Small Cap Value Report (Mon 1 Nov 2021) - SHOE, PIER, LOK

1st Nov '21 by Paul Scott

52 comments 8967 reads

Good morning, it's Paul and Jack here, with the SCVR for Monday. Today's report is now finished.

Agenda -

Paul's section:

Shoe Zone (LON:SHOE) - trading update raises profit guidance again for FY 9/2021. I missed the update from 13 Oct, so cover both today. It looks an excellent recovery, although there is a question mark over undisclosed benefit from business rates relief, which will be substantial given SHOE operates from 410 sites. With net cash, and divis returning sooner than expected, this looks a credible, and good value recovery share. I also like the growth in online, and a change in strategy to make online sales "core" in the future. Thumbs up from me!

Jack's section:

Brighton Pier (LON:PIER) - eight university town bars, eight mini-golf sites in retail and leisure hubs, a pier in Brighton, and a theme park in North Yorkshire. This is an unusual combination of assets. Current trading looks understandably positive and the shares are up, but the company has disappointed before and this looks like a complex and costly enterprise to run. The shares are illiquid too, so it's high risk.

Lokn Store (LON:LOK) - strong results and although the shares look expensive, there is a long term growth opportunity here which can be realised via a relatively low risk strategy. Margins are already high but the company suggests these could improve further. It might be worth looking beyond the high earnings multiples but there's no doubt 33.5x forecast earnings feels pricey.

Explanatory notes -

A quick reminder that we don’t recommend any stocks. We aim to cover 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…

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Phil117

1st Nov '21

£LOK. I have to say that I find this utterly fascinating. And just can't really get my head around it. Here you have a business with an Enterprises Value of c. £300m and a Market Cap of c. £250m. It has a decent brand / track record but basically has big sheds for sub-let. No patent. No real magic sauce. Definitely no monopoly. On a stand alone basis it trades on Revenue, EBITDA and Net Income (pre-property value adjustment) multiples of roughly of 14x, 25x and 78x. Pre-expansion capex the business throws off FCF about £8m according to the Prelims, which are presumably somewhat inflation protected via the ability to push through incremental yearly price increases. But presumably not too much as clients do have some choice / price sensitivity. All in all it means a FCF yield of roughly only 3%, which explains why the Div Yield is less than 2%. Much of the net asset value expansion seems to have come from successive rounds of positive property re-valuation. Presumably this can always go two ways. Net Debt has been steadily rising as the site portfolio expands. Leverage is modest yes to Market Cap but not on a Net Debt/EBITDA Basis.I guess my question is who is the marginal buyer at this valuation and what is their investment thesis? It's clearly not a high yield income play? A warehouse property play? Someone betting on continued positive property re-valuation with some modest property portfolio growth attached? Is this seen as ultra-low risk and business cycle independent? As I say I'm genuinely fascinated by who looks at Lokn Store (LON:LOK) at current levels and goes, lovely, I will have me some of that. And ditto holders who have done well and choose to stay in

Rusty2

A mixed bag, some good, some bad (a few total losses). Quality is pretty average. You are better off here.

Very bias in my opinion, very little about the negatives. There are no performance figures on his tips, only his annual bargain selection.

stockscreen

A cracking business which never seems to put a foot wrong. I hold.

Which stock are you referring to?

JohnEustace

Well the Ecr Minerals (LON:ECR) RNS did say a bit more.

Craig was a good CEO and a great friend and his loss will be felt by many. Our thoughts are with his family at this difficult time

sharw

Some time ago I had a look at the effect of a Simon T tip. It was obvious that the minute the email hit inboxes there were a large number of people buying simply on the word 'buy' - they would not have had time to read anything about whatever the company was. I took the trades that were not a round number of shares - presumably £ specified - and found most of those numbers as sells later in the week as the price held in anticipation of those who did not pay the premium receiving the tip in the Friday magazine.

Good luck to them but not my style.

GN100

turbo, as others have commented on this thread, a mixed bag. I would SUGGEST that if you bought his portfolio at around the beginning of the calendar year you may end up in profit, although it may be a long wait for some of them. One of the problems is, and this applies to most of the small-cap universe, to make a reasonable amount of money you have to often well exceed the EMS in your holding. If the share is illiquid then getting out can be a problem. As always there's no free lunch. Also, remember that ST is a journalist like any other, he has to produce an article for his editor and that is a tip. I think he is probably better at picking than some of his contemporaries. As has already been mentioned, I think you are better off here - no tips are given but the research is there for you to see and the collective wisdom of Stocko comes free with your sub. If I was to reduce to only one source of info it would be Stocko.

davidjhill

I think the minimum offer amount is whatever is paid in the preceding 12 months rather than 6?

Directors are in a bit of a bind though as they are no longer unconnected parties and therefore will have to excuse themselves from any discussions around any offer they may make for the business. It will be the independent non execs that will probably have to opine on fairness of any offer.

Also, the directors are duty bound to look after shareholders best interests. Otherwise they risk a law suit against the individual directors. Would not be good for Science group if that happens as market would be unlikely to take it well.

As they only own 27% they need a lot more holders to accept a lower bid and why would they do that? The directors of Science group are now managing the business and they are duty bound to manage it properly. Given they own 27% they are also not incentivised to do anything else.

turbo

Thanks for the replies re: Simon Thompson/Investors Chronicle. Fully agree Stockopedia is the go to place for proper background and research! Was just thinking about maybe subscribing to IC for a few months, but maybe I'll give it a miss if the minimum subscription is 6 months.

sharw Yes 0935 for me as well. You are quite right about the volume you can see how and when it grows on the one-day

chart.

mojomogoz

FWIW I think it's insane to follow Simon Thompson tips and that the IC should not have this guy tipping speculative and speculatively priced micro caps to UK PIs. Very shoddy. He doesn't do good work...just cosmetic banalysis.

Bull market on and liquidity good and not throwing around much in the way of investment size...well you might tip toe thro his volatility and pick up a little return...tho still get hit with some fat tail downside in things.

Bull market and/or liquidity cools. Then even at small size you may find exit only available at chunky mark downs.

Bah humbug.

turbo, Obviously the choice is yours and I'm not trying to sell an IC subscription but mine occurs every 3 months and comes to £34.37 for the digital mag plus £34.38 for the Alpha. The Alpha goes into a lot more detail and if it draws your attention to the Company then you can come across to Stocko and dig deeper. I find that these articles can be useful for triggering your investigation into the Company - much as happens here and with the Stock Slams. If I make more (and hopefully a lot more) than the costs then that's good enough for me.

Thanks for your reply GN100, will take a closer look :)

Hi Mark

I'm not very informed on Anglo Pacific (LON:APF) so take my views with big pinch of scepticism. They are very much drive-by-banalysis.

I did not like historic CEO. He comes from a generalist asset management background not a commercial commodity background (not even a financial analysis specialism in the area). He ran Audley Capital. If I recall correctly this was an activist fund in the mid Noughties (when activism was quite the rage) that then turned into a value fund with commodity focus as commodities bull phase got really hot 2007-2010. I might not remember fully correctly but my provenance is ball park (it was my job back then to meet and analyse guys like that)
The Aussie coal asset dominates cash flow. This has been a real winner investment for the biz. Its been known to be nearing the end of likely payout for a while I believe as the mining moves off of the area that they have royalty marked out for
I believe the recent returns to the coal assets were very much an unanticipated surprise if we cycle back to earlier this year.
The assets of the biz are dominated by new 'battery metal' royalties. Whilst I like the narrative here (I don't deny battery metals got buying pressure!) I'm sceptical of price paid and ability to be in position to access best deals.
My scepticism in 4 could be really misplaced and 'the market' could be telling me that...but I think the market is gorging on the coal returns and pretending its a trendy battery metal play.
If coal isn't making cash for them them they will need to raise significantly to buy new assets....I don't see anything getting close to coal cash soon...
...so is the dividend sustainable from operating cash flow? I'd guess not (again needs work)
Finally as a negative point...after building this baby and placing it in the glory of battery metal why is the CEO off now?

So IMO reduce future returns from coal a lot (be simple and make zero and then add a little residual for some return). Note, the fact that the coal assets are held way below the recent battery metal acquisitions despite throwing off so much cash flow tells you that Anglo think its near used up as an asset for them....and I'm not on top of it but Q3 was a really nice surprise.

Will S

Seems the new Finance Director Terry Boot at Shoe Zone (LON:SHOE) is really working out well then.....

Bouden54

Agree, ST tends to only list the positive points (in a rather exaggerated way) as if he's trying to sell you something. I much prefer the balanced approach on here, where Paul and Jack weigh up both the bull and bear cases and readers can make up their own mind.

illiswilgig

Thanks Mojo for taking the time - that's a very useful summary of Anglo Pacific (LON:APF) points - positive and negative. I think you've got it pretty much spot on - my views align with yours. Gives me plenty to think about.

I was not aware of the CEO's previous. He has not inspired me, though he did well with the Liorc Iron Ore and flipped it to buy into the Cobalt stream which was a bit slow at first but seems to be coming good now. Like you I wonder why he's leaving now when it seems that it might be coming together at last.

Q3 came in as I anticipated - with current prices I expect Q4 to be higher.

With the golden goose tailing off in the next couple of years they do need another large stream/royalty to keep the cash rolling in, fund the dividends and pay for new acquisitions.

The good news is that the cash rolling in at the moment might just alllow them to fund another royalty/stream - the bad news is that there might not be a good enough deal available to them!
I agree with you there.

They may just strike lucky (again) as they have a development nickel mine 'Piaui' sitting in their portfolio - and a cheap option to raise the grr to ?4.25%? But even if everything goes according to plan - it won't come into production for a few years. So there could be a nasty gap.

I like the battery metal portfolio but don't think the numbers are great - unless they are really lucky with the prices in the next couple of years. I probably have too large a holding here, been holding on in the hope of a good exit point - still might happen but I will be watching carefully,

thanks again for the write-up,

cheers

Mark

I discovered Paul and Stockopedia via Globo, which was one of Simon Thompson’s tips, he got into a real mess with that, he could not see any of the problems. Yes I quite agree he is like a salesman. When his tips go wrong he is always trying to make out there are not any problems.

tic_tac_toe

check your local library (or ask them to stock it) ours has a new copy each week.

KevinS1

You can normally find an IC subscription ofer for getting the first 4 or 6 weeks for free - just remember to cancel your DD before the 4 or 6 weeks is up. I've subscribed for a while (and more recently also to the Alpha bit), but am debating about giving it a rest and perhaps trying something else....................Sharepad, or another magazine.

Whilst Ive enjoyed the couple of years I find I fall behind with the weekly magazine and often find myself 2 or 3 weeks behind.

I don't think I have ever identified a specific stock to undertake further research on from IC, but I have had reinforcement of some of my holdings and have enjoyed the more general articles. Like others here I get a lot of info from this site and also a number of other subscriptions.

Small Cap Value Report (Mon 1 Nov 2021) - SHOE, PIER, LOK

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Paul Scott

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