Small Cap Value Report (Fri 9 Nov 2018) - VCP

Good evening/morning, it's Paul here!

Sorry about yesterday's report being essentially empty. I trudged into the City to see Geoff Wilding of Victoria (LON:VCP) instead, which seemed a more useful use of time. It's an interesting & topical subject. Bullet points of our meeting;

• I was late, so we only had time to rattle through the Qs which our readers here submitted earlier this week. Geoff commented;
• Share price, even after recent fall, is up 2927% since 2012, so shareholders are happy
• Day-to-day business is unaffected by recent aborted bond refinancing
• Bond issues get pulled all the time, it's not a big deal
• "Open goal for those with less than pure motives to spread outrageous untruths" - I asked directly if this was directed at me or Graham? Absolutely not. Apparently there have been negative market rumours, which this was referring to. Geoff said that he hadn't seen my commentary. "That's probably a good thing", I quipped in reply

We then went into Q&A, me asking the Qs that readers submitted here earlier this week, as follows;

Tristan - Debt fuelled acquisitions need to slow down. Accounts difficult to interpret.

A: VCP is in debt reduction mode now. Focus is on organic growth & paying down debt. 99% cash conversion. Annual Report explains the business model, so a little frustration. Understand that shareholders need reassurance.

Carcosa - what are your key assumptions? What trade-offs are inherent within your strategy?

A: (pause) Err, I'm happy to answer any questions, but I have to understand the question!

me: (pause) yes, I have no idea what those questions are about either. Let's move on.

Pippasfan - the Board is all male. What about more diversity on the Board?

A; (perplexed look) We're an equal opportunities employer. We just employ the best people for the job, and don't care how they look, or what colour or gender they are, etc.

Me - why did terms of bond issue deteriorate last week?

A: because the share price fell. Not ruling out bond funding in future. Business model is to use bank funding to make acquisitions, then refinance as needed. Nothing wrong with the business, could go back to bond market in future.  In debt reduction mode now.

Markids28 - what impact will a slowing economy have? VCP is diversified - 30% UK, 20% Australia, 50% Europe/RoW. 50% of costs are variable, 40% semi-variable, 10% fixed. So operational gearing is low. Showed me a graph showing that profit was robust in 2008 recession. 

Bank Covenants - I challenged the company to reveal what the bank covenants are.

Not disclosed. I made it clear that I think the bank borrowings are too high. In debt reduction mode.

Lots of headroom on covenants. "I've got £100m riding on this personally, so I'm risk averse". Risks are calculated - e.g. earn-outs - so if acquisitions disappoint, then the vendors get paid less

Me - I challenged Geoff on the weak balance sheet (as I see it).

A: explained how it's better to buy growing, efficient businesses. This inevitably causes goodwill to build up on the balance sheet.

(I accept this point, but in my view, the balance sheet looks weak, and hence may not be able to withstand a recession. Agree to disagree on this point)

Nick - asked about the status of the VCP shares pledged by Geoff's loans with HSBC and JP Morgan. Has he been asked to post additional collateral?

A: Not an issue. Hasn't drawn down the loans. Just there for a rainy day.

My opinion - I made it clear to VCP that we have no agenda here at Stockopedia. All we're trying to do is to give an honest opinion on the daily newsflow. That was understood, and the negative RNS comments were not in any way directed at us.

Overall, I'd like to see VCP strengthen its balance sheet. For me, the debt is too high. So a period of debt reduction would be good. I think NTAV needs to re-build, and move into positive territory. That's just one person's view.

On the positive side, there has been astonishing shareholder value created at Victoria by Mr Wilding since 2012. He's a formidable man. I found him very open, and straightforward today. Much the same as when I met him initially 2 years ago, when he gave me a masterclass in buy & build.

Make what you will of it. For me, I'd want to see a stronger balance sheet before investing. So it's not for me (or Graham), but this meeting today seemed to reassure a lot.