Small Cap Value Report (Fri 31 August 2018) - RTN, WTB, FFI, ESG, Wonga/HAT | Graham Neary

31st Aug '18 by Graham Neary

52 comments 12979 reads

Good morning!

While the main article is being written, feel free to comment and share your thoughts on whichever small-caps you think are most interesting today.

Incidentally, this is my last SCVR for a while. Britain's top share blogger makes his return next week, while I head south by 24° of latitude to enjoy some late summer sunshine. Cheers!

Graham

Our interesting stories today include some big-caps:

Restaurant (LON:RTN) - interim results
Whitbread (LON:WTB) - sale of Costa to The Coca Cola Company
FFI Holdings (LON:FFI) - annual results
Eservglobal (LON:ESG) - half year results
The collapse of Wonga has provoked some commentary on the implications for H & T (LON:HAT) (where I have a long position) and other lenders.

Restaurant (LON:RTN)

Share price: 287.6p (+4.5%)
No. of shares: 201 million
Market cap: £578 million

Interim Results

The market is pleased with these numbers despite use of the phrase "broadly in line" with respect to adjusted PBT expectations for the full-year.

Rather than focusing on a potentially minor PBT downgrade, investors are instead focusing on a sturdy like-for-like sales performance (+2.4%) over the past six weeks, since the World Cup ended.

As a reminder, RTN operates Frankie and Benny's, Chiquito and other restaurant brands, pubs and concessions.

The results presentation includes a chart illustrating the progress in like-for-like sales. It excludes the World Cup period:

So we do have evidence that the company has been making improvements to the customer experience, compared to last year, e.g. by upgrading menus and increasing options.

One of the big disclaimers we must attach is that margins have been getting worse. Price cuts are a big factor in this.

The H1 performance itself is nothing to shout about: like-for-like sales down 3.7%, EBITDA margin down by 1.6 percentage points, and EBIT down 21%.

The company deserves credit for the clarity of its disclosures. This is one of the advantages of big-caps: they often give you really detailed information, so you don't have to guess as much compared to small-caps.

For example, cost pressures are broken…

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InvestedGeordie

31st Aug '18

Good Morning Graham,

What a tremendous (and tireless) service you have given us - Thank you! Enjoy your hols, and I look forward to seeing you in London in the not too distant future.

Thanks,

IG

Threepeat

And BTW have a good break now all the schoolkids are back home

Enjoy

buz

Awesome work Graham. Enjoy the hols. Now where are stockopedia going to find a good quality small caps writer to sub in? ;)

LovelyLovelyGorgeous

FFI Holdings (LON:FFI) - another vote from me please. There are lots of numbers flying around in a very detailed report. I "think" the results are probably ok and that the fall is a knee jerk reaction to all the IPO costs coming off the bottom line and possibly about increased overheads in the short term.

Camtab

Well done Graham and have a great break. I think you have added an interesting extra dimension to the Small Companies Report. All the best

gus 1065

I think the Mobile Streams (LON:MOS) Stock Rank style, “Contrarian” just about sums the company up perfectly.

Big thanks to Graham from me for his excellent coverage. Complements Paul’s approach nicely and adds greatly to the quality of the SCVR brains trust. Happy hols.

Gus.

Gostevie

Hi Graham,

Many thanks from me as well for producing these superb reports during Paul's sabbatical. I hope you enjoy your very well deserved holiday.

As an aside, the EU ban on halogen lightbulbs comes into effect tomorrow:

https://www.metro.news/its-lig...

I can't help but wonder if this might be beneficial to Luceco (LON:LUCE), which has been discussed in these reports on several occasions and which produces the non-banned LED lightbulbs.

Disclosure: I have previously held shares in Luceco but currently have no position.

loudenr

I have a small holding in this and am disappointed by the results but it was signposted in previous reports. The market is just hammering things at the moment. Directors have been making big purchases around the 75-80p mark. I am sure going forward there is a reduced corporate tax rate in the US.

I f they estimate operating income of $20M for FY 19 at current exchange rates that is £15.3M. On net profits of $1.7 for FY 18 the tax charge could be significantly lower in the FY 19 accounts (under £500k possibly). We could be looking at EPS in the region of 9p ish. This assumes everything goes to plan for the rest of the year.

One other observation is that the balance sheet does not look great.

andrea34

Have a great holiday, Graham; I have really enjoyed your daily updates which have been very informative.

mojomogoz

FFI Holdings (LON:FFI) too please if can fit on radar....the market's giving this one away ;)

Well, it is a bit complicated with a lot of recent moving parts operationally and financially but IMO today's price doesn't value the core completion contract business fully (high margin, industry dominant and some growth - above average inflation for production costs driven mainly but some scope to add a bit of organic through synergies with acquisitions and China...I'm always a sceptic on China hopes but they have done it quite interestingly so far).

I bought a bit earlier this week ahead of the results. As can be seen in this note - https://www.stockopedia.com/content/film-finance-good-value-high-margin-quality-earnings-stock-with-growth-upside-393844/ - I thought there a decent chance of disappointment on results day but for me the results are quite clarifying so I bought more today at the 50ish mark. There's a lot to prove out and perhaps an overhang of sellers so maybe it will get cheaper into the information gap now. It's on 5x forward EBIT which has probably erred to the cautious side due to announcement of extra costs to up-skill corporate function and additional investment into Reel Media acquisition.

The big risk? It's Reel Media. There's a very high amount of expected profit growth to come from this business over next 5 years and that is reflected in 'contingent goodwill' (that wont be the right accounting term but get what I mean). That's really interesting IMO! Obviously Reel Media is well established but felt that they needed capital support to grasp more opportunity.

One could look at Reel Media accounting and what it indicates as hubris. But on the balance sheet the goodwill is already balanced by the liability of the payout they need to give existing management if they hit targets. The FFI are pretty hardened speciality finance sorts so my guess (and it can only be that!) is that the due diligence and the path for execution success is pretty good. I take the accounting for Reel Media as a sign of real opportunity.

But, Reel Media may be a dud! As an established and profitable unit it will cover its costs pretty well but that will still mean current acquisition goodwill writedown and perhaps something like existing Reel Media mgt walking away with the business paying nothing to get it back (so pocketing a tidy round trip profit due to upfront cash payment from FFI). Sounds bad...but the price today of FFI doesn't even cover the value of completion contract core business and that is unaffected by this....then there's the other acquisitions of which Rainbow/Pivotal has shown a considerable synergistic pick up in revenues as result of FFI tie up.

Patience and tolerance for uncertainty and some negative updates along the way required on this. But somewhere between 1 and 3 years this will be worth at least double today with a fairly decent option at multi-bagging.

I'll comment some more into my original note when I have time.

on FFI Holdings (LON:FFI) I think the balance sheet looks fine...lots of moving parts due to acquisitions, goodwill and reserving for insurance business but it seems to net out well enough.

Why is FFI Holdings (LON:FFI) down so much? Well they wont have helped by messing up the numbering of notes to the accounts! Which perhaps goes to prove that they need extra head office headcount to cope with enlarged group and means they shall be a little bit more beaten with a sh1tty stick.

If cross-referencing, generally subtract 1 in consolidated statement and get to the right note. Looks like there's a ghost section 2 'accounting polices'

1James1n1

Hi Graham,

Thanks for your insightful and thought-provoking reports over the Summer which are a daily required reading for me. Enjoy a great break and I look forward to your columns in partnership with Paul again after your break!

James

mammyoko

Great coverage over the spring/summer Graham. Enjoy your well-earned break

LeoInvestorUK

Caledonia Mining (LON:CMCL) - A Zimbabwean gold miner with no news today :)

First, let me get my excuses in for mentioning this at-all here:

it is has been covered by Graham here in January
was deemed worthy to present at Mello Derby
it is actually producing gold, paying a good dividend but is also investing in increasing production
has a reported PE of around 3
issued apparently good news just last Friday
it fell significantly this morning.

It has fallen 30% from its yearly highs in May and early August. It is also down over 10% since Graham said in January "I would guess that the recent share price increase, and the current valuation, still leave an opportunity for new investors here.".

The gold price is down 8% since May, but broadly flat since August. There have been no major currency movements, either ZWD/GBP or USD/GBP that would explain this.

Therefore the reasons for the move appear to be either investor sentiment, rumours of / interpretation of last Friday's news or somebody knowing something (relevant) that I don't.

Investor sentiment could have been affected by disappointment over the conduct of the election and subsequent political crackdown, but this doesn't really marry up with the timing of the falls. The advfn rumour mill is fairly quiet.

My working theory is that it is simply a seller trying to reduce their position, and that this morning's trades haven't all been reported yet. The normal market size is only 300 shares. I bought just 400 shares earlier at 497p and the quote moved up 10p, which just goes to show how illiquid they are.

The next thing is of course is to look into the detail of last Friday's news and what it means for the P/E and free cash flow. Here's the article:

https://www.londonstockexchang...

Is that something you'd be interested / have time to look at Graham? If not I will try to take a look later.

cholertonandrew

Hi Graham, hope you have a really good holiday. Thanks for the reports- I think you’ve been doing a great job.

Regards
Andrew

Thank you Graham! I enjoy your detail.

covkid

Have a great break Graham - thanks for all your efforts

OsullivanB

Thank you for all your excellent work Graham. I look forward to your return just as I welcome Paul's. What a team!

Beermonster

Great work as always Graham - have a great holiday.

Small Cap Value Report (Fri 31 August 2018) - RTN, WTB, FFI, ESG, Wonga/HAT

Restaurant (LON:RTN)

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Graham Neary

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