Small Cap Value Report (Fri 5 Nov 2021) - ELTA, MORE, SNWS, PURP, NICL, GATC

5th Nov '21 by Paul Scott

92 comments 11490 reads

Good morning, it's Paul & Jack here with the SCVR for Friday.

Agenda -

Paul's Section:

Electra Private Equity (LON:ELTA) (I hold) - update on valuation. Recently demerged Hostmore (LON:MORE) looks excellent value to me at 118p. Price dislocation in the first few days of the demerger could be providing a buying opportunity?

Smiths News (LON:SNWS) (I hold) - additional comments on the FY 08/2021 results, which Jack covered yesterday. This looks a strikingly cheap value share, with big dividend income in the pipeline, now that historic issues have been largely resolved.

Purplebricks (LON:PURP) - profit warning from yesterday. I'm tempted to buy back in, but am worried about potential legal case, and cash burn. New strategy doesn't seem to be working.

Gattaca (LON:GATC) - in line results for FY 7/2021 were published yesterday. Recent share price sell-off looks to have brought it down from an inflated valuation, to something much more reasonable. I would consider a purchase at 177p.

Jack's Section:

Nichols (LON:NICL) - owner of Vimto, with some attractive quality metrics. The company has been in business for over a century and it remains financially healthy, so a potential buy and hold candidate. Today it announces an 'ahead of expectations' update and the shares have derated recently, so it's a better time to look now than it has been at other times in the past.

Explanatory notes -

A quick reminder that we don’t recommend any stocks. We aim to review trading updates & results of the day and offer our opinions on them as possible candidates for further research if they interest you. Our opinions will sometimes turn out to be right, and sometimes wrong, because it's anybody's guess what direction market sentiment will take & nobody can predict the future with certainty. We are analysing the company fundamentals, not trying to predict market sentiment.

We stick to companies that have issued news on the day, with market caps up to about £700m. We avoid the smallest, and most speculative companies, and also avoid a few specialist sectors (e.g. natural resources, pharma/biotech).

A key assumption is that readers DYOR (do your own research), and make your own investment decisions. Reader comments are welcomed - please be civil, rational, and include the company name/ticker, otherwise people won't…

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Hotter continues experiential shopping store roll-out

3 November, 2021 | by The Retail Bulletin

Footwear brand Hotter has opened its first pop-up store in the Trafford Centre as the retailer re-fits an existing high street store as part of its experiential shopping focus.

The business, which sells over 1.3m pairs of shoes a year, is continuing to .roll out its Retail 2.0 strategy in response to changing high street and consumer needs. Hotter’s strategy is to offer bespoke shoe fitting experiences using the latest precision fit technology in-store, online and within its app. The first of Hotter’s high street stores to be redesigned to become more experiential – holding less inventory and maximising expert advice available – is its 1,000 sq ft Solihull store, which will be fully operational in the coming weeks.

In addition to opening a pop-up unit in the Trafford Centre, Manchester, over the Christmas period, Hotter has also partnered with nationwide garden centre group Notcutts, and plans to open digital kiosks in selected locations. Hotter accelerated its digital-first transformation in 2020 and now 90% of all new customers are acquired through its digital channels.

Victoria Betts, Chief Commercial Officer at Hotter, said: “Around 40% of in-store orders are now ordered directly from our warehouse and we expect this to rise with the continuation of our Retail 2.0 strategy.

“The transformation of our physical store network, alongside opening up pop-up units and garden centre digital kiosks, is about adapting the way we interact with customers as they continually seek more from in-person shopping experiences.

“Change in the retail sector is happening at a phenomenal pace and we’re continually innovating and refreshing. This strategy perfectly complements our digital-first approach, which has been embraced by customers and staff, allowing us to deliver high quality products direct to doors and support Hotter’s growth even through the Coronavirus lockdowns.”

As part of the Retail 2.0 strategy, Hotter is investing in motion mapping tables, providing an immersive digital experience for customers to interact with products. It is understood that Hotter is one of the first UK retailers to invest in this technology.

Stores which are re-fitted will have new layouts designed to encourage customers to use the technology, including several seating areas with iPads and large touchscreen pods; as well as industry-leading Footprint Footprint™ 3D Scanner machines, which offer precision foot measuring via 3D technology.

Hotter’s Trafford Centre pop-up will be available throughout November and December to offer customers the chance to accurately measure their feet on Footprint™ 3D Scanner, supported by trained technicians. Customers will then be able to purchase items online, for delivery to their home.

Leading the market in comfort, Hotter has reported a strong trading this year, with an overall global sales growth of 25% in the first six months of 2021 (Source: Electra RNS), despite the tough retail conditions. Its parent company, Unbound Group PLC, also announced it will list on the AIM market in Q4 2021.

ACounsell

5th Nov '21

Previous experience with withholding taxes on dividends for European companies (specifically Belgium & Denmark) is that AJ Bell not interested in handling the required admin. For Belgian & Danish listed companies this means any dividends suffer 27% and 30% deductions rather than the significantly reduced rates due to double taxation relief treaties (15% in Denmark, 10% in Belgium unless in recognised UK pension scheme when no deduction). With the latter can’t recall if an AJ Bell SIPP counts . AJ. Bell does provide W-8BEN (USA) and NR301 (Canada) forms on their site so the investor can submit and get a reduction in dividend withholding tax.. I guess they only do it for these markets as less complex/more established and UK holders are more likely to hold US & Canadian listed shares.. Finally not sure how an individual with a holding in an ISA or SIPP through a platform such as as AJ Bell could get any joy contacting Atalaya Mining (LON:ATYM) directly in a personal capacity given the shares will be held in a nominee A/C.

Andy Sav

6th Nov '21

Atalaya Mining (LON:ATYM) Anyone filling in the form for tax exception on the divi and wondering where to find 2. Company Registration Number; its here: https://cyprusregistry.com/com... HE 152217

yiannos1

Hi nixster ,

I do not know how can anyone can count the actual occupancy of a restaurant , unless you go and sit inside (although this is not the issue).

However, I had a Big Mac and chips last night , and I have noticed it was running at about 25% occupancy the restaurant.

Then I went to have a Starbucks coffee but I have noticed that was running at about 25% occupancy as well.

Both terrible companies I suppose. Look at their share price over the years-terrible performance!!!!

Anyway , have a great weekend.

nixster

But McDonalds and Starbucks are actually the top two brands in quick service restaurants. Hence the share price and the market cap for both the companies.......

Again, I have got nothing against TGIF - I just dont see I would ever have a meal there, but I definitely do know - I will pick food / order in from Mcdonalds and pick a coffee from Starbucks every once in a while.

https://www.statista.com/stati...

Rusty2

But you are not everyone. So we should not invest in a stock just because you don't want to eat there?

I would never eat at McDs or Starbucks, out of choice, so what.

I may eat in a pub, but I'm not going to buy shares, in that pub company or brewery. I may drink certain breweries products, but does not mean it a good investment, IMO.

Hi Nixster,

Who cares if you don’t eat at Fridays????!

I did say to you in the beginning that I do not own a Tesla , but you still do not get it.

The share price of Hostmore is a great opportunity compared to all its peers.

Regards

gwilli68

"Your post is such a mess! Just abandon that line of thinking. You're totally wrong on everything."

Would anyone whose taken a look at the research please be able to help me understand why Im thinking about this wrongly? Ive no doubt Im wrong but I cant see why. Here's the cash flow statement from the Edison Hostmore (LON:MORE) research. The columns from left to right are 2019 to 2022. The net cash flow line (for example, £3.5m in 2022) was much lower than Id been expecting. Thanks.

JESSE LIVERMORE

I had a go at explaining this at 20:04 yesterday.

In essence due to adopting the accounting standard IAS16, the net interest line now includes lease payments in addition to interest on Bank debt.

The actual interest on Bank debt in 2022 will be around £2m, rather than £26.5m. Adjusting for this makes a huge different to the Net cash flow line.

The October prospectus (180+ pages) is a much fuller source of information than the Edison note.

JSLDUK

Agree TGI’s is a tired brand and their new concept 63rd &1st has only opened in cobham recently. Although I do suspect most hospitality brands will be doing well post COVID if there aren’t further lockdowns, with business rates relief, grants from councils, resructured leases or rent relief from landlords and customers who have been locked inside for too long with cash to spend.

Hi Rustbucket and Yiannos1,

I ended my first post in this thread with "Just some personal thoughts. DYOR". Neither I can, nor I am in trying to influence any buying or selling decisions for anyone here; But merely expressing a "personal" perspective - which is why we have this comment section.

I will be stoked for you guys if the stock plays out. Again, I got nothing against TGIF. Good luck.

Will S

Thank you for letting us all know what you found in the Numis info

Thanks Jesse, I appreciate the helpful response. I suspected it must have something to do with the leases but I hadnt thought that that would play a factor in the Cash Flow statement. The Edison statement does show a line "Closing Net Debt / (cash) excluding IFRS16 lease liabilities" but that amount only drops by £3.5m between 2021 and 2022 (from £29.5m to £26m), tying with the net cash flow amount for the year. I obviously dont understand it correctly, thanks for your help.

Dojosan

"As a 28 year old working in the city"

TGI is defo not targeted for you - Nixster. I hold MORE.

TGI IMO remains focused outside London or at the very least suburban London and it's for the mainstream who want a night out, seek comfort food but do not want to stray too far from what they know. It's a "middle of the road" choice for families / friends / a larger party. It has its place, just like how Wetherspoon or an All Bar One has theirs. Old? Yes Doesn't mean it's the end of the road, a few refinements as what can be seen with management and they might refreshen a "mature" brand. Oh yes, and I would not be their consumer at TGI but it does not rule me out of believing that they can dominate their niche and dominate it very well.

Momoko Miyamoto

I'm a regular McDonalds customer, I think it is an incredible business but I really can't figure out how they turn a profit when their products are so cheap. Admittedly the food is not the best but the value, consistency, customer service and convenience are unrivalled.

abtan

Hostmore (LON:MORE) (no position)

Hi gwillis68

Curiosity got the better of me so I decided to take a look at the Hostmore (LON:MORE) demerger prospectus.

---

For something a bit more detailed than the Edison cash flow report, may I suggest the cash flow statements on page 86 (slide 89.)

https://www.electraequity.com/...

I looked at 2018 and 2019, which in my opinion gave an overview of how the company performed pre-covid.

Adjusting out working capital movements and banks loan repayments gives me approximate pre-covid cash generation of c£10m per year.

My understanding is that the market cap today is £136m + c£30m non-lease debt = c£166m

That looks expensive to me given the industry this company operates in, but having said that, a lot has clearly changed since 2018 and 2019.

I have no opinion on cash generation in 2021 or in future years.

----

Onto your question about net interest (which is primarily rent leases) jumping to £26m in 2022, I imagine that this is to to do with Rent deferrals:

"Payment of certain of the costs of the Group over the periods affected by the Covid-19 pandemic have been deferred and, subject to further negotiations in the case of rent deferrals, will become payable during financial year 2021 and financial year 2022.

As at 27 June 2021, these included £18.7 million of rent deferrals (some of which have subsequently been paid) and £5.8 million of VAT deferrals, which is payable in monthly instalments from July 2021 to January 2022."

I think I saw that annual leases are c£12m (it's late, so I don't feel like checking and I'm happy to be corrected), so the deferred rents noted above would be relatively quite material.

However, once these deferrals are cleared, I imagine annual cash generation will look significantly better than the £3.5m that Edison is forecasting for 2022.

Cheers

7th Nov '21

Thanks Abtan, that's very helpful, I appreciate it. I recognise the £10m per year pre covid. It looks like most of the VAT deferral will be paid in 2021 (so will have an effect of £0.8m on the 2022 cash flow if they are equal payments over the 7 months from July 21). And I dont think they give details on the rent deferral and how much of that has been paid already, and how much is paid in 2022. I guess its knowing that number that will help understand how much better the £3.5m cash generation in 2022 would really look. Thanks again.

RDHOWARTH

OK Apol I didn’t realise, in a way though that’s encouraging as presumably Hostmore (LON:MORE) is under less pressure to expand TGI and can satisfy the franchise agreement through 63rd & 1st.

cojode

Article in Retail Bulletin which gives an update on future strategy for Hotter Electra Private Equity (LON:ELTA) including this sentence half way through thru "Hotter is investing in motion mapping tables, providing an immersive digital experience for customers to interact with products" which indicates that the company believes its target audience of 55+ are both tech savvy and prepared to engage in new experiences. Let's hope they are right. (disc: I hold)

JollyBiologist

8th Nov '21

I wrote to Jarvis about this and their reply was:

a) the XO trading account can only hold and trade UK listed stock and you will not need to complete a Cypriot tax form as the ATYM shares are UK listed

b) All dividends received into the XO accounts will be in sterling as the accounts can only hold GBP.

To add to my previous comment I contacted AJ Bell and much to my surprise they said that they had completed the necessary paperwork for their shareholders and all dividends will be paid in GBP. I await the receipt of the dividend to see if this actually comes to pass! Still not sure why they won't do the necessary admin for Belgium & Denmark though.

Small Cap Value Report (Fri 5 Nov 2021) - ELTA, MORE, SNWS, PURP, NICL, GATC

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Paul Scott

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Hotter continues experiential shopping store roll-out

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