buy but it's not a huge leap to suggest a Tier 1 OEM provider might want to buy Seeing Machines (LON:SEE) for a measly $200m.

pwozzy,

Yes, Seeing Machines (LON:SEE) 's announcements have generally been fairly level headed which indeed lends much weight to their "extremely positive impact" comment. This is emphasised again today with the care they have taken in summarising the EC press release - I have added a * to each word that provides a step of separation that has to be passed before someone's DMS is actually present in all new cars in member countries:

"the Commission has put forward* measures to lead* an integrated policy* for the future* of road safety, with specific proposals* to mandate* that new models of vehicles are equipped with advanced safety features*."

I also spotted that they are now saying the first production by the two German OEMs is due 2021 (which could mean first sales in 2022 even if on target), whereas the RNS below definitely says "mass production launch starting in 2020" for one of German OEMs. This appears to a be timescale slip and makes a further nonsense of the claimed "EU" 2020 new-model deadline.
https://www.stockopedia.com/sh...

For comparison, here is a potted history of ABS (anti-lock brakes):

1920 - First patent
1971 - First electronic automotive implementation
1993 - First OEM to make it standard across range
2004 - Mandated by EU for all new cars
2013 - Mandated by US (as part of stability control)

As a road user and shareholder I hope and believe DMS will move much more quickly, but still my best guess is it is 5 years away in the EU and 8-10 in the US. Furthermore any perceived monopoly by a AUS/UK company has the potential to cause political delays in what are both increasingly protectionist trade blocks.

dscollard

it is not yet a live service though you should be able to register interest at www.runprofits.com

JohnEustace

Paul,
The Carpetright competitor is Tapi, founded by Lord Harris who previously owned Carpetright and run by his son.
Lots of colourful stuff online about the “vendetta” between the two businesses.
E.g.
http://www.thisismoney.co.uk/money/news/article-5565403/As-Carpetright-fights-survival-Lord-Harris-floors-boss-bold-bid-snap-100-stores.html

davidjhill

leo

Proposal is all new cars need to be fitted with Seeing Machines (LON:SEE) type tech by 2022 to be legally sold in EU.
Between 2020 and 2022 all "Type Approval" cars need this tech, which are basically new models.

Thus you will likely see a phased requirement to fit the tech over a 2 year window at which point all new cars/models will be required to have the tech fitted. The key point is that you are unlikely to get a bunch of lobbyists against said proposal as car manufacturers are largely supportive of adopting it anyway.

DMS market is enormous though, even without it being legally mandated, and Seeing Machines (LON:SEE) have a material advantage of (a) being a number of years ahead of competition and (b) already in use in mining equipment etc. so plenty of practical demonstration of reliability/performance etc.

It is a blue sky stock to some extent but I think somewhat de-risked from the types of blue sky stocks we are all too familiar with since revenues are now starting to expand dramatically.
The key now for me is how much of the market share it can gain as that is the fundamental KPI for the forward valuation I think.

Paul -Carpetright (LON:CPR) 's aggressive competitor is named as Tapi in an earlier post but there is also new competition from Flooring superstore. It started online but this has the disadvantage that people like to check and compare colour and feel of carpets before buying so it is rolling out showrooms where you can do just that without the disadvantage of large rolls of stock on each site. See:

https://www.flooringsuperstore.com/stores

tabhair

The same thing happened recently at Safestyle UK (LON:SFE). It went public a few years back, some of the management team then sold their shareholdings, went off and set up a new company doing the same thing, poaching staff from the old company to go into direct competition.

An owner operator selling shares in their business, and then leaving the company (assuming they're not retiring) should be a serious red flag to investors.

rivaldo

As regards T.Clarke (CTO), it's undoubtedly cyclical as you say. However, the commentary omits an important paragraph from today's update which confirms that CTO have already secured their revenues for this year to 31/12/18 (and a substantial portion of next year's too), so any cyclicality won't be a problem for some time to come:

"Overall, the planned Group revenues for 2018 have now been secured with some capacity in the North West and Newcastle businesses to address. Future secured revenues are £145 million for financial year 2019 and £40 million for years 2020 and beyond."

On forecast 13.2p EPS that's a current year P/E of only 6.4. And presumably any new business won will further contribute to this year's outturn.

Plus these (N+1 Singer's) forecasts are based upon 2.7% operating margins, whereas CTO have themselves confirmed they're now targeting 3% margins.

It's also worth noting that CTO have diversified from their more traditional (and more cyclical) M&E business into higher margin and less cyclical areas like "Intelligent Buildings":

http://www.tclarke.co.uk/our-b...

Which may explain why CTO are winning business like the new Dyson campus, Battersea Power Station (where Apple will be based) etc. I don't think the market has fully appreciated this shift yet.

pj8

Paul

With the exception of the Prospectus Directive, I can't see how the EU restricts your ideas about fundraising. The prospectus requirement is intended to protect investors but I agree that it is heavy-handed (who actually reads all of them?) and that a more streamlined requirement would benefit everyone.

In my view, the UK Govt could already improve the fundraising process in several ways - but chooses not to do so.

David,

Seeing Machines (LON:SEE)

My reading of both the reality and the proposal do not accord with implementation in 2020 / 22. I have explained why I don't think 2020 is feasible (an OEM signed over 6 months ago won't start production in 2021). Additionally close reading of what I believe to be the definitive proposal suggests mid 2021 at the absolute earliest:
https://ec.europa.eu/transport/sites/transport/files/3rd-mobility-pack/com20180286-proposal_en.pdf

"Article 17 provides for the date of application of this regulation as of 36 months from the date
of its entry into force. This will allow the Commission to adopt the respective delegated acts
in advance and to provide sufficient lead time to manufacturers to adjust to the new
requirements."

"This Regulation shall enter into force on the twentieth day following that of its publication in
the Official Journal of the European Union.
It shall apply from [PO: Please insert the date 36 months following the date of entry into
force of this Regulation]."

"Article 14 refers to the implementation dates for the different safety requirements as specified
in Annex II. The respective implementation dates for the newly introduced requirements are
as follows:
– the bulk of the safety measures will start to apply from the date of application of the
Regulation for new types and 24 months after this date to all newly produced
vehicles;"

So the steps are:
1) publication in OJEU - although significant consultation has taken place, it is currently a proposal and so I have no idea how long that could take.
2) then 20 days after that: entry into force
3) then 36 months after that: application (it starts to apply) for new type approvals
4) then 24 months after that: application for existing cars.

Nonetheless, there is plenty to be positive about, for example reference to "visual attention" appears to require a video based solution.

james young

hi paul

any comments on s and u

Great work unraveling the timeline.

The question that remains is - if you're correct and the timeline for regulatory enforcement of the technology is extended out to 2021/22 and beyond, what happens in the mean time?

- Fleet: This business has to keep growing to cover cash flow needs, so what is the likelihood of it reaching enough velocity to sustain the whole business?
- Auto: If Seeing Machines (LON:SEE) can secure further contracts with OEMs, I believe they receive upfront cash payments for engineering fees

It would be useful to see broker notes to better understand their DCF models & cashflow projections but I don't have access to them. Looking forward to discussing SEE's numbers when they are next released

peterthegreat

Glad to see that Paul is having a look at Andrews Sykes, one of the few companies which can genuinely blame the weather for its ups and downs. The usual complaint is about the illiquidity of the shares and the risk posed by the dominating voting power of major shareholders/management but, up to now, this does not seem to have stopped the company from providing decent long term returns to all its shareholders. Perhaps a play on the apparently increasing extremes being shown by the weather in many areas.

Monty9

Hear hear to your suggestions for fundraisings.

Thanks - that's concise, comprehensive and useful so a thumbs up from me.....

I agree, plenty to be positive. I have a relatively small long position and really want to buy some more but am parking my enthusiasm for now until I can see tangible evidence that revenue growth curves are genuinely in the ballpark versus my expectations. It is important that we see revenues move into the $40/50/60m over next 6 -12 months. Then I think they will get assigned a big growth multiple but likely not before given the length of time it has taken to get here and the fact that we are 3/4 years away from mandated DMS

TMFMayn

I have heard the following on the CVA grapevine...

1 Joe Public hears about a retailer closing stores/CVA-ing/having financial problems and starts to think twice about shopping there because, say, a carpet order may not actually be delivered if the firm goes bust.

2 Staff at a troubled retailer become available for work after CVA, so rivals could pick up decent employees. Also staff still at a troubled retailer could be more likely to seek stronger employers as workforce morale will be low

3 Prominent CVAs are helping stronger rivals with their own landlord and rent discussions. Landlords should be becoming more pragmatic about rent levels and may in time trade lower rents for a stronger tenant covenant.

So it may not be a complete disaster for rivals of a CVA retailer.

Small Cap Value Report (Fri 18 May 2018) - CPR, CTO, reforming fundraisings, CVAs

CVAs

Short squeeze

Carpetright (LON:CPR)

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Paul Scott

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