Small Cap Value Report (Fri 23 Nov 2018) - Mello/Masterclass, REC, CFYN, GTLY, FSTA

23rd Nov '18 by Graham Neary

26 comments 8707 reads

Good morning!

Final call for Mello London & Masterclass

This is the last SCVR before Mello London, so it's my last chance to remind you of the Stockopedia discount code MLStocko25. This gets you £25 off, for one or both days.

I've also been informed that there is a Black Friday sale for the ShareSoc Masterclass event. Full members of ShareSoc can buy tickets until midnight tonight for £24.50. Non-ShareSoc members can book for £44.50 until midnight.

Three directors or CEOs from my portfolio holdings will be at Mello: Jonathan Lander of Volvere (LON:VLE), Scott Maybury of PCF (LON:PCF) and Charlie Cannon-Brookes of Duke Royalty (LON:DUKE) (you may have noticed a pattern - I like my financial stocks).

Others I would be interested in are Impax Asset Management (LON:IPX), National Milk Records (OFEX:NMRP), Bioventix (LON:BVXP), etc. The problem of having too many good choices!

One or two of you may have been looking forward to getting revenge on me for my bad beats and suckouts against you during the poker tournament at Mello Derby ealier this year.

Unfortunately, I'm going to have to skip the poker on this occasion, seeing as I'm scheduled to be on stage three times the following day, including first thing in the morning. My brain needs a rest sometimes! May the luckiest person win.

Today I intend to look at:

Record (LON:REC)
Caffyns (LON:CFYN)
Fuller Smith & Turner (LON:FSTA)
Gateley Holdings (LON:GTLY)

Record (LON:REC)

Share price: 31p (+2.5%)
No. of shares: 199 million
Market cap: £62 million

Half-year Report

(Please note that I currently hold REC shares.)

This is an investment I got into around the start of 2018. It hasn't worked out so far, as Record's currency hedging products have failed to achieve any momentum over this period.

I hold the stock for a couple of reasons - I trust…

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Graham Neary

23rd Nov '18

Hi Phil, I've coveerd Record (LON:REC) now.

The £1 million performance fee offsets lower management fees. I think this is due to passive hedging now generating a mix of mgmt & perf. fees, rather than a higher fixed mgmt fee.

Graham

BH1991

Also worth mentioning that Virgin Atlantic are in talks to buy Flybe (LON:FLYB) . No figure has been mentioned and Flybe have declined to comment on the speculation. Share price up 35% this morning.

re: Gateley Holdings (LON:GTLY)

Hi rtj... I'm not a fan of this type of thing... so I have spread some FUD all over it.

G

Snoo

Immense volumes traded on Flybe - 58m shares already today - a significant chunk of the free float.

I wonder if any of the other airlines might end up bidding for it. Flybe's recent sale and leaseback shows that they need money, but they could have a decent profitable core of routes which do not face competition from anyone else, and might even be subsidised, for example Newquay-London.

Laying off staff and closing routes costs money which Flybe probably doesn't have, so a new owner could turn this around IMO.

gaustin

Graham - any chance of looking at FUTR - Full year results announced today which look very good. Peel Hunt have just initiated coverage.

bbd

Ditto FUTR Graham, cannot see what's not to like

simoan

The StockRank is terrific at 85 but I think the shares should be cheap, given that it's a law firm, and the recorded quality metrics could easily deteriorate. How can it have a sustainable competitive advantage providing legal advice?

Graham,

I completely agree with you on "people" businesses and have no interest in Gateley Holdings (LON:GTLY) either. However, in terms of quality metrics you'd expect the ROCE to be high due to the capital light nature of the business, and well, the high margin is just a fact of life for legal services i.e. if all UK lawyers charge far more than their cost of doing business and high profit margins are endemic in the industry, why would the margins be reduced by competition?

Obviously, some companies have tried in some areas e.g conveyancing but I've never met a lawyer on the breadline, have you? :-)

All the best, Si

JohnWigg

Gateley Holdings (LON:GTLY) - "How can it have a sustainable competitive advantage providing legal advice?" Two ways, I think:

1) It has bought companies offering complementary services, eg. Hamer, surveyors. (GTLY is active in the construction industry.)
2) It now has capital, unlike an LLP. It can offer alternative charging models to the standard "billable hours"; it can offer contingent fees.

There are now (I think) four law firms quoted on AIM and all have rather distinct business plans. It might be worth revisiting them a few years hence, ie. after a full business cycle.

I have to leave the office now but I agree that Future (LON:FUTR) looks good today. Will have to catch up on it another time. Cheers. G

re: Seeing Machines (LON:SEE)

So is it a buy or a sell?

G

Ben1

Graham, I went back to read your previous comments on Gateley. Having recently invested in Burford Capital, it was interesting to see why you think Law firms should be privately owned. I can see your argument. If true that most law firms think that being private is the best ownership structure it explains why they need to access funding from firms such as Burford.

freeman7

I won’t be at Mello London but could Graham or another attendee please question Jonathan Lander about some of the recent actions at Volvere PLC.

Re the cash from the disposal of Impetus, I would specifically like to know:

1. Why did the board change its position from one of retaining net proceeds “for use in pursuit of Volvere's continuing investing policy, which is to invest in or acquire growth or turnaround stage companies” on 04 October to “The Board believes that a return of cash is appropriate and represents a good use of the Company's excess liquidity arising from trading operations” just seven days later on 11 October?

Is there really such a shortage of available opportunities for Volvere that returning cash is the best option, and if so why wasn’t this known on 04 October?

2. Why was a further return of cash announced less than two weeks after the first one on 25 October? Were the board unaware of how much cash was surplus to requirements when they organised the first buyback?

3. Why were both share buybacks structured so as to require shareholders to respond within only one business day, thereby giving shareholders very little time to make a decision, and also making it virtually impossible for shareholders with their shares held in online broker nominee accounts to participate (Online execution only brokers usually set their own shareholder response deadline at around a week before corporate action deadlines)?

Why didn’t anyone, and especially ‘independent director’ David Buchler and Nplus1 Singer raise concerns that the buyback timescales were prejudiced against many of the company’s shareholders?

4. It’s noteworthy that 95.4% of the first buyback was taken up by the Landers and Andrew Cohen (a director of a Volvere subsidiary, and 91.5% of the second buyback was taken up by the Landers. Is this a fair indication of company insiders' view of Volvere's prospects?

Disclosure: I hold, but am less confident than I was before insiders took more than £8.6mln of the roughly £9.5mln offered in the buybacks.

AnonymousUser192020

The Future (LON:FUTR) CFO deserves an award for the most cliches in their Linked-in profile: "Transformative thinker, flexibly tenacious finance director who delights in creating growth. Understands the big picture and diverse needs of different stakeholders whilst rolling up sleeves to understand which levers really drive commercial value. Experience of the challenges of digital revolution on a traditional industry and how to gain the hearts and minds of employees and customers." Better I suppose than being a"tenaciously flexible" FD!

That said, despite the well documented problems of traditional print publishing, I'm always surprised at the vast range of glossy 'special interest' magazines available in newsagents. Especially as services like Readly will give access to an almost unlimited number of titles as pdf's for just £8 pm. There must be something in it for the publisher.

davidjhill

I bought some Flybe (LON:FLYB) the other day at 9p. I couldn't work out why a NTAV of 51p should trade at sub 20p in the £1 and I think that NTAV ignores any value in the Heathrow landing slots, that actually should add quite a lot of hidden value.

I accept that there is likely some discount applied to the NTAV for illiquidity, say 25-30%?
Thus I think the business should be worth 35p+ to a buyer, and if that buyer wants the landing slots maybe another £5-15m, so 40-50p of value.

A bid feels like it succeeds somewhere in the 35 to 40p mark though but could come in initially around the 30's but go as high as 50p in the event of a bidding war.
If Stobbart were interested when the price was 35p, presumably at some premium, then that also gives some validation to those numbers.

Any other views?

TamzinPiworld

I know there was a lot of discussion of Creightons (LON:CRL) H1 results, which were released on Wednesday (21.11.18). We've just published their results presentation:

https://www.piworld.co.uk/2018/11/23/creightons-crl-h1-results-november-2018/

Also today, we published Forbidden Technologies (LON:FBT) from ShareSoc November (14.11.18).

https://www.piworld.co.uk/2018/11/23/forbidden-technologies-fbt-sharesoc-presentation-november-2018/

jules2k6

Volvere (LON:VLE) I too found the share buyback was not available to me as a nominee shareholder and was not impressed.

I don't think the slots are that valuable, my understanding is they are for domestic services, therefore limiting the market for who would buy them.

Virgin already had a regional service to Heathrow, 'Little Red', and this closed due to losing money, the slots were then passed to Flybe. It would be impossible to really compete on the Scottish routes with BA, who have greater feeder traffic and higher frequencies. The previous Virgin services saw small load factors even with keen pricing.

Did read that Heathrow to Newquay is going 4 times daily from March, with the route being subsidised by £5 per passenger each way. That might be more like it as the route is safe from competition. In the summer months this might be a good money-spinner.

Perhaps Branson might want the airline more as a flying advertisement? For the investment that is load of customer exposure with plenty of cross-selling opportunities with the outside chance of rebuilding it into something more profitable.

25th Nov '18

No this is incorrect. Check out the Independent for better articulation but in a nutshell the slots they have accumulated at Heathrow can be used flexibly over the next 3 years or so and the 13 pairs of Heathrow slots are calculated at a value somewhere north of £100m!

Thus the value I used of £5-15m is absurdly low. The true NTAV of Flybe (LON:FLYB) is apparently closer to 150p if you include the landing slots !!

I don't believe for a second they will get that in a bid scenario but I would expect 40p+ and even then the purchaser would be getting a lot of value. for free.

Flybe don't own the slots at the moment, and have to operate the services for 3 years, at which point they do get the slots. But the restrictions on them are fairly stringent, either Cairo, Moscow, Riyadh, or a European airport (source: Headforpoints).

In practice changing the destination to any European airport sounds promising, but I can't really think of anything suitable for Flybe. Closer destinations are heavily contested, and the further out ones are unsuitable for its fleet. Heathrow also will be gaining more slots because of the third runway. Domestics have to be the way forward for them at this airport anyway.

If the slots really were flexible then a bidding war would have commenced a long time before hand. Flybe's share price has been low all year.

I don't think the value is going to be that large. IAG took over British Midland and gained 56 slots at Heathrow for £172.5m (and resold the BMI business). This was despite the supposed value of the slots being £770m, the trouble is in the slots market there ain't exactly many set prices, just what another airline is prepared to pay. In the calculations they assumed top dollar, forgetting that when one party is distressed they have little bargaining power.

Put it this way, if these slots are worth so much, why are Flybe putting themselves up for sale? They have enough cash, or enough assets to raise cash on to operate for another year, which is when they have operated the Heathrow routes long enough to own the slots. And then you would have the institutions complaining that they are basically giving the value away for nothing.

I don't disagree that they will only get a fraction of the real hidden value. I expect this to get taken out at 35-45p, which is actually less than NTAV, so zero value attributed to the landing slots. However, my point is more that at the 9p I bought at and even at the current 16p there is not a bad risk/reward to be considered.

Virgin actually want to be able to fly to Moscow etc but actually can't get sensible slots, so this may be where they are considering a bid. You buy assets that can be recycled into the wider group at less than market value, you buy connectivity around the UK (and to some degree Europe) that they have needed for a while (but couldn't make Virgin Red work) and you buy longer term landing slots that you do want access to at zero cost. I'd say that's their rationale.

However, I'd imagine both Easyjet and Stobbart are also interested for different reasons.

Flybe (LON:FLYB) aren't really distressed though. They have a lot of cash and facilities so not likely to go bust any time soon. Therefore they have a little bargaining power, even if we all feel it's not exactly a strong hand. Will be interesting to see how it plays out.

Small Cap Value Report (Fri 23 Nov 2018) - Mello/Masterclass, REC, CFYN, GTLY, FSTA

Final call for Mello London & Masterclass

Record (LON:REC)

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Graham Neary

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