Small Cap Value Report (Fri 8 Mar 2019) - Mello, DEB, GOAL, BST, REDD | Paul Scott

8th Mar '19 by Paul Scott

79 comments 14836 reads

Good morning, it's Paul here.

Mello London

David Stredder's team have been working hard to put together 2 events, back to back, in May 2019. The location is in Chiswick again, which was an excellent venue last time.

Mello Investment Trust & Funds - this should be an excellent one-day event on Wed 15 May.

The line-up of speakers & exhibitors looks superb - lots of very interesting insights, I imagine.

Mello 2019 - the main, 2-day Mello event is back (also in Chiswick) on Thu 16 & Fri 17th May. Previous attendees will know how well-organised, friendly, and interesting these events are. As usual, Graham and I will be in attendance, chatting to all & sundry about shares! Hope to see you there.

Debenhams (LON:DEB)

Share price: 3.06p
No. shares: 1,227.8m
Market cap: £37.6m

Series of announcements

Let's recap on the situation with this struggling department store chain.

Trading update (profit warning) - earlier this week, on Tuesday, the company issued a profit warning. To summarise it;

LFL sales still negative, at -5.3% in H1
Discussions ongoing to restructure balance sheet (i.e. equity/debt fundraising)
Statement from 10 Jan 2019 that trading in line with expectations is no longer valid (it didn't seem credible to me at the time)
Still expecting to close c.50 stores in the medium term
Needs support of landlords & local authorities, to reduce rent & rates liabilities - this is the crux of the situation, and I don't see any alternative to a CVA or administration - hence it's very difficult to see any value in the existing equity.

Sports Direct statement - major shareholder, headed by Mike Ashley, has put in a requisition to sack almost the entire board. Bizarrely, Ashley has offered to take over as CEO of Debenhams, on a full-time basis - i.e. relinquishing his role at Sports Direct.

It's difficult to take this seriously, since Ashley seems to be doing so many deals at the moment, buying up various struggling retailers, that you wonder how he could possibly take on a role as big as running Debenhams on top of everything else.

It also brings into question the massive conflict of interest. Presumably he wants to buy Debenhams and merge it with House of Fraser. The only realistic way to…

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jwebster

8th Mar '19

GVC Holdings (LON:GVC)
As an aside 888 Holdings (LON:888) sold off this morning with the GVC issue so I've topped up a few. If you like this industry, but not GVC now, that's an option to research.

simoan

simoan - it is a FTSE100, it is clearly investable, even if you don't like it !!

Since when has the fact a share is in the FTSE100 made it invest-able??? You'll be telling us holding utilities and BT are good ideas next. The whole sector GVC is in is uninvestable due to government regulation and interference, just in the same way BT and utilities are uninvestable. Of course, I would know the company if it hadn't renamed itself so we can all forget it's past, that in itself is a red flag to me.

davidjhill

Since when did GVC re-name itself ??? It has been GVC for as long as I can remember

Roger Lawson

My comments on GOAL here: https://roliscon.blog/2019/03/08/another-accounting-scandal-goals-soccer-centres/ . Probably yet another audit failure. Never could see that this business would generate good profits from enabling folks to kick a football around.

Gromley

GVC Holdings (LON:GVC)
Somewhat tongue in cheek, but I note that the CEO'S retained holding is 666,666 shares.

Didn't 666 feature somewhere in the Patisserie Holdings (LON:CAKE) numbers?

Is this a coded message?

(Oh , I also see they both sold for £6.66 curiouser & curiouser)

coniston

GVC Holdings(Lon GVC
There margins have been very erratic over the years,they have made some big acquis ions BWIN being a reverse takeover,Bpty merged with WIN ( which turned out to be a disaster),along came GVC who seemed to have the midas touch in an otherwise complex business cultures,quite a bit of goodwill on the balance sheet & with the shrewdest operator selling most of he's shares, why would you wan.'t to take the opposite view.It reminds me of another shrewd cookie" T Pidgley who is renowned for calling the Housing cycle.

rmillaree

GVC Holdings (LON:GVC)
I had a look at GVC but the fact that they have all the Corals and Ladbrokes shops (do they have 3,400 shops in total? perhaps thats worldwide) looks like a noose around their neck. I walk past my local ladbrokes and there is hardly ever anyone in - there is a William Hill around the corner and that is a much nicer experience for the bod who frequents these places. i am guessing your % of your millennials that would ever walk in a labrokes is probably shockingly low.

Ok presumably online can more than cope with the gradual closing of the shops - but i suspect at some stage in the near future it could simply be cheaper to close all but a select few of the stores.

add in regulatory challenges , moral challenges and directors deciding now is a good time to cash in says everything.

Ok lets think about this reference the main bods selling - before they sell they will do a bit of planning, in this planning stage they then have the option to present a reasonably glass full - glass half full - or glass mostly empty viewpoint as to how the business will do. It is 100% in their interests at this stage for everything to be glass full in that regard - hey it doesnt matter as its only guesses about how things will pan out.

Looking at the proof of the pudding in this matter - they have been projecting decent profits 2019 and even better profits for 2020 (20% growth expected in 2020) - so thats glass pretty much full - looking forward.

HOWEVER - with regard to delivery , as we now getting into the nitty gritty of delivering on the rosy projections and for 2019 we have seen a downward trend in expected EPS for 2019 of 1/3 over the last 5 months. And they advised per the most recent results that "trading was strong" - hmmm seems a bit of a mismatch between the numbers and the tone of how they are doing.

Heyho time will tell - lets come back in 18 months and see if they are still expecting to make a clean 400 mill profit in 2020. If they give me 10/11 on the under over in this regard i would be staking a big wad on under.

Zipmanpeter

Non-Standard Finance (LON:NSF) reported this morning - interesting given that their reverse nil premium takeover offer for Provident Financial (LON:PFG) is running.

As had been expected, I thought NSF operational results were excellent overall. As expected, income and profit were up strongly in all 3 divisions but growth has been achieved without impairment rising. Also since their respective acquisitions, all 3 component businesses have been receiving heavy investment but these are now almost complete. Profit should accelerate sharply from now on - as promised by Mgt previously.

* Total loan book up +29% to £310Mn, impairment down to 25.6% and lots of positive specifics about how productivity is rising with scale
* Branch based lender Everday Loans grew its loan book +24.7%, delivered a normalised risk-adjusted margin of 36.7% and a ROA of 15.8%. Having doubled its branch network to 67 it still sees scope to grow 100-120 branches albeit at a slower roll out of 5-10 new branches. Currently, no major direct competitor in this space.
* Guarantor Lending Division grew +61%, taking market share from Amigo with lower impairment and clearly entrenching itself as no 2 in sector, a strategy that could double the business in a few years. Back office is now consolidated on 1 platform with new products clearly coming into view.
* Loans @Home Home Credit grew only modestly (+2%) but is being steered into being a strong cash generating business as loan durations are shortened, driving up yield and customers managed for quality (impairments down to 32% but still above £MCL's rates

Operational leverage in biggest and best performing EveryDay Loans and Guarantor lending should now be very strong going forward. Final 2018 divided will be 2.6p, equivalent to 4.2%. This would grow very rapidly if the group did not plan to change shape by taking over PFG.

But what do these results say about the price NSF offered for the takeover: 8.88 NSF shares for every 1 PFG. In my view, they support the appeal of the NSF mgt team (who at Board level will replace the PFG team) and support their strategy since they can clearly operate well in the non-standard finance market space.

In practice, if the takeover of PFG goes through, I'd expect the value of the existing big 2 NSF business' will grow very strongly indeed as cross selling branch based term loans and guarantor lending products to the Vanquis customer base should create a goldmine - especially as they get access to cheaper finance. Already I think they are worth much more than they paid for them .

Selling off NSF's weaker no 3 Loans@Home is not ideal but consolidating with 50% market share, much stronger Provident Home Credit is not likely to be a winner with competition authorities so I understand. Similarly, selling Moneybarn may mean letting go of a good business but it should fly on its own and let the NSF Board focus on Vanquis bank and the remaining consumer credit business.

Indeed, it would surprise me to see EveryDay Loans branches rebranded to Vanquis, selling EveryDay branded loans since this would give High St credibility to the Vanquis brand, further attracting low cost retail deposits and helping raise and legitimise the Vanquis' brands profile still further.

If they can just manage credit cards as effectively as they have loans in NSF's businesses, it will be a big success.

The market seems to agree with NSF taking over PFG since with 50% shares shares already declared in favour, despite there only being a 6% bid premium implied on PFG shares ie no better offer expected and indeed I would argue that PFG is now exerting a handbrake on NSF's standalone shareprice.

Disc. NSF are my biggest single holding. I'd have been happier them staying alone but I will certainly support them taking over PFG since I think they really understand their non-standard customer very well.

all I will say is that in the last 7 years I have watched them or owned them they have over delivered every single year

CEO still owns £7m worth of stock. not immaterial.

mammyoko

Nasty Redde (LON:REDD) news just out - loss of major contract

thirty fifty twenty

re: GVC Holdings (LON:GVC)

well spotted Gromley - for good analysis, the devil is in the detail !

GVC Holdings (LON:GVC)
all I will say is that in the last 7 years I have watched them or owned them they have over delivered every single year

Thats an excellent point - i have no criticism about GVC they certainly have delivered up to the point of the Ladbrokes Takeover and i would have 100% confidence they will make the best they can with regard to ladbrokes /corals so i would have no concerns operational wise - but the size of that acquisition is an elephant sized event. On the face of it, it looks like they valued ladbrokes at £3.2 to 4 billion and now the entire company is worth under £4 billion - so the market is saying they way overpaid in that regard. Add to that the 33% decrease in earning projections for this year since september (IF stockopedia info is correct) and it seems like all the good work of 7 years could be down the swanny if Ladbrokes/Coral doesn't deliver future cashflow profits that would cover the £3.2 to £4 billion they paid.

CEO still owns £7m worth of stock. not immaterial.

That is true - lets just hope he is not offering a cryptic clue by leaving himself exactly 666,666 shares left after the sale of a random total of 2,061,475 - EDIT oops someone else already noticed that fact.

Mark Tughan

Redde (LON:REDD) significant contract LOSS just reported. SP had been falling for a while, I'm guessing it was clear that this had been leaked, hence the announcement during market hours.

Company stares that the profit effect is only minus £4.7m (8.7%) but market presumably asking itself whether this could be a harbinger of more. It was a longstanding customer.

Commiserations to holders, which I don't, but had been watching. I'm not tempted to catch this, mainly because of the threat to the divi. It wasn't covered in 2018 and was barely covered for the forecast 2019 and 2020. Unless there is a significant compensating contract win, I'd say the divi is not at all safe.

Sorry, I thought it was Ladbrokes but now see it's just some crappy acquisitive investment vehicle with loads of gaming businesses (including Ladbrokes) with loads of debt and which hasn't made a profit for 3 years. Why do people invest in this kind of garbage? Sucker stock indeed!

Si

what a load of rubbish. you don't like it and you don't like the sector; that's fine don't invest.

However, you have done absolutely zero analysis on the company nor have any understanding of its history, operating performance or management and yet you feel you can call it "garbage"!!
I don't really care but its not very helpful to others.

However, you have done absolutely zero analysis on the company nor have any understanding of its history, operating performance or management and yet you feel you can call it "garbage"!!
I don't really care but its not very helpful to others.

Actually, it was you that introduced the company to this blog today (even though it's not a Small Cap) so the onus is on you (not me) to tell everyone why it is such a great investment?

DJCP

Just a quick note that Mirriad Advertising (LON:MIRI) ,mentioned a few days ago with regards to being one of City Financial's (ex-)holdings are up 44% today.

Not sure if the poster who mentioned them (can't look at moment, sorry) actually bought.

Roland Head

Another point that's worth noting about Debenhams (LON:DEB) is that the company's problems are now said to be having a direct effect on trading. In other words, customers won't order big ticket items or buy gift cards, for example, because they are wary about the risk of being left high and dry.

The risk is real, and perhaps unusually, it's present in customers' minds, thanks to the press coverage which followed the House of Fraser administration.

Needless to say, when things reach this point then the clock is ticking very loudly indeed.

Roland

deleted post - wrong end of the stick apologies to davidjhill

Paul Scott

Hi Ramridge,

Hi Paul - Re. Sosandar (LON:SOS) Including today's drop of 2% as I write, that makes a total drop of some 13% over the last 3 days.
As this is your largest holding, I wonder if you have any comments to make.

No, I don't have any comment, because there hasn't been any news.

Short term share prices are going all over the place at the moment, usually on small volumes, in many small caps.

It doesn't matter to me what the share price of Sosandar does, as I've bought into the long-term potential of management & the business.

Regards, Paul.

Small Cap Value Report (Fri 8 Mar 2019) - Mello, DEB, GOAL, BST, REDD

Mello London

Debenhams (LON:DEB)

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Paul Scott

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