Small Cap Value Report (Fri 29 Dec 2017) - SGI, Final Thoughts

Friday, Dec 29 2017 by

Good afternoon!

As expected, there was very little news this morning of any substance. Almost none, in fact.

Fortunately, Stanley Gibbons (LON:SGI) has graced us with its interim results (at 11:07am), so that gives me something to look at.

Stanley Gibbons (LON:SGI)

  • Share price: 3.75p (-32%)
  • No. of shares: 179 million
  • Market cap: £7 million

Interim Results

This coin and stamp business now falls below our market cap limit.

There are a couple of interesting features in this announcement. The bottom line is that the shares are probably worthless. But we can still see what the company is doing to manage the situation and produce the best result it possibly can.

1) Cutting loose SG Guernsey.

This is the investments division, which was crippled by the offer to customers that it would buy back their stamps from them. That turned out to be something it could not do, while also remaining solvent.

SG Guernsey has huge potential liabilities of £54 million. These are contingent, so they weren't listed on the balance sheet.

Off-balance sheet financing often involves some unusual business or accounting practices. In this case, Stanley Gibbons was booking profits on its investment products while the potential liability to buy back the corresponding stamps associated with those products kept growing and growing.

The upshot of sending SG Guernsey into administration is that Stanley Gibbons Plc will now be queuing up to get its money back from its former subsidiary, along with the bank and customers. All of these will be unsecured creditors.

The footnotes include a pro forma balance sheet for the group as a whole, since this deal only happened in November (but the main financial statements record the position at the end of September).

The pro forma balance sheet, showing Stanly Gibbons without its investment division, is as follows:

  • Non-current assets = £12 million
  • Current assets = £30 million, of which £25.5 million is inventories
  • Current liabilities = £29 million, of which £17.4 million  is borrowings
  • Non-current liabilities = £7 million, mostly pension obligations.

This leaves net assets of £8 million. After such heavy losses and write-downs, it's remarkable that the NAV remains in positive territory. At its peak, in 2014, net assets reached as high as £84 million!

The problem is that the borrowings are repayable on demand, while the…

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All my own views. I am not regulated by the FSA. No advice.

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The Stanley Gibbons Group plc is engaged in trading in collectibles; dealing in antiques and works of art, auctioneering; the development and operation of collectible Websites, philatelic publishing, mail order, retailing, and the manufacture of philatelic accessories. The Company's segments include Investments, Philatelic, Publishing and Coins & Medals. The Company's Flexible Trading Portfolio (FTP) allows users to invest in rare tangible assets. It allows users to discuss their options and objectives with one of its Investment Portfolio Managers. more »

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39 Comments on this Article show/hide all

Fangorn 29th Dec '17 20 of 39

Thanks to both you, Graham, and PP , for an interesting year of SCVR's

All the best for 2018

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purpleski 29th Dec '17 21 of 39

In reply to Lennart, post #13

Hi Lennart

I do have to disagree. While I would not say that I learn something from every company on which Graham and Paul comment, I do learn from comments they make on many of them and from their often insightful opening commentary.

The size of the company is surely irrelevant? They are not, after all, tipping the company on which they comment, but appraising it, which enables readers here to profit both metaphorically (in learning) and hopefully financially, from the wisdom they impart.

With that I will sign off here and wish Graham and Paul and all readers a Happy New Year and successful investing in 2018

Best regards

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Graham N 29th Dec '17 22 of 39

In reply to cafcash49, post #15

Thank you very much Charles. Onwards and upwards to 2018! Cheers. Graham

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Graham N 29th Dec '17 23 of 39

In reply to fwyburd, post #17

Cheers Francis. Thank you very much for your contributions too. G

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Lennart 29th Dec '17 24 of 39

Welll, I am aware that liquidity on the last trading day may be limited but the "the no online quote" happens quite regularly with small caps even on ordinary trading days. I just wanted to point out that you may not be able to sell small caps even if the holding is modest.

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gus 1065 29th Dec '17 25 of 39

In reply to Lennart, post #13

Hi Lennart.

As “small caps” go, Treatt (LON:TET) with a market cap of over £260m is quite a decent size and liquidity is usually pretty good. With half day closing for the markets and only 6,000 or so shares trading hands today it’s not really surprising if there is no on line bid from the brokers who are probably looking to go flat over the long weekend.

There’s something of an art dealing in small caps in terms of when you try to trade both during the trading day itself and over the course of the week, especially around holiday periods. It helps if you can be flexible when trying to trade and it sometimes takes several attempts to fill an order either by dealing in smaller batches or seeking quotes on several occasions. Likewise, I tend to get better execution prices if I can sell when others are buying or buy when others are selling. If you have access to Level 2 (usually requires a paid subscription service) this will give you a much better feel for the depth of the market on the bid and offer side and if you’re a regular investor is a very useful resource.


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jonesj 29th Dec '17 26 of 39

In reply to Lennart, post #13

Lennart, on what objective basis are these companies too small to invest in ?

If you're running Berkshire Hathaway, I agree. However, for us smaller investors we can easily put a meaningful proportion of our portfolio into these small caps, without liquidity issues or being forced to table an offer for the whole company.......

I've never seen anything too small for me to invest in & recent surveys show a lot of members with more modest portfolios, so I doubt size is a factor for them.

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leoleo73 29th Dec '17 27 of 39

In reply to Lennart, post #13

(Edit: I see several people have now replied with similar points while I was writing this)

I don't think it is very constructive to down-vote people without any explanation. If people don't know what they've done "wrong" they will either continue doing it or (worse) refrain from posting some valuable insight in future. But I'm all for upholding high standards in debate.

Lennart, below I've taken the time to list every factor I can think of that might have pushed somebody over the edge into down-voting you. Hopefully it is obvious that some are more significant than others:
* Misspelling "too" as "to"
* Misspelling "Treatt" as "Treat"
* Not using the ticker automatic link "£TET" (which would have resulted in " Treatt (LON:TET) " appearing).
* Complaining about liquidity on the very quietest trading day of the year
* Some will suspect you were trying to trade after 12:30 when the market was closed (yes, you did say "this morning", but some won't have seen that).
* Not saying which broker wouldn't give you a quote - it may have (must have?) been a broker issue.
* Many here will think private investors have an competitive advantage trading small caps precisely because of their size / illiquidity - institutions can't buy in quantity and so don't bother to do research.
* Treatt (LON:TET) is a terrible example of a too small / illiquid share: It is valued at £274m, has a normal market size of £4500, trades on SETS (a visible order book that you can directly submit bids/offers to), has a small spread and had nearly 20 trades on the quietest day of the year.
* When a share is genuinely illiquid both Paul and Graham are usually very careful to point this out.
* You didn't back your opinion on Treatt with any insights / evidence, such as valuation metrics, opportunities, risks etc.
* Some people just don't like negativity (not much you can do about that!)
* Talking about a stock with no news or dramatic price movement in a news-driven article (albeit on a slow news day)

I happen to agree with you about Treatt (LON:TET) - a forward P/E ratio of 25x doesn't leave much scope for error, cashflow appears to be very poor, currency tailwinds may turn into headwinds and (above all) I'm concerned that it became too fashionable in 2017 with Lord Lee reportedly having 40% of his ISA invested in it. Stockopedia rate it a "Falling Star", underlining that momentum appears to have faltered.

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matylda 29th Dec '17 28 of 39

Well done Graham.

Just roughly checking through my numbers (I am not a big tracker of overall performance, more so of individual stock monitoring). Only really got back into stocks again after a more passive approach (been in funds etc. such FCSS and JII (and still am to a certain degree)) for 5 years or so due to a number of things including house moves, an addition to the family, etc. - Up about 15% since April stock pick wise so cannot complain!

It's actually a relief to me to come back into things and avoid the madness of adv (I won't say it), etc.

A final thanks and all the best for the new year, long may this remain a sensible and level headed medium for us all.

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Mark Carter 29th Dec '17 29 of 39

Ah yes. Releasing statements on a Friday, at the end of the month, not at 7am, during a holiday period when people are still digesting their mince pies, as Stanley Gibbons (LON:SGI) did, was bound to make for terrible reading. Hey ho.

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gus 1065 29th Dec '17 30 of 39

In reply to Mark Carter, post #29

Leopards and spots. Stanley Gibbons (LON:SGI) did the same thing last year with an earnings result released at 11.15am on the last trading day of the year.

If they last that long, perhaps they’ll put a first rather than second class stamp on the results release next year ....


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rpannell 29th Dec '17 31 of 39

In reply to Lennart, post #13

Apart from all the comments above about Treatt (LON:TET) not being very liquid, I have to give my own personal experience of trading Treatt (LON:TET) .
I agree that it may be overvalued so have been cutting my exposure at about 3000-6000 shares per day for for the past 8 trading days. No problems obtaining quotes through Barclays. I did not try today of course - it's hardly going to be a sellers market on a half trading day just before a holiday.
So, unless you happen to be a billionaire, Treatt (LON:TET) is certainly not too small to invest in so to suggest that Paul and Graham ignore such companies is just plain wrong. As others have suggested, may I suggest that the problem is more your inability to understand that today is an iliquid day for all shares rather than just for TET

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DJCP 29th Dec '17 32 of 39

A belated Merry Xmas, and an un-belated Happy New Year from an avid 'lurker' -
to GN, whom I knew nothing about until the SCVR (but have been very impressed by his analysis)
to PP, who I have known about for a while now (and am used to his exuberance, albeit much tamed now he's older (definitely !)/wiser (maybe? lol) /more sensible (seems to be? lolol) - how's the poker going PP ? ;^) lol - Seasons greetings to your Mum too :o)
to all the other contributors, who's 'criticism' of GN and PP's not-advice, surely educates not only them, but also the rest of us readers - BitCoin being one 'marmite' topic for the latter part of this year as an example.

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jamesdougal 29th Dec '17 33 of 39

I was interested to see you hold IGG. It's a company I'm interested in but am continually put off by the potential impact of EU legislation. What are your thoughts on the potential impact of these?

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clarea 29th Dec '17 34 of 39

In reply to Graham N, post #18

No worries Graham it was a bit tounge in cheek anyway thanks to you and Paul for the nuggets you both shared in 2017.

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Michael Billingham 29th Dec '17 35 of 39

Thank you, Paul. Thank you, Graham.
A great year - your reports have been a huge help.

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wildshot 29th Dec '17 36 of 39

Many thanks to both you Graham and Paul. Like many I really appreciate your reports and have been reading them for a while.

Whilst I've had very little funds to add in recent years to my existing ISA I am constantly reading and learning. Through reading your reports for more than a year I've now taken the plunge and become a paid subscriber. It is interesting to see the stock ranks and how they fair with my existing holdings and targets for my new holdings. Seeing that the share I've identified to sell scoring so low on stock rankings and the ones I intend to buy both scoring in the 90s makes me feel as though I've learnt well in how to assess the potential of companies.

Thank you both and the Stockopedia community, I wish you all a very prosperous 2018.

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Warranstar 29th Dec '17 37 of 39

In reply to jonesj, post #26

Hi JonesJ
Do you find that your broker is particularly good for dealing in the shares of smaller companies? If so, please can you tell us in what ways they are so good, and which broker is it?

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Ned Kelly 30th Dec '17 38 of 39

Many thanks to both Paul and Graham for your insights and opinions through out the year. Although pretty much a "Lurker" on here I do look forward to reading the report every day and have learnt much on the importance of Balance Sheet strength, ROCE, free cash flow, etc. through reading these reports and how to use them. Big winners have been Keywords Studios (LON:KWS) and £G4M.
Many thanks

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Howard Marx 30th Dec '17 39 of 39

In reply to jamesdougal, post #33


IG Group (LON:IGG) on the 18th Dec issued a "Response to FCA and ESMA announcements" in which they estimated that "any reduction in historic annual revenue from the implementation of the measures currently being considered by ESMA .. would have been less than 10% including the impact from lower binary revenue".

By contrast the IG Group (LON:IGG) share price is 25% down on last years peak.

The ESMA will lauch a consultation in January with final proposals likely in 2Q18.

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About Graham N

Graham N

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 and hold an audited, FTSE-beating investment track record.  Away from finance, my main interests are recreational poker and everything to do with China, especially Mandarin Chinese. more »


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