Small Cap Value Report (Fri 8 Jan 2021) - RCH, TRMR, DPP, SCS, SBRY, CCT, PETS, MARS

8th Jan '21 by Paul Scott

120 comments 14084 reads

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

Timing - today's report is now finished.

Agenda -

Reach (LON:RCH) - Trading Update

Tremor International (LON:TRMR) - Trading statement

Dp Poland (LON:DPP) - Reverse takeover & share dealings re-commence

Scs (LON:SCS) - Very significant major shareholder announced!

J Sainsbury (LON:SBRY) - trading update

Character (LON:CCT) - Freehold property disposal

Pets At Home (LON:PETS) - Good trading update

Marston's (LON:MARS) - Q1 update

Reach (LON:RCH)

Share price: 224p (up 28% at 08:45)
No. shares: 312.1m
Market cap: £699m

Trading Update

Reach plc, formerly Trinity Mirror plc, is a national and regional news publisher. The Company is engaged in producing and distributing content through newspapers and associated digital platforms.
[Source: StockReport synopsis]

Good news this morning with a positive update for FY 12/2020 -

Reach plc ("Reach", the Company") today announces that it expects underlying operating profit for 2020 to be ahead of market expectations, in the range of £130 to £135 million, following a record digital revenue performance.

This new £130-135m range is ahead of existing consensus expectations for u/l operating profit of £124.3m . So about 5-9% increase above expectations, coming right at the year end, is very good.

Digital revenue grew by 24.9% in Q4, up from 13.4% in Q3. Print circulation sales were down 11.7% in Q4, an improvement on the 12.6% decline in Q3. These trends contributed to an improved total revenue decline in Q4 of 10.2%, compared with the 14.8% decline in Q3.

That's a good acceleration in digital revenues in Q4, which were +16.2% for the 5 months to 22 Nov 2020, which I covered here on the 27 Nov 2020 trading update.

Although overall revenues are still falling fast, reinforcing the fact that the main business (newspapers) looks moribund long-term. There's been a surge of investor interest in the digital side of the business in the last year, as you can see from the share price.

Digital strategy - is to persuade customers to sign up (now at an impressive 5m customer registrations), which enables Reach to track user activity on its website, and thereby better target advertising.

Pension deficit - is…

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simoan

9th Jan '21

Short positions now increased J Sainsbury (LON:SBRY) on the 7th Jan to 9.4%. Interesting given their results this week.

I think you need to be careful interpreting short positions as a particularly bearish signal. Some of these positions may just be some kind of hedge e.g. Blackrock have a 3% short position but also a 5% long position.

I'm also a bit worried about the accuracy of the information on shorttracker.co.uk - it shows Carillion as the 6th largest short position with no changes in individual short positions since the end of 2017! I don't know about you, but when I see something like that, it makes me wonder about the validity/accuracy of the other information present.

All the best, Si

abtan

Reach (LON:RCH) (no position)

Hi Nicobas

Thanks for the comment.

I'm not sure that is entirely correct.

If the company is doing as well as it's implying it is, then the bank will never not extend it credit facilities, especially in the current environment where CLBILS loans up to £200m are 80% backed by the government.

Note that voluntarily paid £0.6m in finance costs even when they have net cash.

Something just doesn't add up.

Incidentally it's precisely because of Patisserie Holdings (LON:CAKE) (never held a position) that I take more notice of these things.

Cheers

davidjhill

Reach (LON:RCH) doing a little more digging on this today and what's interesting is that digital is now around 25% of overall revenues and effectively at an inflection point. ie the drop in revenues from print next year is expected to be offset by the additional revenues in digital and starts to overtake it in YE 2022 - ie overall group revenue should be growing again. The increase in digital doesn't really increase Opex either so margins improve. That's important as it now means that cost cutting is no longer required to maintain and grow EPS of 33/34p.

Given the growing net cash pile and FCF yield of around 17% coupled with an expected increase in group revenue then servicing the pension gap doesn't seem remotely like a stretch, so a 6* PE is looking very stingy indeed to me. Indeed if the digital strategy continues on Q4 trajectory or even upwards then estimates will need revising upwards as analysts only appear to be factoring in 18-19% digital growth next year vs 24% in Q4. Similarly print is expected to decline 7%.

Free cash generated pre Pension is around £260m over this year and next. That demonstrates the highly cash generative nature of the business and clearly shows any pension servicing should be comfortable.

nicobos

Reach (LON:RCH) trust me...this is the reason.

I work for a debt fund (which holds debt & equity positions) and we told EVERY one of our portfolio companies to FULLY draw on their Bank RCFs in March 2020. So did every private equity sponsor I know.

You forget that there was a scramble for liquidity and a lot of uncertainty. Because of the lower capital weighting (for banks) of undrawn vs drawn facilities, there was no certainty that the banks had enough liquidity to fulfil their obligations. Doesn’t matter if you were a good borrower or not, banks were swamped and cash is king.

Remember you go insolvent due to running out of cash, not because of a lack of profit. This was the first time in my career, I’ve seen borrowers bust through their cash flow cover covenants (cash to debt service) long before their leverage test (net or gross debt to ebitda).

Everyone was withholding payments and trying to preserve liquidity so their was a massive systematic cash crunch. Reach (LON:RCH) for example may give advertisers 30-60 days to pay (I don’t know if this is the case but just an example), what if their clients withhold payment and Reach (LON:RCH) has to pay staff etc.

Paying £600k finance costs is sweet FA compared to the certainty of survival and no equity dilution for shareholders (Via an emergency equity fund raise).

Phuntt

I’ll add to that. Nearly every company I’m aware of maxed out their credit lines back in March/ April even when it seemed to be somewhat pointless or unnecessary - the fear of another 2008 style credit crunch was real and has led to the situation today where many companies have huge amounts of both cash and debt on balance sheets.
Most credit facilities also have graduated terms as well - eg first £20m overdraft at 2%, next £20m at 4%, next £20m at 4.5%. There will be significantly higher financing charges on most balance sheets this year than strictly necessary. I had thought this might be a major bull point for banks during 2021...

bugs1bunney

slightly off the subject sell all facebook google twitter stock a storm is coming.The clamping down of free speech is a very dangerous game to play.Americans and some uk users are jumping on other platforms fast.

john2

Google? People won't want to stop making Google searches. It wasn't Trump's prime platform.

Westway001

I don’t think the majority of people would argue against blocking the tweets of a very dangerous lunatic whose followers are easily led astray.

MiserableJacktPotato

So how come the Iranian and Chinese governments get accounts?

How come the leaders of public disorder over the summer weren't banned?

"first they came for".....

Hi Nicobos

Thanks for the input.

I must admit that I still don't get it.

Credit drawdowns in March/April I get (as you have indicated - I don't disagree with this) but why have the credit drawn at the end of June (i.e. the end of H1) when the CLBILS scheme exists?

I'm genuinely interested to know why your debt fund, for example, thinks that liquidity could be an issue when the backer of current loans is the UK government, who take on 80% of the risk?

If there was any risk for £RCH , then I imagine, funds would easily be available in days, not weeks or months.

10th Jan '21

Abtan

It’s a Euro debt fund so note that this was the case for all Borrowers in Europe (from UK, Spain, Germany to even likes of Latvia).

You are trying to analyse the situation in hindsight when the threat was very real at the time !

From a UK perspective, the CLBILS schemes were announced but who would actually qualify (would PE businesses be eligible for example!?) and how the scheme was to be administered was not really determined until mid summer. UK banks were speaking to the government on a daily basis to try and figure out the ‘rules’ and how they could implement the policy efficiently / effectively.

There was a massive backlog of firefighting work to complete at UK banks, so only the most critical of cases would be seen to (a bit like the NHS currently !). Reach (LON:RCH) may have had plans for investment or to build a working capital buffer that required cash, so would have been prudent to take advantage of available liquidity whilst it was there.

A CFO who did not draw down an RCF and then faced some sort of emergency liquidity requirement would not be in a job for very long !

I’d probably ask the opposite question ? Why wouldn’t you fully draw down all available liquidity, squeeze debtors and creditors where you can, reduce Capex spend to preserve cash in June last year ?

To quibble about the pocket change of a bit of extra interest is akin to trying to pick up pennies in front of steamroller!

All the best with Reach (LON:RCH). Been on my watchlist for a long time...so will continue to follow with interest.

timarr

If they're fomenting public dissent, violent disorder and disseminating verifiable lies under the guise of officially mandated authority then they should be banned too. But the social media networks are acting in their own best interests, as you'd expect, they're public companies.

They're going to be regulated anyway unless they start to moderate content properly. Claiming that they're open platforms and therefore not responsible for what's posted can't really be justified any more and that will drive up their costs and erode their margins. Which perhaps is a reason for selling, but probably not one to worry about immediately.

But the "first they came for ..." quote is from Martin Niemöller's lament about his and his fellow Germans' failure to defend their democracy from the Nazis. It's about standing up to authoritarianism, rather than defending some absolute version of free speech. There's only one side in America trying to deny pluralism at the moment so the quote could equally be well be used to defend the social media companies as condemn them. Bit late in the day, mind.

Free speech is not, in any case, absolute - in particular sedition, incitement and hate speech would normally be excluded under the harm principle. If the social media networks actually started moderating on that basis they'd be performing a societal good - and probably seriously reducing their traffic.

rmillaree

I'm not sure that is entirely correct.
If the company is doing as well as it's implying it is, then the bank will never not extend it credit facilities, especially in the current environment where CLBILS loans up to £200m are 80% backed by the government.

I would totally disagree with your line of thinking here as you have added the word "never"- presuming any financial institution will "always" in the future do something that is discretionary on their part is fraught with risk. Infact i would go so far as saying any presumption in that regard is somewhat risky - even if practicably speaking its seen as low likelyhood that the renewal wo';t be rubber stamped.

If we look back to the 2008 recession the housebuilders were doing fine and dandy up to 2017 just before the credit crises hit and many of the knock on consequences were made significantly worse by banks simply refusing replacement financing needed to complete ongoing projects which forced the housebuilders into an overnight shutting of much of its in progress work - ok you may say that in the meantime trading had turned much worse - but i would never presume anything when you are the one going cap in hand to another. Another example would albeit alomng slighty different lines would be Northern Rock where they kinda presumed their funding taps would be rolled over indefinately - i think it was the removal of the funding taps that caused their failure rather than any lack of trading. So i think the words "never not help" and banks should not really be used in the same sentance :)

Hi Rmillaree

Fair point on my use of "never" - you're correct, this was probably the wrong word to use, even if it is very likely that a "supposedly" highly cash generative business would not struggle to access debt facilities.

As an aside I think the 2020 situation is very different to the 2007 one.

As I understand it the loans issued today are 80% covered by the UK government. So the bank is effectively only taking on the risk of 20% of the loan.

For example, if someone wanted a £100k mortgage pre-2019, the bank would have needed to bear the risk of creating £100k loan on their balance sheet.
Today for the same mortgage, the bank's risk is only £20k, yet they are still able to reap the benefits of the full £100k mortgage.

I'm happy to be corrected, but I thought this was the point of the CBILS and CLBILS schemes launched in 2020 - to get as much cheap credit into the economy as quickly as possible without credit institutions having to worry about risk levels.

Thanks Nicobos.

"You are trying to analyse the situation in hindsight when the threat was very real at the time !"
This is a fair point and there may be some subconscious truth in this.

"how the scheme was to be administered was not really determined until mid summer"
I didn't realise that discussions on the administration of CLBILS loans continued past June 31st (ie at the end of Reach's H1). I thought - clearly incorrectly - that everything was clear as of March/April when the schemes were launched. I know the US had issues with their own covid loan programmes (particularly PPP), but I didn't really read about many issues over here.

"I’d probably ask the opposite question ? Why wouldn’t you fully draw down all available liquidity, squeeze debtors and creditors where you can, reduce Capex spend to preserve cash in June last year ?"
I completely agree with this, though if I may, I'd like to add one question - if you expect to lose £60-80m in annualised free cash flow overnight (and that's after funding £50m into your pension), are you really making £60-80m of annualised cash flow in the first place?

For what it's worth, I am probably being too pedantic and missing out on a golden opportunity. As a company that I've only recently looked into I'm sure there are logical explanations for the phenomenal increase in cash generation from 2018 to 2019, and presumably into 2020, even after paying the c.£20m deferred consideration for the Express and Star.

I don't hold, but look forward to seeing future updates.

Funding Circle Holdings (LON:FCH) (no position)

On a completely separate note to our previous discussion, I wondered whether you might have any thoughts on Funding Circle Holdings (LON:FCH) in the current environment.

I was expecting them to be a big winner in 2020 with all the government backed loans flowing around in their key markets, but came away repeatedly disappointed.

I've no idea if you have any experience with them, but given your background any thoughts would be much appreciated.

I was actually very impressed at the speed which the government acted to put various schemes in place to shore up the system. Get the press release out, work out the detail later (a bit like Brexit!

Sorry Abtan, wrote a message but not sure why only the first line was posted !?

Funding Circle Holdings (LON:FCH) let’s just say I’m highly sceptical...

mojomogoz

11th Jan '21

In a market were beta to upside is expected a previously relatively high rising but growth limited defensive can be a good short to help you leverage more long whoosh /cyclical into your book if you run a high gross long and short portfolio (ie so you’re always committed decent amount both sides)

Thanks. Even if this kind of stuff is way above my paygrade. My main concern would be the accuracy of the shorttracker website, particularly given that it does not declare short positions under 0.5%. You only need half a dozen of those and it could quickly make the data shown to all intents and purposes meaningless. I gave up referencing the website years ago as I didn't really trust it was telling me the whole picture.

Small Cap Value Report (Fri 8 Jan 2021) - RCH, TRMR, DPP, SCS, SBRY, CCT, PETS, MARS

Reach (LON:RCH)

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Paul Scott

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