Small Cap Value Report (Fri 30 Aug 2019) - SHOE, G4M, CLG, LGRS

30th Aug by Graham Neary

41 comments 6689 reads

Morning folks,

Today we have a profit warning from Shoe Zone (LON:SHOE) and an update from Gear4music that is in line with expectations. We also have results from Clipper Logistics (LON:CLG)

After that, I may look at a few stories that I missed earlier in the week.

Cheers

Graham

Shoe Zone (LON:SHOE)

Share price: 134p (-30%)
No. of shares: 50 million
Market cap: £67 million

Board changes and trading update

The 30% fall in share price today looks reasonable after a dire update.

The CEO has tendered his resignation, "in order to leave Shoe Zone and pursue other business interests". He leaves immediately.

I always hate seeing an abrupt departure like this. To me, it suggests that there was a falling out or some other sort of conflict at the top of the company. If you're leaving a company you care about, and if you've done a good job as CEO, why wouldn't some form of transition be arranged, some period of time in which the company can think about finding a replacement?

The two brothers who have managed Shoe Zone together for the past 20 years clearly feel that they are up to the task, and won't be seeking a replacement. Instead, one of the brothers returns to his original role as CEO, and the other will remain as COO.

Trading update - it's hardly a coincidence that the CEO is leaving on the same day as a nasty profit warning.

This year will be below expectations (not quantified).

The "tough high street trading environment" is blamed.

Shoe Zone stood out as a share which was seemingly immune to high street conditions. As a provider of very cheap footwear, some of us thought that its business would stay firm even as other retailers struggled. Now we know that this isn't quite true. Perhaps the declining footfall has finally started to take its toll?

There is a property writedown of £3.1 million, to £5.3 million. Freehold properties on the high street simply aren't worth what they used to be. The flipside of declining property values is that Shoe Zone is able to negotiate rent reductions at many stores.

Finally, there will be no special dividend this year. The special was worth 8p last…

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back2value

30th Aug

Hopefully Clipper Logistics are moving vast and ever-growing amounts of Sosandar products...

LeeWilliam25

£G4M - I've said this before but I think it's worth repeating. G4M's products are something I've had a personal interest in for years. I don't buy music gear so much these days but I still browse for those 'fantasy' items I'll purchase when the time is right, of late this has been Midi Keyboards and Active Monitors (speakers).

When searching for prices on these items I started to include G4M along with my usual resources:

1. GAK (Guitar Amp Keyboard)
2. Amazon
3. Any other source as reference, could be Thomann.de, eBay or a London based Retailer
4. + G4M

I usually end up ruling £G4M out, it's products can be found anywhere else and it rarely seems to compete well on price. Sources 1 & 2 usually trump every time. So for that reason alone I'm not interested in G4M as a share holding, it has no discernible moat so it's buisness appears to hinge it's success as an online retailer that manages to capture a decent share of a popular market. But it's certainly not unique in it's offering.

To G4M's credit it has a large and comprehensive product range and it's website is well presented, it's easy to find what you're looking for.

It's unique offering is own brand products, these may sell well in the large and growing amateur market but these are cheaper items (not sure what their margin is). I imagine professional musicians will largely ignore these.

Gromley

A slightly wry smile from me when I saw the statement from Shoe Zone (LON:SHOE) this morning - commiserations to holders, it is not your pain I am smiling at.

I was discussing only yesterday my brief holding earlier in the year when I bought at 215p and sold a very few days later for a c. 7% loss. I was just about feeling vindicated when I discussed yesterday that despite the price rising in the meantime it was now back below my sell price. I am feeling much more vindicated now!!

Back at the end of May, Damian Cannon described his decision not to buy as a "lucky escape" I bet that feeling is somewhat reinforced now Damian? Luck or skill - its results that count!

Anyway I will leave comments on the trading element for now (I cannot add anything to Graham’s write up).

I just a have a bit of a thought on the write-down of freeholds.

The true economic value of the freeholds to the business as a going concern is related to the rent they would otherwise pay if they were leasing the property.

As rents have come in general, the “value” of these assets has therefore decreased.

In that sense I don’t really see these write-downs as a bad thing as such. Similar to when companies with a US presence had to write-down the value of the retained tax losses, because the payable/avoidable taxes had reduced.

On the other hand, this valuation should also be closely aligned to the capital they could raise in a Sale & Leaseback. That could be a negative.

At face value I would not see this business as cash constrained. I would note though that they have rundown their cash-pile via the special dividends, now suspended. If trading is really bad, those previous special dividends could end up looking reckless.

I have no idea what the freehold properties are, but the perhaps could be in an upside if they could be sold at a higher value with change of use planning consent. I wouldn’t want to count on that, but it might be an area for investigation if there were other attractions here.

In the short term though, I would look for a turn on their trading news-flow (and clarity on how big a miss this year will be) before considering a purchase.

tomps3

Wameja (LON:WJA) (formerly £ESG), released H1 results earlier this week, and a KPI update last week. The figures represent the historic business, the model changes going forward, with a large cost base removed and HomeSend being scalable.

Here's John Conoley the Exec Chairman giving an update on where they're at, and how he views the future.

Snoo

Looked in yesterday's report for something on Amigo Holdings (LON:AMGO) but was wondering if anyone had opinions on it.

On paper, it looks extremely cheap relative to earnings.

Their operating cashflow does not stack up, with a large 'interest receivable' item making this negative. Is this an effect of booking profits on loan contracts issued before the loan is fully repaid?

I can understand that the rate of defaults may be set to increase, perhaps sharply so but unclear on how this may affect profits. From the share price reaction it seems that an increase of a few percent might be pretty bad for profits.

timarr

Amigo Holdings (LON:AMGO) is looking like a perfect storm - they're setting aside more cash as the number of customers in arrears rise and they're seeing a rise in customer complaints. A regulatory clampdown on guarantor loan companies is expected to arrive soon which will likely force them to focus on new customers rather than recycling existing ones - a more difficult and expensive proposition.

Far too hard to value. Another Woodford stock as well.

purpleski

Hi Covkid

“the 'returns' aspect for a lot of online companies will change in the future”

Could you explain?

Thank you.

LeeWilliams. I think the “...2 usually trump everytime...” could allied to almost any product, with the exception possibly of clothing (I hold £BOO). Also if you want something that you are happy to have second hand or is a bit obscure then eBay.

I find shopping such an unpleasant experience (I have just spent a mind numbing hour wondering around B&Q) that using Amazon (unless you need it instantly) is just so much easier. And returns are a doddle.

For this reason anything bricks and mortar retail is un-investable for me.

dealtn

Looking at Index Gilt price changes (or the real yield reciprocal) in isolation won't tell you about inflation. For this you should be looking at the "breakeven" inflation derived from its relationship with a Conventional Gilt as well. If the former is rising in price strongly, without similar moves in the latter, then you can be sure inflation is a driving factor. Moving together, or even lagging the latter, then it is a falling yield (or deflation) story you are witnessing in the main, despite Inflation Linked Gilts "showing" price rises.

Martin C

Snoo, Woodford is invested in Amigo - that should be enough of a red flag to avoid it like the plague! :)

On a more serious note be careful. "Cheap relative to earnings"? They made reference to regulatory changes/issues which are obviously going to result in lower earnings going forward.

Damian Cannon

"Back at the end of May, Damian Cannon described his decision not to buy as a "lucky escape" I bet that feeling is somewhat reinforced now Damian? Luck or skill - its results that count!"

Well remembered Gromley. Definitely some luck involved there...

I can't quite remember the name of the presenter who waxed lyrical about Shoe Zone (LON:SHOE) but it just goes to show that even the smartest investors can get things wrong.

On a side note I know that some private investors see illiquidity as somewhere smaller investors can gain an edge over institutional investors. I can understand the logic but this kind of situation gives me the willies. After all if I can't buy or sell easily, even with my small trade values, when market conditions are kind then just how bad will it be when conditions become unsettled?

Damian

Silver Moon

herbie47: Aren't Superstocks Superstocks because they are up there? 'Way I see it the only way next is down, the question is when.

There was a big fire in Whirlpool's trailer park yesterday, wouldn't have expected trailers to burn quite so fiercely. I don't suppose they were full of returns by any chance?

-1

I bought Shoe Zone only last Tuesday at 200 pence, I doubt if I was on my own and now feel somewaht chagrined. It was a toss up between that and United Carpets but had I gone the other way UCG might be next to drop 33%. It is a long game anyway unless you have a supercomputer and algorythms to match.

herbie47

Do you mean share price? Well XLMedia (LON:XLM) is certainly not up there. Quite a few seem to struggling, only one in the top 10 that is of interest to me is Mission Marketing (LON:TMMG) but that is down about 25%. Yes I have feeling that some may well be going down soon. Note Shoe Zone (LON:SHOE) is superstock.

Yes, that is a worrying sign. How could it all go wrong for Woodford, so many investments that seem to have no rationale at all, and concentrated in property.

One thing that is noticeable for me is how these guys (and Funding Circle) seem to have trendy head offices, seemingly staffed by casually dressed 20-somethings who can enjoy a bit of pool or table tennis while quaffing free beers after work.

Probably fine in the good times, in the bad times it'll be these people responsible chasing the increasing pile of defaults.

I have to agree, after reading a bit more it doesn't seem very good. Thanks for your (and timarr)'s input.

sharmvr

I would suggest with companies such as this, you are better of looking at the price to tangible book ratio as opposed to PE, and the company is at 1.4x per stocko (certainly not what I would call extremely cheap).
As a sub-prime lender one might argue a higher multiple to book since they get a more attractive return on their assets than vanilla banks and in theory carry less debt, but then again they do need to hold more capital for risky lending, so that higher income is held on the balance sheet as opposed to paid out.
In my simple brain, people who can actually afford to pay 50% of the principal in interest are unlikely to need to borrow, with or without a guarantee.

As far as accounting, not straightforward but will try and answer - please note I am simplifying the matter a lot:
they have to account for the interest on an accrual basis, ie a receivable (similarly any upfront fees are liabilities, released to P&L over the life of the loan),
I expect if customers are defaulting they will default on the interest and the loan principal, especially if interest at the end of year one represents 50% of the principal.
Loan losses will be charged to P&L - a deduction in profit and the hit will be accelerated since the entire amount will be written off, even though the asset was initially anticipated to be realised over several years (non cash item of course, but then again cash left the door and is not going to come back, so I would suggest it is a cash item).

Don't know about Amigo itself (beyond the ads) and what their impairment policies are, but anything at 3 months arrears, I would expect specific provisions / impairments against and then a general level of provisioning based on the economic cycle and their own history.

Cynical perhaps, but financials tend to be slow in recognising provisions / impairments, often because they are trying to sell loans / assets before buyers realise they are impaired (I know - that is so 2008) unless they are having a good year, in which case, it is nice to have something to write back and show how low your loan losses are in a downturn because you happen to be so good at analysing credit risk.

Peter Brown

31st Aug

I always get twitchy when a CEO suddenly departs. With recent events at other companies my first thought is always accounting "issues", but I would also expect (hope?) any suspicions of that nature to be announced at the same time as the departure. Time will tell.

covkid

2nd Sep

As margins get squeezed the focus on costs will highlight what the cost of returns really is & whether it can be sustained. I think that most on-liners will start to either charge for or limit the amount of returns accepted.

Small Cap Value Report (Fri 30 Aug 2019) - SHOE, G4M, CLG, LGRS

Shoe Zone (LON:SHOE)

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Graham Neary

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