Small Cap Value Report (Fri 20 July 2018) - REC, SIXH/MPAC, ATY, BGO, MIDW, VLG

20th Jul '18 by Graham Neary

38 comments 12354 reads

Good morning!

Stocks of interest today include:

Record (LON:REC)
600 (LON:SIXH)
Athelney Trust (LON:ATY)
Bango (LON:BGO)
Midwich (LON:MIDW)
Venture Life (LON:VLG)

Record (LON:REC)

Share price: 43.3p (+4%)
No. of shares: 199 million
Market cap: £86 million

First Quarter Trading Update

(Please note that I currently own REC shares.)

This is a specialist currency manager whose shares I've held for about six months now.

I like many things about this company and its financial characteristics, and have likely mentioned them in previous editions of this report.

The only thing it's lacking is growth. This is why it remains one of my smaller positions. If it showed signs of growth, and the valuation remained reasonable, I'd be interested to promote it.

This update shows a few signs of life. Key points:

AuME (assets under management equivalent) down from $62.2 billion to $61.9 billion. Not good, but....
Client net inflows of $0.6 billion, with an inflow to the higher-margin Currency for Return product.
Number of clients increases by four to 64

My view - I still don't have enough conviction to take a large position in this stock, and I may end up selling out of it to go into something where I have more conviction.

The benefit to holding it is that it is very good at generating cash, and most earnings are being paid out as dividends.

For example, nearly all of 2018 EPS is being paid out, including a special dividend. I think the trailing yield based on today's share price is 6.5%. Record is achieving that even while maintaining a very strong balance sheet.

So for someone who likes a bumper dividend yield and isn't too concerned about growth, this may be of interest.

600 (LON:SIXH)

Share price: 17.75p (+8%)
No. of shares: 113 million
Market cap: £20 million

Final Results

In truth, these final results are of less interest to me than yesterday's announcement: Buyout of Pension Scheme Agreement.

After the plunge at MPAC (LON:MPAC) this week, lots…

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Item

£m

Working Cap

15.9

PPE

3.2

Net Debt

-8.5 *1

Deferred tax

3.9 *2

TNAV

14.5

davidjhill

20th Jul '18

I don't disagree that the NTAV isn't 200p+

BUT

if the pension fund goes the NTAV being circa current market cap assumes that the existing packaging business is worth absolutely nothing, which is bonkers. As a stand alone business to private sale it is worth at least 60p in my view and actually probably north of 100p.

The US pension unlikely to be in deficit if the FED tightens at the rate it is signalling to the market.

Of course if there is another recession / downturn that changes things again.

A fundamentally misunderstood stock which, I guess is why it probably trades in such a volatile range depending on reported conditions. As a consequence of the debate investors have over where it should be valued that won't help the share price either particularly until there is more of a consensus.

-1

Camtab

Graham, I have been thinking about pension schemes in the light of MPAC (which a company I have shares in). Is it right to say if interest rates rise this will be beneficial as liabilities are reduced? What if they have pursued an investment process of liability matching over the last few years? An approach Mercer and others consultants promoted. If you have matched liabilities then a rise in interest rates would mean a fall in capital values of the scheme (as presumably they are invested in govt debt vehicles). BUT the cashflows have been secured so the deficit aspect is of no interest (unless inflation rises significantly, which has long bothered me about this advice). Alternatively if you are 100% invested in equities (which a mature scheme won't be) a raise in interest rates becomes a negative because we are told money goes away from equities and towards bank accounts and yield instruments so liabilities fall as assets fall. I don't know how the two are correlated.

leishylegs

Hi Graham,

Thanks for the nod on the Athelney Trust half year report - a work of genius and very entertaining.

I'll look out for reports of inflatable tanks and invisibility cloaks in some of the forthcoming defence company reports!

Richard

Collector

Nice one Gus made me smile !

Richard Cockbain

Graham, thanks for highlighting Athelney Trust (LON:ATY) ... entertaining reading over lunch.

Graham

re Bango (LON:BGO) : This is a potentially cracking stock. The current operating costs of the business will support up to 10* the existing EUS so don't expect the cost base to ramp up from existing levels by much at all. Almost everything from now on drops to the bottom line as they hit operating cashflow breakeven a few months back from memory and should be close to moving into overall group profitability soon.

Great deal in Japan with Amazon Prime. Also strong presence in LatAM, one of the fastest growing payments markets.

2019 EPS is expect to be circa 8p so roughly 19* earnings. For a business that should grow at 25%+ per annum post the next year or so of expected doubling I can easily see a case for 300p over the next year or so.

Graham Neary

re: Athelney Trust (LON:ATY). You're welcome! Always fun to keep an eye out for their updates. G

Hi WS, re: 600 (LON:SIXH), thanks for pointing out the existence of the warrants. G

Andrew L

Athelney Trust (LON:ATY) seem slightly bonkers in my view. Did anyone ask them for their political, economic views? They come across as the London taxi driver who unprompted feels the need to tell you what they think about the world. The Athelney Trust (LON:ATY) commentary should be in a blog on their website.

What seems bizarre on Athelney Trust (LON:ATY) is that there is almost no commentary on the stocks they hold. The stocks they do mention seem to be low quality to me. I would accept Athelney Trust (LON:ATY) giving their views on the world if they were one of the world's greatest investors. This appears to not be the case.

Either the people at Athelney Trust (LON:ATY) are bonkers or their commentary is an attempt to get media attention. Turning it around and what would you think if a political/economic analyst started harping on about stocks in a very opinionated way? The Athelney Trust (LON:ATY) commentary makes me think they are a bit too full of themselves. If I held I would sell just on the basis of their bizarre commentary. The commentary ensures I would never buy Athelney Trust (LON:ATY).

Looking at their website and Athelney Trust (LON:ATY) have underperformed so why do they think we want a long commentary about the world as well as their personal advice?:

http://www.athelneytrust.co.uk...

dgold

Announcement today from Sports Direct says:

During a year-end results presentation by Sports Direct at the Stock Exchange on 19 July 2018, Mike Ashley read aloud a brief statement about the Group's relationships with its strategic investment companies. This statement has led to interest from various parties, and in response to this we are publishing the statement in order to make it freely available to all.

The statement read by Mike Ashley is as follows:

"One of our biggest challenges this year end has been an assessment of our relationships with our strategic investment companies. A number of these such as Game and Findel consider us to have significant influence over them by virtue of signalling us as a related party in their accounts.

I do not believe that we have significant influence over these companies. I do not believe they apply the core SD principles of being conservative, consistent and simple.

I want a show of hands of those people in this room that disagree that applying our core principles of being conservative, consistent and simple, and thus increasing our significant influence within these strategic investments would be a bad thing? I want to be crystal clear, if you disagree with this put your hands up?

Now you know why I don't think we have significant influence. We will be contacting our strategic investment companies in the next few months and urging them to adopt our core principles of being conservative, consistent and simple, and we will let you know at the half year where we have got to.

Sports Direct believe accounts should be shown in a form that can be understood and relied upon and I am sure you would agree."

Does anyone understand what he is actually trying to say and the possible implications? It seems to be causing a drop in the price of Game Digital (but not so much Findel).

simoan

Does anyone understand what he is actually trying to say and the possible implications?

I think the excellent post above from ratioinvestor about Athelney Trust applies equally to Sports Direct - bonkers management, crap investment -> who cares! :-)

All the best, Si

Snoo

I wonder if it was worded deliberately? It would take some time to think whether to put your hand up or not, by which time the chance would have gone.

Can these Sports Direct investments be even deemed as 'strategic' if they are not going to influence them in some way? I don't know exactly but there must be some opportunities between them, Debenhams and Game.

ppdrs

Perhaps he'd visited a pub a few hours before the presentation?!!! I'm a holder of £GAME and wondered about the drop in SP over the past two days. Like you I'm wondering what his statement means, and whether it spells problems for £GAME...?

Just read the very late RNS from Staffline (LON:STAF) announcing the acquisition of Grafton Recruitment's Ireland business. Very frustrating that they disclose revenue, pre-tax profit and net assets, but nothing on what they've paid (assumed very small consideration) or most importantly the impact on earnings - so not sure how much we can glean from it. As a holder of Staffline (LON:STAF) I have been concerned for some time that they are too focussed on revenue targets over earnings - and that this latest acquisition may be another step in the vanity project towards their next revenue target...

gsbmba99

Just a guess but classification as a "related party" normally means additional disclosures of transactions between the investee company and Mr. Ashley or SD. Perhaps Mr. Ashley, who is a private man when it suits him, is seeking to "convince" the investee companies that such additional disclosures are unwarranted (or, perhaps more accurately undesired and unwelcome).

WallerMa

Hi Graham

I’d be interested in you having a really good look at these results.
Haddeo & Partners already control this company with over 25% of the shareholding and it is Haddeo that also stumped up the £8.5m for the loan notes which pay a coupon of 8%. So in 2020 the debt will be able to be refinanced at lower levels or Haddeo could accept shares at 20p and reduce company borrowings by £8.5m. If they do it would be a sign of confidence in the business going forward.
Other points are
- significantly reduced borrowings due to pension buyout, fund raising and sale of ProPhotonix stake
- introduction of dividend at circa 3%
- decent trading update
- indication that margins will improve
- Stockopedia data currently understated significantly
It seems to me that Haddeo are making all the moves to position this business for a sale
I look forward to your comments

Regards

bestace

What a bizarre statement from Ashley! He seems clueless about what a related party is. This bit in particular:

Sports Direct believe accounts should be shown in a form that can be understood and relied upon and I am sure you would agree.

I find that mind boggling in the context of the Financial Reporting Council still having an ongoing investigation into Sports Direct's 2016 accounts for failure to disclose related party transactions with a company controlled by Ashley's brother.

From the regulatory announcements and disclosures in the accounts of Findel (LON:FDL) and GAME Digital (LON:GMD), the nature of their relationship with Sports Direct is clearly more than just that of a major shareholder, so I really don't see how Sports Direct can be treated as anything other than a related party, all the more so if Ashley is talking about exerting influence to get them to follow some accounting principles specific to Sports Direct.

So in my view the accounts of Findel (LON:FDL) and GAME Digital (LON:GMD) would not be complete without full disclosure of all their dealings with Sports Direct.

As an example Findel spent £680k on professional fees in FY17 on matters relating to Sports Direct, including a proposal for Ashley to become their chairman. Even if that amount is not financially material, it is surely information of interest to shareholders, but it would not have been disclosed were Sports Direct not treated as a related party.

Ashley seems to think it is only by removing those related party disclosures that the Findel and Game accounts can be "understood and relied upon", which is completely bonkers.

Gromley

Hi WallerMa,

That's a very interesting point re 600 (LON:SIXH) and Haddeo. I looked quite extensively at the accounts and prospects but hadn't looked at that angle.

That has given me something to think about over the weekend as I had previously considered all of the divestments to be a matter of survival given that they had been cashflow negative for at least 18 months.

They have basically sold off pretty much all of the family silver and the balance sheet now has an interesting profile

Item	£m
Working Cap	15.9
PPE	3.2
Net Debt	-8.5 *1
Deferred tax	3.9 *2
TNAV	14.5

*1 - assuming the get £ 3.5m from the pension scheme surplus.

*2 - I'm not totally sure about the deferred tax, but this is what is left over once I eliminate the 35% on the pension surplus.

That strikes me as being rather like the profile one sees when Private Equity (re-)floats a company on the market - No real assets and material net debt.

I can't think though that I have seen such a manoeuvrer performed on a company that remained listed, but would be grateful in anyone has seen such.

As far as I can see though - Haddeo only have about 12% of the loan notes, so I'm not sure if they did stump the whole amount originally? (They may have disposed of some already).

Interesting angle !!!!

I realise I should have added a disclaimer to my previous post, for the avoidance of doubt, I have been a previous holder of 600 (LON:SIXH) . Not at the moment though as I consider them a little expensive in the round, their results though were better than I expected, so I'm slightly more interested.

21st Jul '18

Thanks for pointing out the Haddeo proportion of the Loan Notes I hadn’t picked that up

I’m expecting the bid to come from an American Company given the profile of the trade revenue and the dominance of the dollar

It seems the only way Haddeo and the other Directors will maximise their interest.

Finally I would have voted your post positively if only I could have worked out how!

Regards

Also thanks for the prompt to mention I do have an interest in 600 Group.

Small Cap Value Report (Fri 20 July 2018) - REC, SIXH/MPAC, ATY, BGO, MIDW, VLG

Record (LON:REC)

600 (LON:SIXH)

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Graham Neary

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Small Cap Value Report (Fri 20 July 2018) - REC, SIXH/MPAC, ATY, BGO, MIDW, VLG

Record (LON:REC)

600 (LON:SIXH)

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