Small Cap Value Report (Fri 3 Jan 2020) - NXT, JSG, MBT

3rd Jan '20 by Paul Scott

16 comments 6415 reads

Good morning, it's Paul here.

To get you started today, here is the link to yesterday's completed report, which turned out to be a bit of a monster, taking me until 21:30 to finish. It's a review of everything I currently hold personally. That completes my series of end of year reviews, which seem to have gone down really well with subscribers here, judging by the positive comments & high number of thumbs ups - much appreciated. It really makes a difference to the writers here, if we get decent feedback.

Today I'll be reviewing trading updates from;

Next (LON:NXT)

Johnson Service (LON:JSG)

Mobile Tornado (LON:MBT)

Estimated time of completion today is 1pm, as there's not much to report on, so that time shouldn't slip.

Next (LON:NXT)

Share price: 6954p (flat on the day at 09:01)
No. shares: 133.2m
Market cap: £9,262.7m

Trading statement

Fashion retailer Next has had a decent Christmas, as expected. The summary says it all;

An unusual feature of Next is that it buys back its own shares with surplus cashflow each year. This is driving up EPS. Note from the StockReport (average no. shares in issue) this was 155.6m in 2014, and had fallen considerably to 133.2m now.

The chart below shows how Q4 to date (it's a 01/2020 FY) has been the best quarter of this financial year - helped by colder weather in November, and better stock availability;

Valuation - latest guidance from the company is for 458.7p EPS this year, rising 3.5% in the following year (implying 474.8p). Taking the new year estimate of 474.8p, and dividing it into the current share price of 6954p, gives a PER of 14.6 - which looks about right to me, since EPS growth is quite pedestrian and mainly driven by buybacks.

My opinion - both Graham and I have been long-term bulls on this share, because it has managed to offset declining High Street business with a very successful internet operation.

I think the re-rating in the last year has been fully justified, but I'm not…

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MrContrarian

3rd Jan '20

My morning smallcap tweet: Tornado blow.

Mobile Tornado (LON:MBT) Johnson Service (LON:JSG)

Mobile Tornado Group (MBT) guides FY rev £3.3m, EBITDA -£0.3m, which is below current market expectations. Blames "delay to the full deployment of the Company's solution with a government agency and a major public utility in Israel."
Johnson Service Group (JSG) guides FY slightly ahead of market expectations.

rmillaree

Next (LON:NXT)
Excellent numbers out today - can't really see any particular downside. Numbers announced for next year look fine also. Interesting that they they still see share buybacks as being value up to £71.76 - equating to an 8% return per their calcs. I sold out on the recent price strength - based on these numbers i may be back in if there is any shareprice pullback closer to the 6500 level if trading continues to go well. My one slight niggle with next that i probably shouldn't worry about is the increasing reliance on finance interest income to earn their crust - albeit the growth rate in this segment has moderated in this period which is good. I guess i am way to old school worrying about the "kids" of today buying their fancy dresses on an hp type deal.

davidjhill

Galliford Try (LON:GFRD) so these are now £170m market cap following the sale of the homes business today, At the final results they had net debt of £56m. They have received £300m of cash + removed £100m of debt and recently received £32m from a previous disputed contract over-run. So by my reckoning you can now buy Galliford Try (LON:GFRD) for less than half its net cash.

Am I missing something?

john2

According to the Galliford Try web site there has been a roughly 1 for 2 share split, which accounts for today's huge price jump. They do look a pretty good buy.

hi John - no share split. Old shareholders still have same number of new shares. They also now have 0.574 of Bovis shares. What the Galliford Try (LON:GFRD) business retains is its construction business but now appears to be in a position where it has 111m share sin issue prices at 165p = approx £170m market cap. Include the cash receipts and they should have £376m in net cash all being equal. I believe the construction business will be profitable as they have focused on higher margin business more recently. Seems like an anomalous valuation to me.

I am already long as I held into the Bovis merger so my Galliford Try (LON:GFRD) shares are more or less free but am considering adding as it seems like there is a lot of value

Fegger

Stockopedia says £1 bilion market cap. Or will it need to be updated shortly. Please could you explain where you get £170 million. Thanks

Stockopedia is 1 day out of date. They are taking the 111m shares in issue and multiplying by last nights close of around £8.70.

This morning Bovis bought from Galliford Try (LON:GFRD) the Linden housing business. They paid £300m in cash, took over £100m of debt and gave shareholders 0.574 shares for every Galliford Try (LON:GFRD) they held. Galliford Try (LON:GFRD) then cancelled the old shares and gave new ones in a 1 for 1 proportion. The new share price is now around £1.70 so this is £177m market cap.

It's not like this has been an unknown event though. It has been known for months and yet the Galliford Try (LON:GFRD) share price has continually traded at almost the same value of the shares we received in Bovis with little residual value attributed to the remaining business. I understand that the construction business isn't the most attractive but I struggle to see why it is worth 45% of cash whilst trading profitably with no debt given the order book, so I'm trying to work out what others see that I may have missed.

Snoo

IIRC the good part of the business was the Lindens Homes part. Last time I looked at it the market cap of the whole company implied that the valuation of the other businesses excluding Lindens was actually negative.

Gromley

I think the Stocko Market Cap for Galliford Try (LON:GFRD) must be yesterdays figure (before the disposal).

I agree with David's for market cap based on 111m shares in issue.

I haven't looked previously, but agree the apparent discount to net cash does look interesting. (net cash of c. £376 all else being equal.

Just from a very quick look at their last accounts they had other LT liabilities of £100m and also receivables of £754m vs payables of £1,253m (don't know how much of that stays with the new business).

So maybe the "net cash" does not actually belong to the shareholders?

Galliford Try (LON:GFRD)
So maybe the "net cash" does not actually belong to the shareholders?
That would be my initial thought too - generally housebuilders have much more solid balance sheets than construction - so this company could end up with large liabilities i would guess.

Having a quick look at the prospectus the numbers there suggest the continuing group will have trade and other receivables of 406 million and trade and other payables of 675 mill - those numbers will be a historical snapshot in time but it does suggest that there will be significantly more payables that receivables - which will be a potential cashflow concern if those numbers need to unwound at a later date.

nquaile875

Thanks for the report Paul and well timed in one respect as Johnson Service (LON:JSG) is an IC tip of the Year 2020!

Happy New Year and keep up the good work. I've really enjoyed reading your review articles. Nick

hi - Thanks. Having gone back and re-looked at the prospectus I think that net assets are probably closer to current share price once goodwill is stripped out and cash received, so maybe current price is not particularly wayward after all. The accounting treatment for the claims is not altogether clear either so this could move that number a bit too. I will probably avoid adding at this stage then until I can get a clearer picture on profitability and net cash position. Appreciate the steer.

Thanks

hi Gromley - see post above with rmillaree. Net assets don't appear to be quite as simple as I thought and probably closer to current market cap but with some further uncertainty around claims accounting treatment I can't quite get my head around. I'll sit on the sidelines I think until I can get a much clearer position on profitability. Construction isn't something I usually invest in so unless there is compelling value probably best to sit on my hands.

4th Jan '20

Galliford Try (LON:GFRD) are in the Naps Portfolio for 2020. Would have thought Ed might be better to review this choice as the company has changed significantly due to this sale.

Atstockwatch1

5th Jan '20

skas

Small Cap Value Report (Fri 3 Jan 2020) - NXT, JSG, MBT

Next (LON:NXT)

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Paul Scott

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