Small Cap Value Report (Fri 4 Oct 2019) - GRG, SCS

Hi, it's Paul here, with Friday's SCVR.

I'm starting early (writing this on Thurs evening) because am meeting my stockbroker for a boozy lunch in the city on Friday. Hence I want to get this out of the way, so as not to short-change my readers here.

ZANE afternoon tea at Claridges

Before we start though, I just wanted to report back about my charity auction for afternoon tea with me at Claridges last week.

Ken & Cheryl (readers here for several years) very kindly sent me a gift, of a voucher for afternoon tea for two at Claridges. I thought let's raise a bit of money for the Zimbabwe charity that I visited earlier this year, ZANE. So I invited bids for subscribers here to join me.

A subscriber here, called Sanjay, submitted the highest bid, and we met up to enjoy afternoon tea & had a terrific discussion about shares, property, economics, you name it! It was a really enjoyable meet up - he set the agenda. We're meeting up again to have another session, on balance sheets, which I'm happy to do in return for another generous donation to ZANE from Sanjay.

We now have quite a few Stockopedia subscribers who have engaged with ZANE, and are making regular donations. I'm so pleased about that. No matter how bad my portfolio gets, I always put it into the perspective of the terrible poverty I saw in Zimbabwe earlier this year. People there somehow managed to just get on with life, despite living in often appalling conditions.

I know that many subscribers already have your own charities that you generously support. My trip to Zimbabwe (at my own expense) to see ZANE's activities for myself, and meet virtually all its highly dedicated team there, means that I've done the operational due diligence for you on ZANE, much in the same way that I try to assist you with due diligence on shares, in these reports. Therefore, subscribers can donate to ZANE knowing that its work really is saving & improving lives on a day-to-day basis. I can't stop thinking about my trip to Zimbabwe, it's on my mind all the time, hence why I'm trying to raise bits & bobs for ZANE whenever I can.

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Consumer confidence

Every now and then, I check out the GFK consumer confidence stats. The latest report for Sept 2019 is here.

As you can see below, people actually feel fine about their personal finances, and for big ticket purchases. But there's a crushingly negative perception on the overall economic outlook - hardly surprising when we've been told on a daily basis by news outlets, for the last 3 years, that Brexit will make the roof fall in.

The figures haven't changed much from a year ago.

We've got full employment, and wages are rising well above inflation. So if you take the Brexit factor out of the equation, things would be pretty good.

The EU has a history of doing last minute compromise deals. So if the same thing happens with Brexit this month, then an optimist might see the possibility of a big stock market rally in bombed out shares, if/when some kind of fudge is agreed near the end of October. Who knows? My hunch is that this is the most likely outcome, hence why I remain invested in cheap small caps.

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Greggs (LON:GRG)

Is still delivering fantastic LFL sales growth, as its recent trading update shows;

·    Company-managed shop like-for-like sales up 7.4% for the 13 weeks to 28 September 2019

·    Total sales for the nine months to 28 September 2019 up 13.9% and company-managed shop like-for-like sales up 9.4%

Despite a bit of a slowdown in the growth rate, it's still astonishingly good. Evidence that High Streets are still alive & kicking, for shops that offer a decent product, at an attractive price?

The PER of 20 looks challenging though, despite the strong growth.

I wouldn't pay a PER of 20 for anything operating in the High Street.

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SCS (LON:SCS)

Share price: 221p
No. shares: 40.0m
Market cap: £88.4m

Preliminary results

ScS, one of the UK's largest retailers of upholstered furniture and floorings, is pleased to announce its Preliminary Results for the 52 weeks ended 27 July 2019.

This lower-priced retailer of sofas has been an unlikely survivor of the carnage in the retail sector in recent years.

There's a lack of broker coverage available to me, but the reported (adjusted) EPS seems to have come in ahead of expectations;

Underlying earnings per share of 30.3p (2018: 26.8p), an increase of 13.1%

That's a PER of only 7.3 - although the question arises, why would it be higher, given the state of everything?

Current trading - this is quite bad;

Whilst it is still very early in the new financial year, the Group has had a more challenging start to FY20, with like-for-like order intake falling 7.6% for the period from 28 July 2019 to 29 September 2019. On a two year basis, like-for-like order intake was down 3.0%. The period has been impacted by the record temperatures seen over the key August bank holiday weekend and the increased political and economic uncertainty that the UK is currently facing.

Balance sheet & cashflow statement - both look excellent. Therefore I see no solvency risk here at all.  It's tremendously stronger financially than larger competitor DFS.

Going concern note - is robust. SCS learned the hard way that when credit dries up, it can be catastrophic (it went bust in the last recession). However, the balance sheet now is loaded with cash, so this should not be an issue, even in another recession.

Going concern
The Group generates strong cash flows, reflecting the negative working capital requirements of the business model. In addition, the Group has a committed £12.0m revolving credit facility in place.

The Group's forecasts and projections show that the Group has adequate resources to continue in operational existence for the foreseeable future.

Having considered the Group's current trading and cash flow generation including severe but plausible stress testing scenarios, the Directors have concluded that it is appropriate to prepare the Group Financial statements on a going concern basis.

The comment about "severe but plausible stress testing scenarios" is important, and is a much stronger statement than the one from Ted Baker yesterday.

My opinion - it's cheap, it pays a great divi, and has a strong balance sheet.

It's your call, on whether you want to invest in something like this, right now?

Looking at SCS's website, I have to say that the products look tons better than when I last looked. Great value too. This raises the question of whether sofas really are big ticket items any more?

This is irrelevant really, but personally I like to get a good 15 years out of things like sofas. The old fashioned style of a 3-piece suite (a settee and 2 arm chairs) seems to have given way to something more flexible. So when I last updated my settees in about 2002, I picked 2 different sized settees, and a large pouffe (no laughter at the back please!) for about £1,750. That ensemble could probably be replaced now, for about half the price, from ScS, yet our incomes have risen quite a lot since 2002, making settees almost disposable for people who let children leap all over them, and make a mess with food droppings (and pets).

Bearing this in mind, I'm warming to ScS, as a company which might be more recession-proof than I imagined?