Small Cap Value Report (Fri 20 Apr 2018) - REC, BON, DIS

Friday, Apr 20 2018 by

Good morning!

I have a flight this afternoon, so I apologise in advance for comments which will be more brief than usual.

Some announcements which have caught my eye:

  • Record (LON:REC) - Q4 trading update. Reduction in AUM-equivalent (I hold).
  • Bonmarche Holdings (LON:BON) - trading update. FY 2018 (ending in March) is in line with expectations.
  • Distil (LON:DIS) - trading update. FY 2018 (also ending in March) in line with expectations.

There's not much else to report in small-cap land, apart from a tiny subscription for new shares at the struggling tiddler Mobile Streams (LON:MOS), and a start date set in stone for the new CEO of Revolution Bars (LON:RBG).

In big-cap land, I'm scratching my head a bit over the tobaccos. I have accumulated a position in British American Tobacco (LON:BATS), whose share price suffered yesterday after weaker-than-anticipated results from Philip Morris (US:PM). I need to do more work monitoring developments there, when I get some time.

Record (LON:REC)

  • Share price: 44p (-10%)
  • No. of shares: 199 million
  • Market cap: £88 million

Fourth Quarter Trading Update

Please note that I own shares in REC.

There is no doubt that this is a disappointing update. Reading through, there are only one or two snippets of positivity.

Record is a specialist asset manager which focuses on currency management - helping clients to hedge their currency exposure, using simple or active strategies to boost returns.

Unfortunately, the high-margin product, Dynamic Hedging, isn't growing. Assets under management (using the method to calculate this for FX) for this category has fallen from $4.5 billion to $4.3 billion during the latest quarter. 

A year ago, this product had $6.3 billion in AUM-equivalent.

This is the service it provided to clients during the quarter:

The Dynamic Hedging programmes performed as expected, and low hedge ratios in line with US dollar weakness allowed US investors to keep currency gains in the underlying assets.

Leaving the Dynamic Hedging product aside for a moment, returns in the Multi Strategy product were negative during the quarter. Over the long-term, it has…

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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 »

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Bonmarche Holdings plc is a multi-channel retailer of womenswear and accessories. The Company offers clothing and accessories in a range of sizes for women through its own store portfolio, Website, mail order catalogues and through the Ideal World TV shopping channel. The Company's subsidiaries include Bluebird UK Topco, Bluebird UK Holdco and Bonmarch Limited. The Company has approximately 310 stores across the United Kingdom. more »

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Distil Plc is a United Kingdom-based holding company. The Company is engaged in marketing and selling of Blavod Black Vodka, Blackwood's Gin and Vodka, Blackwood's Limited Edition Vintage Gin, Diva Vodka, Jago's Vanilla Cream Liqueur and RedLeg Spiced Rum domestically and internationally. The Company markets and sells its brands in various international markets, including the United Kingdom, the United States, Germany, Spain, Australia and Russia. RedLeg is a premium Caribbean rum, infused with spices. Jagos is the vodka-based cream liqueur with a vanilla cream flavor made with whole cream. Blavod is made using grain vodka, triple distilled and double filtered. The Company's subsidiary is Distil Company Limited. more »

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

35 Comments on this Article show/hide all

Camtab 20th Apr '18 16 of 35

Thanks for your thoughts on Record. This is a company I have held for some years now, For my part it has been a great cash cow and I think this is how it should be considered. As you say the div is healthy all be it not well covered. But if you consider 40% of the business is owned by management and employees I would be surprised if they cut the dividend unless forced. Also their operating margin over 30% suggests a strong moat and their balance sheet is second to none. So what is my point? Well I am not sure growth is important in that scenario nor am I sure you will see it. Currency hedging is done often to protect a portfolio of investments against adverse currency movements, which are notoriously difficult to predict. I am not sure therefore that outperformance is a key, given they will get it right some of the time and not the rest of the time. This is where the performance will bolster share price, i.e. from time to time. Hence my comment about growth. Anyway I am a happy holder (despite todays report). All the best and keep the good work going!!

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dahokolomoki 20th Apr '18 17 of 35

For me on Record (LON:REC), AUM will only meaningfully increase if performance is good. The fact that performance fee has been nil this quarter and also previous quarters is telling of the underperforming returns.

Also it looks like revenue going forwards is going to be more volatile, with less fixed management fees and more performance related fees. Hopefully this pressures the staff to actually drive good performance for their clients and thus build a reputation for REC and drive more AUM.

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matylda 20th Apr '18 18 of 35

In reply to post #355538

IQOS is a kind of such attempt Phil.

Blog: Briefed Up
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Zipmanpeter 20th Apr '18 19 of 35

Bonmarche Holdings (LON:BON) - results suggest that the still relatively new MD (Helen Connolly, ex Asda) is doing a good job and may thus be worth following in the future. Efficiency is up and the estate is now better and more even. However, the overall business itself still looks like a poor bet vs others in the retail sector . The fantastic internet growth reflects the small base and its target market (elderly, poor women) are easily deterred from High St shopping by bad weather (hence -11% LFL instore).
I still see little in the range or positioning that justifies its long term existence and since it has already come through the CVA process quite recently, little chance that a large part of losses are tied up in a small tail of easily closed, under-performing shops. If Bonmarche Holdings (LON:BON) disappeared, no one would mourn and its customers easily migrate to SM own labels/other discounters and (maybe) online specialists for the elderly like JD Williams / Ambrose Wilson.

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Graham Neary 20th Apr '18 20 of 35

In reply to post #355448

Hi Gus, yes, British American Tobacco (LON:BATS) has suffered a perfect storm of weak dollar, rising interest rates (so its attraction as a bond proxy lessens), increased regulation, declining smoking rates and then of course those poor Philip Morris numbers.

But you've held it for 30 years so your total return must be fantastic - well done! I'd love to hold on to my British American Tobacco (LON:BATS) long-term, too. Buying it at current levels on forecast PE of less than 12x (according to Stocko) is a really interesting opportunity, i think.

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willhampson 20th Apr '18 21 of 35

In reply to post #355538

Hi Phil, not an expert either - far from it - but British American Tobacco (LON:BATS) said they had invested US$2.5bn in vaping and equivalents in their last final results so I think they are certainly moving with the trend, or taking steps to move into these areas.

Edit: Thanks for reporting on this Graham (and comments from others). I hadn't realized the share price had come back quite so much, so will do some digging and further research and may take a position.

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alb0728 20th Apr '18 22 of 35

In reply to post #355538

BAT refer to them as "Potentially reduced-risk products"

I'm sold!

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FREng 20th Apr '18 23 of 35

RNS at 2.45pm from Parity (LON:PTY) saying
" The Board of Parity (AIM:PTY), the technology focussed consultancy and staffing business announces the sale of Inition Limited ("Inition") to Digital Communication Group Limited, a UK registered company, for a total consideration of GBP200,000 payable in cash with GBP100,000 payable on completion and the balance payable in 6 months.

Inition is a wholly owned subsidiary which delivers virtual and augmented reality technology experiences. In the year ended 31 December 2017, Inition made a loss before tax of GBP1.0m on turnover of GBP2.3m. All employees of Inition will transfer with the business.

Due to its lack of scale and synergy with the Group's strategy the Board identified Inition as being no longer part of the core business and it was classified as an asset held for sale in the Group's financial statements for the year ended 31 December 2017 with a book value of GBP396k. Following the disposal, the Group will benefit from the reduction in the cash cost of funding Inition's operating losses, which totalled GBP712k in 2017, and the net cash proceeds which will reduce indebtedness. "

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daveinthelakes 20th Apr '18 24 of 35


I don't invest in tobacco stocks but with regard to British American Tobacco (LON:BATS) you may find the latest Terry Smith of Fundsmith annual shareholder broadcast of interest. I believe some years ago they decided to invest in Philip Morris and rejected British American Tobacco (LON:BATS) . The presentation I recall goes into some detail as to the reasoning behind this.


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ricky65 20th Apr '18 25 of 35

In reply to post #355513

re British American Tobacco (LON:BATS) . I see a head and shoulders pattern in your image.

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Wimbledonsprinter 20th Apr '18 26 of 35

In reply to post #355433

Re Bonmarche Holdings (LON:BON), my maths is a bit different and I only make the online business around 9% of total sales. If my maths is correct, it only highlights the point that in store LfL sales cannot continue falling at this rate. Noticeably the sales numbers in the last two quarters (even after the strong online sales)have been about as bad as the Q1 and Q2 FY 2017 numbers, will led to the previous CEO, Beth Butterwick, being replaced. But the position of the current CEO, Helen Connolly seems secure given the cost cutting and the poor overall consumer backdrop at the moment makes these LfL numbers less shocking.

I hold the stock, and a key for me is the cash flow generation . Over the last 3 years, the company has managed strong cash flow allowing the super high dividend, with the overall net cash balance remaining fairly constant. I find it a bit disappointing that today's statement can only state "the financial position remains sound." I would hope that by 20 April, the company could tell investors what the net cash balance was exactly at end-March.

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dscollard 20th Apr '18 27 of 35

In reply to post #355513

great example of a head and shoulders reversal pattern: the current price is pretty much the expected retrace value off a classical H&S (see below 21% drop to neckline: 21% drop from neckline to current basing point)

 Combined with the volume profile at current levels, it appears to be basing and setting-up for a reversal.

 A breakout with volume from current levels is a buying signal with a stop around £34 so less than 10% risk. That combined with the fundamental and a bit of macro on expected rate rises and it looks like a high probability trade 


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leoleo73 20th Apr '18 28 of 35

IQE (LON:IQE) - I think today's fall was due to reports from an analyst that the iPhone X will be killed off citing impact on 3D sensor supplier AMS. Much of IQE's rating (if not its potential) is due to the Apple contract, something that I have long been sceptical of.

However, regarding 3D sensor technology I think the key question is whether this will make it into other iPhones and manufactuer's phones, not the future of the iPhone X. Samsung's adoption of a cheaper alternative was bad news, but my impression was that this was not received well and they may still adopt 3D in a future model.

In the long term the adoption of 3D mobile phone sensors is pretty irrelevant for the success of IQE (as long as they don't cripple themselves over-investing in production) - there is a much bigger picture here. And in the short term they are near the bottom of the trading range I have successfully traded twice already. Therefore I bought today.

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herbie47 20th Apr '18 29 of 35

In reply to post #355678

It is probably due to the TSMC results and the sell off in Europe "SEMICONDUCTORS: SIGNS OF STRAIN (1447 GMT) Europe's chipmakers are falling sharply today, driving the tech sector down 1 percent after weak results from Taiwan Semiconductor (TSMC) overnight reignited fears that semiconductors' reign is nearly over." This was partly due to the slide in cryptocurrencies has dented demand for chips used in crypto mining. Have IQE (LON:IQE) got any exposure?

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Steves cups 21st Apr '18 30 of 35

Hi Paul

I had tickets for the UK Investor show today but cannot be there,

Can you or anyone else tell me if any of the discussion parts are being recorded and shown later?

Just a thought


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Fangorn 21st Apr '18 31 of 35

In reply to post #355448

Much of Philip Morris problems stem from $$ weakness and, more importantly, slowing iQos product sales, particularly amongst the stubborn older smokers.

Wells Fargo optimistic.

Philip Morris Earnings: Is a 16% Plunge a Buying Opportunity?
Is it a buying opportunity? Wells Fargo's Bonnie Herzog contends it is.

Of particular interest was Philip Morris's choice of the word "plateau" to describe its iQOS sales in Japan, as well as concerns about a potential guidance cut in the month ahead.Herzog acknowledges these issues, noting that there's "downside risk" to earnings-per-share guidance of problems continue. But she remains optimistic. "With PM trading at 12.3x FY19 EV/EBITDA multiple (13% below its 1-year historical average) and a 5% dividend yield, we feel this is more than priced in and encourage long-term investors to use today’s extreme weakness as an entry point in the stock," she writes.


The Sax and BOA ML not so impressed/optimistic it seems

PM sized up after pace of iQos adoption"
Goldman Sachs takes the tobacco stock off its Conviction Buy list, while keeping a Buy rating in place

Meanwhile, Bank of America Merrill Lynch is out with a downgrade to Underperform on PM and price target chop to $88 from $113. Analyst Lisa Lewandoski cites concerns over the timing of iQOS commercialization.


Prefer MO(Altria) myself on brand

Smoking is in decline, margins have been successfully raised hence improved profitability.
The usual FDA legal issues abound.

One wonders if tobacco companies will be moving into Cannabis market in near future to offset declining cig sales.

Chunky yields abound. And these companies have weathered all the storms thrown at them so far.

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Fangorn 21st Apr '18 32 of 35

In reply to post #355583

Reynolds' Vuse e-cigarette is the top selling vapor product in U.S. chain stores tracked by Nielsen. Its “heat-not-burn” product Eclipse is only available in limited distribution and not separately reported by the company


Superb addition to BAT stable.

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Edward John Canham 23rd Apr '18 33 of 35

Bonmarche Holdings (LON:BON)

Almost choked on my pint of Fosters when I read this.

Still, they've got to do something about their LfL sales fall!


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Gromley 23rd Apr '18 34 of 35

If there is any truth whatsoever in that (which I think I now established there isn't), I would love to see the strategic justification.

Associated British Foods (LON:ABF) mark II ?

Actually though I think the author of that article (Ben Woods at the Telegraph) just has not done his homework - he refers to "The owner of women’s fashion chain Bonmarche" and then goes on to talk about Sun Capital Partners. 

I think Mr Woods has lost sight of the fact that Bonmarche Holdings (LON:BON) was floated FIVE years ago and unless I am seriously deluded (as I think he is) are no longer owned by Sun Capital.

We all make mistakes, but frankly that is shockingly poor journalism - he ought to be relieved that he didn't write anything that could be construed as derogatory or he'd be in for a world of pain.

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Edward John Canham 23rd Apr '18 35 of 35

In reply to post #356243

In the spirit of true investigative journalism I turned to the stock prices page. Unfortunately they do not list Bonmarche Holdings (LON:BON) .

If they had, now that would have been truly special.


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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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