Small Cap Value Report (Fri 6 Apr 2018) - NXT, TET, MOTR, VP.

Friday, Apr 06 2018 by

Good morning, it's Paul here.

Due to jet-lag, I'm up bright & early again, ready to get cracking when the 7am RNS springs into life! As usual, please feel welcome to add your comments on any interesting announcements below.

I was adding this section below to yesterday's report, then decided to move it to today's so that more people see it.

Continuing my macro thoughts earlier this week, here is a summary of recent, detailed outlook comments from Next plc. This is not a small cap, but it provides unique commentary and transparency, which is of wider importance to the sector, and economy as a whole. Hence why I report on Next.

Commentary from Next (LON:NXT)

(at the time of writing, I hold a long position in this share)

Earlier this week, I outlined here my current macro view - which is that I see reasons for a degree of optimism later in 2018, particularly as the squeeze on UK real incomes appears to be coming to an end.

Belatedly, I've been reading the utterly brilliant commentary which retailing bellwether Next plc produced on 23 March 2018. The version with colour charts is here. It makes fascinating reading, and if you get a moment, I strongly recommend reading at least sections 2 & 3.

Here are a few key points;

1) Currency is now becoming helpful - and should drive price deflation in 2019 - which could also feed through to better LFL sales, although Next doesn't mention that;


2) Real incomes should stop falling;


Outlook for Real Income in the Year Ahead

It appears that the easing of inflation in our own sector is being reflected in the wider economy, as other sectors benefit from stabilising currency rates. If that is the case and average nominal income growth remains at current levels, then we should expect to see little or no decline in real incomes during 2018

EDIT - Many thanks to reader "dfs12", who points out in the comments section below, that big hikes in contributions to auto-enrolment pensions look set to take a bite out of disposable incomes. I've just googled this issue, and the increases are indeed quite…

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NEXT plc is a United Kingdom-based retailer offering clothing, footwear, accessories and home products. The Company's segments include NEXT Retail, a chain of over 500 stores in the United Kingdom and Eire; NEXT Directory, an online and catalogue shopping business with over four million active customers and international Websites serving approximately 70 countries; NEXT International Retail, with approximately 200 mainly franchised stores; NEXT Sourcing, which designs and sources NEXT branded products; Lipsy, which designs and sells Lipsy branded younger women's fashion products, and Property Management, which holds properties and property leases which are sub-let to other segments and external parties. Lipsy also sells directly through its own stores and Website, to wholesale customers and to franchise partners. The Company's franchise partners operate approximately 180 stores in over 30 countries. more »

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Treatt PLC is a United Kingdom-based ingredients manufacturer and solutions provider to the flavor, fragrance and consumer goods markets. The Company's geographical segments include United Kingdom, Rest of Europe, The Americas and Rest of the World. The Company's products include Essential oils, Citrus, Treattarome, Functional ingredients, Chemicals, Organic essential oils, Vegetable oils and Treatt brew solutions. Its Essential oils include Amyris Oil, Angelica Oil and Aniseed Oil. Treattarome products include Pineapple Treattarome, Honey Treattarome and Cucumber Treattarome. Its Citrus products include citrus oils, CitrustT, TreattZest and Citrus add-back range. Its Functional ingredients include beverage specialties, fragrance ingredients and sugar reduction products. Its chemicals include aroma chemicals, natural chemicals and Treatt Flavour Wheel. Its Vegetable oils include Borage Oil and Baobab oil. Its organic essential oils include Organic Aniseed Oil and Organic Lime Oil. more »

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Motorpoint Group plc is an independent vehicle retailer in the United Kingdom. The Company's principal business is the sale of vehicles, of which are approximately two years old and which have covered over 15,000 miles. The Company sells vehicles from brands representing vehicle sales in the United Kingdom, with models from Ford, Vauxhall, Volkswagen, Nissan, Hyundai, Audi and BMW. The Company operates from over 10 retail sites across the United Kingdom. The Company has a national contact-center dealing with online enquiries. In addition to sales of vehicles, the Company operates, a business to business online auction platform for vehicles. The Company also offers ancillary products to customers, including customer finance packages, vehicle guarantees, insurance products and vehicle protection treatments. more »

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  Is LON:NXT fundamentally strong or weak? Find out More »

24 Comments on this Article show/hide all

Jimmac 6th Apr '18 5 of 24

In reply to post #350353

I came on here to ask exactly the same thing & hoping you might take a look at this one Paul. My main thing is the decrease in net cash. I think I've got my head around it, but would be good to hear an explanation to this from the master.

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gus 1065 6th Apr '18 6 of 24

In reply to post #350388

Hi Matylda.

Re. VP (LON:VP.) gearing. Given it’s in the equipment hire sector these companies tend to carry a fair bit of debt as part of the general business model. (Buy kit on secured credit, rent it out at a spread sufficient to cover finance charge, Opex and Capex and make a decent profit. Buy more, get bigger, make more money). This tends to make the businesses pretty cyclical (they’re vulnerable to void risk in a downturn) and their Capex needs careful watching (too little and they lose business, too much and their leverage over cooks). If you look at a comparison with the wider peer group ( Aggreko (LON:AGK) , HSS Hire (LON:HSS) , Speedy Hire (LON:SDY) and Ashtead (LON:AHT) ), VP (LON:VP.) is in the middle of the pack on leverage (and most other metrics too). As an investment, it’s largely a call on where you think we are in the cycle for the various sectors VP (LON:VP.) services. I personally rate VP (LON:VP.) management and have been a holder for a couple of years.


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matylda 6th Apr '18 7 of 24

In reply to post #350448

Much appreciated Gus - Thank you.

Blog: Briefed Up
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mojomogoz 6th Apr '18 8 of 24

Anyone in London next Wed and interested in environment, tech and investing might like this Jeremy Grantham presentation (data will be interesting even if you do not agree with him)...

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ACounsell 6th Apr '18 9 of 24


Agree with much of your comments re Next (LON:NXT) quality of analysis but I fear your enthusiasm and additional purchase has sent the share price down 2.5% this morning!! Also the graph from Barclaycard seems a little contradictory given the difficulty that the restaurant and pubs sector are reporting at the moment. Finally women spending less on clothes (and men more to avoid accusations of sexism!) doesn't seem consistent with everyday experience. I suspect this is more to do with with similar volumes at lower prices given the success of the likes of Boohoo.Com (LON:BOO), Ai Claims Solutions (LON:ACS) and other emerging online fashion clothes companies such as Sosandar (LON:SOS).

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ACounsell 6th Apr '18 10 of 24

Sorry typo - meant ASOS which is ASC not ACS!!!

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Igotts 6th Apr '18 11 of 24

Morning Paul,
Any views on why Churchill China (LON:CHH) is down 30% since Jan? Peaks and troughs seem to have got a lot bigger this last year. Someone selling off a lot, or something we aren't hearing about?

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dfs12 6th Apr '18 12 of 24

Excellent macro section again. Many thanks. One spanner in the works with regards the improving disposable income situation... Auto enrolment pension contributions (directly taken from employee wages) go up today. From 1% to 3%. I'm not sure if this has been taken into consideration fully. Just when it looks like disposable income might break through!

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xcity 6th Apr '18 13 of 24

I read the full Next (LON:NXT) statement on the day. Had to sit firmly on my hands not to dash out and buy some. Purely a question of timing for me. Not that the outlook is that rosy ... but the management control! Accountant type management that is; not necessarily retail.

Such a contrast to Conviviality (LON:CVR) who appear to have employed a very different type of accountant.

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Paul Scott 6th Apr '18 14 of 24

In reply to post #350538

Hi dfs12,

That's a great point re auto enrolment pensions. I'll include a comment on this in the main article.

Many thanks, Paul.

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DarwenLad 6th Apr '18 15 of 24

In reply to post #350493

Thanks for the tip. It is rare chance for private investors to get a chance to listen to one of the smarter global investors who has been around a lot longer than most .

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pj8 6th Apr '18 16 of 24


Great analysis on the Next (LON:NXT) statement - but a small point on the increase in Autoenrolment pension increases. The Government would argue that these have been offset for most people by increased tax allowances, so net income will be broadly neutral. And it's net income that's what really matters in terms of household spending.

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cafcash49 6th Apr '18 17 of 24

For me Next looks overvalued with a Price to Book value of 14.3, sales growth of just 0.48 and EPS Growth of -4.95. I think the share price needs to come down further to be of interest. Charles

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prem14 6th Apr '18 18 of 24

Believe share price fall of Next (LON:NXT) today is due to brokers at Citi who have downgraded Next to sell. I am tempted to buy some as soon as possible. Cheers.

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mojomogoz 6th Apr '18 19 of 24

Paul. Thanks for the great summary of Next (LON:NXT) commentary. I should follow it.

Some general questions re retailers (for whoever wants to give a response...thank you in advance). Note, I'm deliberately poking holes trying to be negative. The questions do not represent my view, more they are my lack of view/knowledge:

1) I'm suspicious of the the data that experiences are up a lot but spending on how one looks is down meaningfully. That doesn't seem likely. So more likely is that the spending is being missed in the data presented or there is a 'trade down' (which could be on High St or to online?). This means Next are missing out on the action. Unless its men going out and looking good and the ladies staying at home in their joggers :)

2) Ex finance, the online statistics are interesting. How much is online margin a function of high street shop window? Does c.18% margin head down to c.10% that Boohoo.Com (LON:BOO) (almost) achieves? If so, what price Boo's high growth trajectory relative to Next's more stationary profile? (Online is probably existing customers switching...perhaps partly due to credit inducements)

3) As it moves to online rather than high street does this change the nature of what it must be in a fashion sense? To keep margin must it move to the fast fashion nature of Boo or risk becoming a basics and staples provider?

4) Men are functional, quick and 'safe' shoppers relative to women (crass generalisation but roughly right). Does the increase in men clothes shopping signify something about where the high street (and so Next) is in interesting fashions sense? Is this a threat to Next margins?

5) Finance is the icing on the cake with 5% of revenue but margin of 53%. Good finance business? There have been many examples of retail businesses caught out by negative credit cycles. Next finance will be low down on the list of must pays. Its customer base is likely to be 'squeezed middle' not affluent.

6) Also, on credit, its possible that Next will face pressure either from cyclical effects or FCA investigative heat.

To be overly simplistic, credit quality comes from older and more middle class punter (>30yr old) and not the young or less affluent. Its small sum stuff and comparable in nature to payday or pawnbrokers or catalogue credit (a bad game that tends to have nasty cycles!)...its not like big ticket car credit for example. Its open-ended credit. If this were catalogue credit it would be lowest quality borrowers and the costs of credit checking would be high (ie, need to pay for credit and affordability data per customer but then only the approved customers produce income and so all costs for failed credit checks recouped from them). At 22.9% APR the margins Next are achieving in finance must come from people running credit balances long term. This sort of credit dynamic has FCA's attention. I wouldn't be surprised if Next get some heat on it.

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ed_miller 6th Apr '18 20 of 24

Re Next (LON:NXT) and pension auto-enrolement: Those who opt-out will sacrifice their employer's contribution - accepting smaller total remuneration. Combine this (i.e. opting-out requires consideration, active decision and then actual follow-through, whereas auto-enrolement - the default - does not) with a contention that apathy is a wide-spread general human attribute (I think most would agree), and I think dfs12 is right to point out that auto-enrolement is likely to produce a significant drag on growth in disposable income for at least the next couple of years.

And, whilst I agree with Paul Scott on the excellence of Next's business model, management and reporting, also salient is that - as JohnEustace pointed out - in their recent Q1 statement, Next (LON:NXT) pointed out that every £1 of lost retail sales incurred, if memory serves, 61p in lost profit (presumably gross profit), whereas every additional £1 of online sales produced 'only' an extra 19p of profit. That sounds a very serious structural headwind given that Next's high online sales growth must at least begin to plateau before too long.

Disclosure: I own a very small number of Next (LON:NXT) shares.

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barnetpeter 6th Apr '18 21 of 24

In reply to post #350538

yes and don't forget the large Council Tax increases starting today...the highest for 14 years. Some huge tax rises are coming in....landlords will be very affected, new sugar tax and so on. If interest rates do rise next month as expected I think any extra income will soon disappear.

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WDWombat 6th Apr '18 22 of 24

Treatt - which I continue to hold - is in a major expansion stage, both in the US and the UK, requiring a big investment. Really the still high multiples are a reflection of this - it is a bet on the expansion's success. The fall in price may have started after Lord John Lee publicly disclosed he was reducing his position. The share had gone up so much that I seem to remember he said it had represented 40% of his portfolio at one stage and the bare multiple was very high after a cracking rise. The slowdown in nominal growth is partly a forex reversal though they do hedge substantially. I would suggest that is why the brokers have reduced estimates. I suspect - only suspect - that they may prove to be a major beneficiary of the new 'sugar laws' but am really here as it seems to me to be in a niche but quite rapidly expanding business and to be in safe but smart hands. I hope so.

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Trident 6th Apr '18 23 of 24

In reply to post #350603

I think many companies will suggest to their employees that they take a salary sacrifice equivalent to the required top up of the auto enrolment %. This will deliver a more immediate tax efficient contribution, and would have a lesser effect on reducing net take home pay, than if they had to reclaim this from HMRC individually. This will also reduce Company NIC paid on earnings.

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dfs12 6th Apr '18 24 of 24

In reply to post #350593

Apparently for low earners the drop in disposable income (resulting from the auto enrolment pension hikes) is likely to be compensated by the rise in the minimum wage that also comes in today!
But the situation is complicated with hikes in council tax and other tax/benefit changes that have been highlighted in the comments.
I hope someone in the government has worked this all out!

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 Are LON:NXT's fundamentals sound as an investment? Find out More »

About Paul Scott

Paul Scott

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »


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