Small Cap Value Report (Fri 26 July 2019) - GOR, SPD, SFE

Good morning, it's Paul here!

Thanks to theresa34l for pointing me in the right direction of interesting figures from Gordon Dadds (LON:GOR) - it looked too good to be true, and it IS too good to be true - I found the catch, after spending a couple of hours sunning myself, reviewing the figures.

In a nutshell, the catch is "deferred consideration". More on that later. It's an absolute ton of debt, basically.

Anyway, the figures are nowhere near as good as they initially look.

As always, with clever lawyers, who do you think is going to come out best - them or you?!

What a nightmare, I've just completely re-written this section from scratch, and lost it all. Arrgghh! Memo to self- must make backups.

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Sports Direct

A flurry of late announcements after the market closed on Friday, should make for an interesting week ahead.

Final accounts - worth having a read of this, just for the entertainment value. There's a long belly-ache about how badly the Debenhams situation was handled. This is just posturing in my view. Mike Ashley's decision to invest in Debenhams was just a really stupid decision, and then he threw good money after bad. Even humble bloggers could see that DEB was not viable in its existing form, due to long & onerous lease commitments. Yet a retailing guru apparently failed to spot that.

The comments on SPD's stake in Goals Soccer Centres are also hilarious;

Based on the lack of engagement in this key matter, alongside our general concerns on the pervasive nature of irregularities, we as the biggest shareholder elected to vote against all resolutions including the reappointment of board members. The result of the AGM was in favour of the status quo despite our opposition and the evidence before the market's eyes, however the foul mouthed tirade and aggressive posturing of Chris Mills to the Sports Direct representative, attending the AGM and asking completely legitimate questions, was extremely unprofessional and unbecoming of a listed business to any representative let alone one from its biggest shareholder.

Pot & kettle, is the phrase that springs to mind!

SPD also has a stake in French Connection (in which I hold a long position), and comments as follows;

FRENCH CONNECTION   

We continue to have an arms-length supplier/retailer relationship with French Connection, and we consider this relationship to be strong and working well. We do not participate in management decisions nor do we have access to management information and these have not been sought or granted.

We note that French Connection has been reviewing strategic options, including a possible sale, since October last year. We believe this process has gone on far too long, and urge management to reach a favourable conclusion for all shareholders as soon as possible.

That's a fair point, but on the other hand, there could hardly be a worse time for FCCN to put itself up for sale, amidst all this Brexit chaos. Therefore personally I'm not bothered if FCCN bides its time on a sale until the macro picture has settled down.

The nice thing about FCCN is that it has several massively loss-making shops, whose leases are expiring. I think the Oxford Street store (probably the heaviest loss-maker) has now closed, so that should give a significant boost to results from this year onwards. With profits rising, what's the rush to sell up? Just because Mike Ashley is bored with it, and has over-stretched himself, won't I am sure have any influence whatsoever on Mr Marks at French Connection, and rightly so!

House of Fraser - there are some choice remarks about this too, and it's yet another obvious mistake from Ashley;

However, as we have continued to look under the bonnet as we integrate the business, we have found that the problems are nothing short of terminal in nature. 

Serious under investment in stores and appropriate support services, excessive and unsustainable outsourcing and financing, and selling brands to their Chinese parent shortly before administration are just some of the many problems faced.

The previous Chairman, Frank Slevin exemplified city greed and excess, and as House of Fraser's future became terminal with people losing their jobs and with more to follow, Mr Slevin thought it suitable to retain these extravagances not appropriate to a business in its death spiral.

... Despite the frustration on our part we understand the position the likes of XPO  [large logistics group] were put in when being so fantastically out of pocket because of the previous management's mixture of misplaced optimism or worse, downright lies.

On a scale out of 5, with 1 being very bad and 5 being very good, House of Fraser is a 1, albeit we are trying very hard to turn the business around this will not be quick and it will not be easy. Even though we do believe there could be a bright future for House of Fraser, and indeed have publicised our Frasers vision which we are very excited about, if we had the gift of hindsight we might have made a different decision in August 2018.

In conclusion, unscrupulous and/or incompetent management have in this case, and in others within the retail market been shown to be largely untouchable by authorities or stakeholders.

There follow further rants about regulation, and even this;

We have also noted to the FCA that we believe that there should be a voluntary drug test for CEOs and CFOs of listed companies. Having such undisclosed personal issues could lead to blackmail and force CEOs and CFOs to make decisions based on saving their own skin and potentially reducing shareholder value.

Next in the spotlight is slagging off the Unite union.

As if the above were not enough, note 14 discloses a contingent liability of 674m Euros!

The Group has been the subject of a tax audit in Belgium and, on 25 July 2019, received a payment notice from the Belgian tax authorities in the amount of €674 million (including 200% penalties and interest) and requesting further information in relation to, amongst other things, the tax treatment of goods being moved intra-Group throughout the EU via Belgium.  

The payment notice is not a formal tax assessment but a "proces verbal" whereby the Group will enter a "fiscal mediation" in order to respond to the tax authorities questions and provide them with documentation. Accordingly, there could be no immediate recovery action.  

Sports Direct will investigate further alongside its tax advisors though it believes that it will be able to address the points raised and information requested which Sports Direct believes it maintains as part of its routine books and records keeping and, accordingly management believe, as at the date of signing of the financial statements, that it is less than probable that material VAT and penalties will be due in Belgium as result of the tax audit.

CFO quits - to round things off, another RNS says the CFO is stepping down.

My opinion - Mike Ashley is never far from controversy. He seems to have made many reckless & fairly stupid decisions in the last year or two, squandering shareholder value. With a controlling personal shareholding, he can stick 2 fingers up at anyone who challenges him.

There again, Sports Direct has bounced back in the past, from various difficulties.

I'll watch from the sidelines. My main worry is House of Fraser - the sheer scale of its stores, means that to bring them up to standard would involve colossal capex. Why invest in a chain that looks fairly pointless? Would anyone invent HoF if it didn't already exist? Almost certainly, not. Therefore, how does it make any sense to invest possibly hundreds of millions in revamping its tired, and pointless stores? Surely it would make more sense to convert them into housing, to get more people into town centres, rather than having large shops that few people are interested in visiting.

Safestyle UK (LON:SFE)

Double-glazing company, with an erratic track record.

It's supposed to be a turnaround, but I note that earnings forecasts are coming down.

This is the summary;

Since the Group's AGM Statement on 16 May 2019, management has continued to make progress on Phase Two of its Turnaround Plan which is focused on recovering volumes and market share, restoring operational effectiveness, reducing costs and enhancing margins.

As expected, the first half of the year will result in a small loss, but despite a challenging market where consumer demand appears soft, the Group remains on track to deliver a small profit for the full year which is in line with current market expectations.

Some positive KPI movements are then mentioned, but it just doesn't interest me at all.

My opinion - double-glazing companies come & go. What concerns me most about this company, is that its profits collapsed when some key staff teamed up with Pat Butcher from EastEnders, and set up in competition.

That very much made clear that there's no defensive moat whatsoever, and profits are really about keeping hold of the best high pressure salespeople. I really wouldn't want to invest in that, at any price.