Small Cap Value Report (Fri 2 Sept 2022) - ALM, TED, SHOE

Good morning from Paul!

Short update today. Edit - I've since spotted a couple more items, so will do a bit more writing, which should be up by, and beyond, the 1pm deadline.

Update at 14:23 - OK we're done for the day, and the week! Sorry for the slow start this morning, blame the Spitfires! ;-)  Many thanks for some superb reader comments today, I've just read through them, and am loving the input from you all on energy cost hedging, and watch list/ potential buys. Great to see people posting interesting comments, instead of hiding behind the sofa in terror, at what are incredibly awful markets (esp in small caps) right now. But as with all crises, it will pass, at some point. Next week should see a new PM, and business-friendly measures being announced, and action on energy too. Depending on what is announced, it might be time for another rally? Although I tend to think these rallies are being sold into, so think it's probably too soon to anticipate a new bull market in UK small caps anyway. But as we always say, who knows, anything could happen!  I'll record another podcast this weekend with my latest ideas, and a summary of the week. I see lots of people are listening via Apple, so it's good I set that up.

Paul’s Section:

There’s apocalyptic news from the hospitality sector morning newsletters, eg. Propel. Pubs are already closing, citing excessive energy utility bills, which in some cases have now risen to more than rent & rates combined. This is expected to render a third of all UK pubs non-viable. I imagine that a similar impact is likely on many other businesses.

It’s obvious that drastic Govt intervention is needed, and fast - not just in the UK, but in Europe too.

I wish I’d kept a list of the companies that have already told us that their energy costs are hedged, as that’s vital information. It’s buried in the archive here though, because if companies mentioned it in their results or trading updates, I would have reported it here. So if you're looking for that information, click on the "Discussion" tab for any company we cover here, and previous SCVRs should be shown, which might have this information in them.

My experience at the Bournemouth Air Show yesterday afternoon was brilliant, well worth visiting, it runs today, tomorrow, and Sunday, FYI). The highlight as usual was the superb Red Arrows, although one of the 7 planes disappeared during the display, so maybe it had to return to base? Hopefully not another bird strike, although if so, that's one fewer pesky sea gull to bother me at 5:00 squawking its lungs off on the flat roof directly above my bedroom!  

The sound from the Typhoon fighter was astonishingly loud - just one aircraft filled the whole of Bournemouth Bay with its engine roar, which you could feel on your chest bones, as well as hear! Spectacular stuff. I loved the WWII commemoration too, with the last remaining Blenheim, escorted by a Hurricane, and a Spitfire. Seeing and hearing what my grandparents would have experienced on a daily basis in the 1940s, was quite moving, but I kept it together!

As regards hospitality, it was £6.50 for a pint of Spitfire, which I literally winced at. Plus they had the temerity to leave an excessive head on it, so it wasn't even a full pint, so I demanded a top up, saying that for £6.50 I want a proper full pint! Then of course you spill a bit on the way out, so a futile gesture, and in any case the minimum wage server doesn't give 2 hoots what anyone thinks. At that price level, it's really only viable to have one pint, so my next trip was to a nearby Tesco, who are selling 4 pint cans of Carlsberg for £4.00 with their Clubcard discount. So £1.00 a pint, versus £6.50 a pint, for a similar product (both nicely chilled). The economics of this are so extreme, that I can understand Tim Martin of J D Wetherspoon (LON:JDW) saying that pubs are facing ruin because of the supermarkets undercutting them to this extreme extent. Now with unaffordable energy bills on top, the whole sector is looking grim. But that's why the share prices are so low, as the market factors in known things like this. If some solution is found, there could be good upside, who knows? Although it seems to early too be anticipating that. Although as they say, the cure for high energy prices, is high energy prices - people use less, and the price comes down again. There is a limit to what people will pay for drinks though, and I suspect hospitality has reached that limit.

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Allied Minds (LON:ALM)

10.7p (up 2% at 11:02)

Market cap £26m

I was about to look into the interim results out today, but then spotted Graham & Meghan had written about its plans to de-list here on 24 Aug 2022.

So there’s not a lot of point in digging into today’s detail.

ALM has also been trying to sell itself, through a Formal Sale Process, but says today that this is “on-going, but no notable interest has been forthcoming to date”. Oh dear. What a pity it didn’t sell itself during the boom years, when its valuation peaked at a bonkers >50x the current price.

Cash position is currently $10.0m, but several of its investments require additional funding, well beyond this level.

Listing costs - how on earth does a micro cap spend (waste!) $2.2m p.a. In listing costs?! It should be more like a tenth of that -

…. the Board believes that a successful de-listing of Allied Minds could reduce annual running costs by approximately $2.2m per annum. The Board believes that such savings when combined with the current cash position should provide two years of cash runway for Allied Minds with necessary headroom to make strategic investments in portfolio companies if deemed appropriate and necessary to maximise value for Allied Minds shareholders.

Outlook - some signs of life here -

The Board remain of the view that there is substantial value to be realised within the portfolio of investments and that this can be achieved within a time frame of 18 to 24 months. It is therefore important that the Company has sufficient resources, including an appropriate buffer, to achieve this which is the key reason for considering and consulting with Allied Minds shareholders on a potential delisting.

If I were a shareholder, I’d ask the company to remain listed, but drastically reduce its costs. Management could be replaced, or moved onto remuneration which is linked to the value they realise for shareholders, a cut of the outcome over a pre-determined level, perhaps?

I recognise a couple of the major shareholders - e.g. Crystal Amber, holds 18.1%, and I believe is winding itself up? Also Metage Capital with 6.55% rang a bell, then I remember they were involved in PPL Therapeutics, which was one of the shareholder actions groups I set up in 2003, and I recall meeting them at PPL’s AGM in Scotland. I got some vague death threats (NB. not from Metage Capital!) afterwards, and was told that I was very lucky to have left Scotland in one piece. Although in person, everybody I met at the AGM was perfectly civil. Maybe I was blissfully unaware of the simmering rage? Anyway, after that, I decided that shareholder activism was too unpleasant, and after doing 5 ShAGs, decided to move on to focus on being positive towards decent companies, rather than trying to extract value from bad companies (which is incredibly difficult to do, as well as being unpleasant).

Metage’s website requires a login, so I couldn’t research them, and it seems to be a secretive Cayman Islands company. But I assume they’re probably a bit activist, based on my previous experience with them. I remember them being so paranoid about the Concert Party rules, that after requesting a meeting with me in 2003, they proceeded to refuse to say anything meaningful, in case it broke the rules! That was a long time ago now though, and as the royals say, recollections may differ.

Anyway, it will be the attitude of these shareholders below that determines if ALM will de-list or not, as there will be a vote -

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My opinion - reading its update today, some of ALM’s investee companies look quite interesting. The prospect of a sale/disposal of some or all within 2 years, sounds a reasonable timeframe.

Although personally, I wouldn’t be happy holding shares in a company which might be about to de-list. The trouble with de-listing, is that it then removes the ability to sell the shares at a time of my choosing. I have heard of cases where people who held on to a share which de-listed, then went on to do quite well with it, so they’re not necessarily always a bad thing.

I see the new Chairman of ALM is called Bruce Failing, a turnaround specialist apparently. I see he embraces his name, with an email address which is: Failing@.....

Would I want to make a fresh investment in ALM, shortly before its possible de-listing? No. It doesn't look a complete basket case though. So having lost 98% of the value from the peak, it would probably be tempting to just hold the remaining scrap, and see what happens.

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Ted Baker (LON:TED)

109.2p

Market cap £201m

Trading Update

The takeover bid at 110p cash, from Authentic Brands Group, is going ahead. Every situation is unique, so shareholders have to personally weigh up what you’re most comfortable doing - i.e. selling in the market now, for c.109p, or holding out for that last penny. As it’s a big acquirer, and the scheme document has been posted, then I suspect this deal is going to happen. Although given the worsening macro picture, personally I would bank the profit now, and forego the last penny, just in case something were to go wrong.

To what extent is the takeover bid boosting the share price? A lot, I would say, comparing this share with other struggling mid-market fashion brands. If this bid falls through, then I reckon the share price would probably instantly halve. Why take that risk, for a 1p final payout? One reason might be the potential for a higher, competing bid, which would be nice upside, but in current circumstances I’d say that’s highly unlikely, but we don’t know for sure, it’s always just educated guesswork with takeover bids, and weighing up the probabilities of various possible outcomes.

Current trading doesn’t look good.

Q2 (14 weeks to 29 July 2022) saw revenue up 3.4% on last year, but still down 28.3% on the pre-pandemic comparator from 2019. That’s awful, given that costs will have risen a lot over those 3 years (e.g. wages, utilities). Companies need to be healthily beating pre-pandemic numbers, to cope with the higher costs.

Ecommerce performance is also bad, barely any higher than pre-pandemic. Although some of that poor performance seems to be self-inflicted, with “challenges” launching a new eCommerce platform.

Licensing is up 62%, but no actual numbers provided.

Inventories are too high, due to slow-moving old season stock.

Net debt of £34m is OK in the context of available headroom (an additional £46m), but not OK in the context of TED probably now being loss-making. So there could be issues with bank covenants looming.

My opinion - this very much reinforces my view that TED shareholders have had a very lucky escape with this 110p takeover bid. The bidder is clearly over-paying, for a poorly performing, and poorly managed, loss-making business. Hence why I think grabbing the money now, rather than waiting for the last 1p, is probably sensible, just in case.

Does the lacklustre trading here have read-across for the rest of the sector? Let me answer that with another question - who in their right mind would be expecting a positive trading update from any fashion retailer right now?!

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Shoe Zone (LON:SHOE)

167p (up 15%)

Market cap £82m

Announces today a £3.5m share buyback, between now and end November 2022.

This news has added £10m to the market cap, which seems a little excessive. Although I think the share price had recently sold off irrationally, despite positive newsflow on current trading.  

Energy costs is the big current issue, so can anyone remember if SHOE has fixed or capped its energy prices?

I covered SHOE's latest positive trading update here, just a couple of days ago.

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