Small Cap Value Report (Fri 19 Oct 2018) - REC, SFE, PDG, SSON

Friday, Oct 19 2018 by
59

Good morning! 

There's a lot of Brexit-related news at the moment but it's unlikely to help us find the next great small-cap opportunity, so I'm going to pretend it's not happening.

Today we have:



Record (LON:REC)

  • Share price: 31p (-12%)
  • No. of shares: 199 million
  • Market cap: £62 million

Second Quarter Trading Update

(Please note that I currently hold REC shares.)

Not a great update from Record.

This is a specialist fund manager providing currency services. I own shares in it because of my positive impression of management (conservative and well-aligned), excellent cash generation characteristics, and my belief, at the time I invested at least, that it served an important financial niche.

Unfortunately, it hasn't achieved much in terms of growth in the last few years - but then, this has been reflected in the valuation.

Its share price has also been a victim of the recent general market correction, and then when you add in the effect of today's trading update, it's dropping deeper into what I hope will eventually prove to be "cheap" territory.

When it comes to valuation, we should bear in mind that the company had equity (as or March 2018) of £26.5 million, almost entirely tangible and liquid, including cash and money market instruments worth £22.5 million.

The Stocko valuation chart shows what I'm talking about: forecast dividend yield of 7% and EV/EBITDA ratio of 6.4x (prior to today's sell-off, so it's cheaper now).

5bc9a849ef2f5REC_20181019.PNG

Today's update is not too encouraging, sadly. Assets under Management Equivalent (AUME) are up by 1.1% when expressed in GBP, but this was driven by market movements, not by client inflows. There was a small client outflow during the period.

Additionally, 7 clients (out of 66) are leaving, taking $2.5 billion of AUME with them (out of $61.8 billion). They use the Passive Hedging product, which is the cheapest one, so the total loss in terms of fees will probably not be huge. But it's hardly good news.

Fees - "Fee rates for most products were broadly unchanged". Again, this doesn't sound great. The…

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Disclaimer:  

All my own views. I am not regulated by the FSA. No advice.

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Record plc (Record) is a United Kingdom-based company, which is engaged in the provision of currency management services. The Company's suite of products is divided in two categories: Currency Hedging and Currency for Return products. It also offers solutions to individual client requirements. Its Currency Hedging mandates are primarily risk reducing in nature. Its suite of Hedging products includes Passive Hedging and Dynamic Hedging. Its Currency for Return mandates are return seeking in nature. The range includes five Currency for Return strategies being Active Forward Rate Bias (FRB), FRB Index, Emerging Market, Momentum and Value, and these strategies can be offered in either a segregated or pooled fund structure. The Company's clients are institutions, including pension funds, charities, foundations, endowments, and family offices, as well as other fund managers and corporate clients. It operates in the United Kingdom, North America and Continental Europe, including Switzerland. more »

LSE Price
30.25p
Change
-1.6%
Mkt Cap (£m)
61.2
P/E (fwd)
12.2
Yield (fwd)
8.0

Pendragon PLC is an automotive online retailer. The Company's principal market activities are the retailing of used and new vehicles and the service and repair of vehicles (aftersales). Its segments are Stratstone, which consists of its vehicles, truck and commercial vans brand, including the sale of new and used motor cars, motorbikes, trucks and vans, together with associated aftersales activities; Evans Halshaw, which consists of its volume brand, including the sale of new and used motor vehicles and commercial vans; US Motor Group, which consists of its retail operations in California in the United States, including the sale of new and used motor cars; Pinewood, which consists of its activities as a dealer management systems provider; Leasing, which consists of its contract hire and leasing activities; Quickco, which consists of its wholesale parts distribution businesses, and Central, which represents its head office function and includes all central activities. more »

LSE Price
23.15p
Change
-2.5%
Mkt Cap (£m)
332.8
P/E (fwd)
7.1
Yield (fwd)
6.2

Safestyle UK plc is a United Kingdom-based company engaged in the sale, manufacture and installation of replacement un-plasticized poly vinyl chloride (PVCu) windows and doors for the United Kingdom homeowner market. The Company's segment includes the sale, design, manufacture, installation and maintenance of domestic, double-glazed, replacement windows and doors. The Company has over 30 sales branches and approximately 10 distribution depots located throughout the United Kingdom. Its product range includes EcoDiamond WINDOWS, EcoDiamond UPVC DOORS, EcoDiamond BI-FOLD DOORS, EcoDiamond REPLACEMENT CONSERVATORIES, GuardDoor, Pavilion and Inspire. It has manufactured over 279,000 frames and carried out approximately 60,000 installations. The Company's subsidiaries include Style Group Holdings Limited, Style Group Limited and HPAS Limited. more »

LSE Price
77.5p
Change
0.7%
Mkt Cap (£m)
63.7
P/E (fwd)
23.0
Yield (fwd)
1.5



  Is LON:REC fundamentally strong or weak? Find out More »


21 Comments on this Article show/hide all

fwyburd 19th Oct 2 of 21
10

Good morning Graham,
I hope you don't mind me mentioning it here but I'm running my Investor Sentiment research again this year and would like to invite your readers to join in. Post is here with the link to the survey
https://www.stockopedia.com/content/market-sentiment-research-october-2018-409914/

Cheers
Francis

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Beginner 19th Oct 3 of 21
2

Quarterly trading update at Record (LON:REC) seems rather lack lustre. The figures seem largely flat, but there is the warning that AUME will take a hit over the next year with two large clients leaving. There is an unusually high volume of trades going through this morning. Is the dividend here sustainable?  If we are due a measure of market instability, this company should prosper.

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paraic84 19th Oct 4 of 21
17

Slightly off topic but I thought readers might enjoy a videoclip of a regional BBC journalist asking the boss of Persimmon (LON:PSN) about his £75m bonus https://twitter.com/spencerstokestv/status/1052981336288432128

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Graham Neary 19th Oct 5 of 21
1

In reply to post #410199

Hi Francis - no problem at all! Thanks for sharing. G

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simoan 19th Oct 6 of 21
1

In reply to post #410209

Is the dividend here sustainable?  If we are due a measure of market instability, this company should prosper.

The forecast annual dividend costs around £5m and at the end of the FY in March 2018 the company had £22.7m in cash even after returning £10m in a tender offer last year. So it doesn't seem there is an immediate threat to the dividend.

All the best, Si

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shine66 19th Oct 7 of 21
5

In reply to post #410239

Unusually, the Telegraph and Guardian in agreement on where those whopping bonuses are coming from:

Help to buy has mostly helped housebuilders boost profits

Help to buy is really help for housebuilders

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simoan 19th Oct 8 of 21
10

In reply to post #410239

paraic84,

Talking of which the snouts are in the trough at Revolution Bars (LON:RBG). I wondered how long it would take after the  poor recent results, and not long was the answer:

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

Just about the only good thing I can think of that would result from a Labour government would be an end to this kind of behaviour. 

All the best, Si

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tabhair 19th Oct 9 of 21
4

The decision by Record (LON:REC) to buy a block of Neil Record's share for 45p doesn't look like such a great decision. The move last year was described as following.

The Tender Offer is intended to provide an efficient way for the Board to reduce the Group's retained capital and return excess capital to shareholders.

Regarding the dividend being covered by earnings, I have my doubts. The business is clearly deteriorating here. Management instituted a fee cut earlier in the year of 10%, so it's alarming that despite that, $2.5b in AUM is about to walk out the door. Not only do you have a reduction in AUM and fees, but costs seem to continue to mount, giving the company the worst of both worlds right now.

Of the £5.3m of ordinary dividends that were paid out last year, this was covered by £6.1m of earnings. With less revenue and greater costs, I cannot see how the dividend is covered by earnings. The real concern here is that even with the cut in fees, AUM has declined in the last few quarters regardless. Perhaps more cuts in fees are require to stem the bleeding?

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purpleski 19th Oct 10 of 21
3

“It's a pet peeve of mine when companies leave out prior-year comparisons. For the record, underlying PBT last year was £60 million. The year before that, it was £75 million.”

Could not agree more. As a part owner of 13 odd companies I think that this should not a peeve but a requirement/obligatory. How companies report to the market/owners should be prescribed by the stock exchange. In the same that what goes into published accounts is prescribed.

Just my view.

Michael

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Gromley 19th Oct 11 of 21
1

Re Safestyle UK (LON:SFE)

The thought that immediately popped into my head when reading the announcement this morning was that maybe they were agreeing some kind of region by region non-compete agreement.

An other more bullish guess is that NIAMAC Developments Ltd (trading as SafeGlaze UK)  [Actually I thought they had been barred from trading as SafeGlaze] has been so damaged by the legal action that Safestyle UK (LON:SFE) are picking over the corpse.

I strikes me though that unless you are in the business and know something it is impossible to tell whether either of these are the case or whether it is something completely different.

Without further clarification, it is not something I could consider investing in.



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Trident 19th Oct 12 of 21

In reply to post #410289

Hi Si

Re: Revolution Bars (LON:RBG)

I can't believe that a Labour Government in current prospect would be the answer to anything much myself that a capitalist would generally believe in. Wait until George Orwell style,under Marxist or radical Socialism (or whatever BS is believed) that some decisions reflect some are more equal than others!

The reality of potential 'upside' for shareholders generally is around the £2.00 mark, so the only way to incentive management, apparently, is to give them a piece of that action, and to deliver a benefit to option holders that requires option pricing at the current level. There might be more underlying complication to the exercise criteria, such as lock in periods etc. but I suspect not.

Only an insider view would know on current Revolution Bars (LON:RBG) trading trends whether that is a truly low bar, or that represents a real achievement for management!? As a pool of money it seems to represent around a net £500,000 gain for all option holders, with the CEO getting at least potentially half that pool. So not the end of the world, assuming no more awards.

Not really worth electing a bunch of Marxists for, is it?

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simoan 19th Oct 13 of 21
8

In reply to post #410314

I can't believe that a Labour Government in current prospect would be the answer to anything much myself that a capitalist would generally believe in. 

Me neither, which is why I said it's about the only thing I could think of. Please don't start off down the track painting me as a Labour party sympathiser - I'm not, it was just a simple comment.

The reality of potential 'upside' for shareholders generally is around the £2.00 mark, so the only way to incentive management, apparently, is to give them a piece of that action, and to deliver a benefit to option holders that requires option pricing at the current level. There might be more underlying complication to the exercise criteria, such as lock in periods etc. but I suspect not.

It has been well proven that such incentives do not work and only engender the wrong kind of management behaviour. I can't find the performance criteria for the PSP scheme. IMO the vesting criteria should always be clearly stated in the RNS announcing the options. Funny that it never is and it's so bloody difficult to find them. BTW the PSP options are free and not based on the current share price. 

Not really worth electing a bunch of Marxists for, is it?

Again, that's not what I said. I regret mentioning it now so let's stop it here and avoid a long boring political debate. I personally have little interest in politics other than how it effects my investments and don't normally vote because of the stupid electoral system we have in this country.

All the best, Si

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paraic84 19th Oct 14 of 21

In reply to post #410289

Do you know what the performance conditions are that they need to meet?

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JohnEustace 19th Oct 15 of 21

Does anyone know who Record (LON:REC) are losing customers to? My guess would be Alpha FX (LON:AFX) who look to be doing better, but Stocko has them marked as zero for momentum for some reason which isn't obvious to me.

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Trident 19th Oct 16 of 21
2

Hi Si

Frankly its hard to enough to spot the difference between Conservative politicians and Socialists nowadays.

Its very hard to know what incentives work for management. I tend to the view, hopefully like you, that some people just like doing a good job. But incentives have always been in fashion, though arguably less generous than some of today's outrageous trends.

In my head, I think of a cash pool equivalence to justify or otherwise. The problem with this is that the tax treatment of cash is potentially less generous (for now!) than options. Overall I am not too disturbed at the proposed awards, as they currently stand. There appears to be a lock in period.

I would imagine quite a lot of previous option awards lapsed as a result of CEO's etc leaving, so hopefully the historic dilution position isn't onerous.

Vive la revolution :-)

https://www.youtube.com/watch?v=qypgPszx3Kc&list=PLO_0P86K9BP98JY8acD2M6kuMTa1t9E9D







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timarr 19th Oct 17 of 21

In reply to post #410329

Do you know what the performance conditions are that they need to meet?

From the annual report it looks like a combination of EPS and TSR (total shareholder return) uplifts. Neither are great - both can be manipulated through share buyback schemes rather than any actual performance improvements.

Ideally there shouldn't be anything linked to share price - that's whatever the market deems appropriate at the time, and not something that managements should be trying to influence directly. Earnings is better, but some component of earnings they can't easily manipulate through friendly accounting is better still.

But broadly, perverse incentives incentive perverse behaviour. And if they didn't work companies wouldn't use them, so they're worth paying attention to.

timarr

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Edward John Canham 19th Oct 18 of 21
2

In reply to post #410369

Revolution Bars (LON:RBG)

The cult of the leader is alive and well.

A team drives an organisation forward, not one individual.

So why do remuneration committees continually come up with this solution - the CEO gets more than 50% of the bonus pot.

I always find it amusing when one of the broadsheets ask as one of their standard questions "Does money motivate you". I've yet to read a CEO reply that says "yes". So take them at their word !

Phil

Edit: One novel thing about this scheme - the CFO is not included.

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dahokolomoki 19th Oct 19 of 21
4

In reply to post #410294

The key question for any company with AUM is can they generate returns for investors? Otherwise money gets pulled and it is hard to convince new investors to invest.

For Record (LON:REC) the red flag is that they consistently never make any performance fees, which is when their funds generate good returns for investors. So lack of performance fees is almost a leading indicator of more AUM pressure coming.

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Collector 19th Oct 20 of 21
1

Re: Record NTAV I won't argue with cash.
But the expression 'money market instruments' always makes me wince.
Was not lehman brothers et al worth billions in 'money market instruments'

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Fangorn 19th Oct 21 of 21

In reply to post #410324

"I personally have little interest in politics other than how it effects my investments and don't normally vote because of the stupid electoral system we have in this country."

Interesting comment

I presume you're in favour of PR?

We share that in common as well then!!!

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About Graham Neary

Graham Neary

Full-time investor and independent analyst. Prior to this, I spent seven years in the financial markets as an analyst and institutional fund manager. I'm CFA-qualified, also holding the Investment Management Certificate and the STA Diploma in Technical Analysis.Away from finance, my main interests are recreational poker and everything to do with China, especially Mandarin Chinese. more »

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