Small Cap Value Report (Mon 15 Oct 2018) - CAKE, SHOE, SDRY, CBOX, PURP, SYS1

Monday, Oct 15 2018 by

Good morning!

The FTSE is down by "only" 25 points so far, meaning that this isn't yet the "Black Monday" I thought it might be. The low earlier this year was around the 6900 level (currently at 6975).

From Patisserie Holdings (LON:CAKE), we have heard of the existence of secret overdrafts propping up the company. The placing at 50p went ahead on Friday with 31.5 million new shares being issued - it could have been so much worse! The pre-existing shares will maintain ownership of 75% of the equity.

I've noted a couple of interesting comments over the weekend. Richard Bernstein from Crystal Amber - who wanted to be part of the rescue deal - has remarked that interest income was suspiciously low, given the cash balance the company was allegedly holding.

Elsewhere, Leon Boros has speculated that bills may have been credited to sales rather than creditors.

EBITDA forecasts for the current year have been slashed by c. 60%. Given that the earnings multiple attached to Pat Val's earnings will also be compressed, we can understand how a 90% discount might have been needed to ensure the success of the Placing.

The shares should come back from suspension by Thursday morning. Putting my optimistic hat on, I think 50p could prove to be a floor for the share price, assuming that the balance sheet is fixed and the chain is profitable (albeit at a lower level).

The problem is that the historic earnings numbers were probably a fantasy, making Patisserie Holdings (LON:CAKE) an inherently speculative proposition at this point. Financial analysis isn't possible with fake numbers!

Bring on the restatement of the accounts.

There are other companies with news apart from CAKE:

Shoe Zone (LON:SHOE)

  • Share price: 185p (+12.5%)
  • No. of shares: 50 million
  • Market cap: £92 million
Shoe Zone PLC (the "Group"), the UK's largest value footwear retailer, reports on trading for the 52 week period to 29 September 2018

An excellent update from this cheap shoe shop. Revenue…

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All my own views. I am not regulated by the FSA. No advice.

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Shoe Zone plc is a footwear retailer in the United Kingdom and the Republic of Ireland. The Company offers women's shoes, men's shoes, boy's shoes and girl's shoes. The Company's online offering combined with its store network enables customers to shop through multiple channels. The Company operates from a portfolio of approximately 550 stores. Its customers purchase all of the products available in stores, as well as an additional approximately 400 product styles. The Company sells over 20 million pairs of shoes per annum. The Company has operations in various countries, including Germany, Italy, Spain and France. The Company's distribution center is located in Leicester, England. The Company's subsidiaries include Castle Acres Development Limited, Shoe Zone Retail Limited, Zone Property Limited, Zone Group Limited, Shoe Zone (Ireland) Limited, Shoe Zone Pension Trustees Limited, Stead & Simpson Limited, Zone Footwear Limited, Zone Retail and Walkright Limited. more »

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Patisserie Holdings PLC is a United Kingdom-based cafe and casual dining company. The Company offers cakes, pastries, snacks, meals, and hot and cold drinks across the United Kingdom. The Company's segments include Druckers, Flour Power and Philpotts. It offers products, such as coffee, dairy, fruit, packaging, cocoa and wheat items. It offers cakes in various categories, including celebration cakes, gluten free cakes and wedding cakes. The Company operates under various brands, including Druckers-Vienna Patisserie, Philpotts and Flour Power City Bakery. The Company offers a range of cakes, such as Gluten Free Flapjack, Gluten Free Chocolate Chip Muffin, Cortina, Chocolate Box, Carrot Cake, Cheesecake, Blackforest, Exotic Fruit Tart, Pecan Tart, Citron Tart, Choc Mousse, Mixed Berry Mousse, Raspberry Tart, Madame Valerie Slice, Mille-Feuille, Gluten Free Chocolate Brownie and Gluten Free Marble Cake. more »

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

51 Comments on this Article show/hide all

cidunn 15th Oct '18 33 of 51

Hi Graham, RE. Superdry (LON:SDRY) and your comment about "Global Digital Brand? That's more of an aspiration than a reality for now"

Found this on their careers site:
The Superdry brand is a genuine British success story that has grown to a turnover of £872m, £96m profit and a strategic plan in place that will make us a £1bn turnover company by 2020. Our brand is already worth £1.6bn in total global consumer sales. We are a multichannel operator with well-developed and highly successful retail, ecommerce, wholesale and franchise businesses and customers in virtually every country in the world. We are well on our way to achieving our goal of becoming a global digital brand.

As you say, feels very odd and out of place!

All the best,

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Julianh 15th Oct '18 34 of 51

"Financial analysis isn't possible with fake numbers!" (Graham Neary)
I love it!!! Absolutely spot on.
One of the reasons I never bought in was that the dingy cake shops and 'so so' quality food never quite stacked up with the excellent reported returns.
Something strange must have been going on if (as we expect / hear / understand) the FD has been taking cash out of the business. He could not have hid this for ever, especially with an HMRC winding up order floating around. If that sort of money was now in his back pocket you would expect him to be sunning himself in South America. I wonder where all the money went.
All just speculation of course.
re: Patisserie Holdings (LON:CAKE)

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rhomboid1 15th Oct '18 35 of 51

In reply to post #408794

Hi clifftoppler

Yup multiple portfolios are available 8-10 at you’ve no excuse not to join!

Hope to see you around here more


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Laughton 15th Oct '18 36 of 51

In reply to post #408794

Clifftoppler - you can probably have as many Portfolios as you want - I currently have 7 (as well as my SSAS and 2 ISAs I like to keep track of what's happening with Ed's NAPS.

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sharw 15th Oct '18 37 of 51

In reply to post #408794

You ask about share prices - there are many reasons to subscribe (principally the stock ranks) but share prices are not one of them because of the quirk of using the latest trade price,

Let me give you an example: Bloggs Group, a small cap has traded for the last few days at 98 - 102 giving a mid price of 100. If that continues most sites show 100 unchanged but on Stocko every time somebody sells at 98 it shows that as the price and -2% and every time somebody buys at 102 it shows that as the price and +2%. The larger the spread the more giddy it will make you feel!

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ed_miller 15th Oct '18 38 of 51

In reply to post #408794

Note that, at the moment, you need to make manual adjustments for stock splits, dividends etc, though Stockopedia does provide a facility to adjust holdings for this, and it will probably become automatic at some future date. For the time being though, you might not find your Stockopedia 'Folios' accurate enough to use as a very easy and convenient way of tracking performance of your individual and consolidated share-dealing accounts, especially if you are reinvesting some dividends - a shame since it would make life much easier if you could enter all those details and be sure that your Stockopedia folio(s) would replicate your actual accounts exactly and in one place. The folios are still very useful though for tracking your holdings and recording notes and transactions for individual shares.

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Trident 15th Oct '18 This post is under review

Here's my complete guess on the situation behind Patisserie Holdings (LON:CAKE). Long-term associate of LJ thought he could play the Bull markets off the books with company cash, hoping to keep surplus gains and return cash.

Problems arose when trading did not result in gains. Board confirmation and minutes of overdraft documents were forged using image signatures used in printed accounts. Bank thought multiple directors were authorising, but only one party was.

New bank account details were forged for existing supplier to move more cash out of business to a bank account set up in name of forged company invoice. No doubt doubling down on trades to try and recoup previous losses.

Situation spinning out of control as HMRC and Landlords became victims of cash crisis. Suppliers may have been used to late payments.

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Cisk 15th Oct '18 40 of 51

I’ll repeat what I posted about Superdry (LON:SDRY) a while back - the store local to me in (a very upscale mall) has permanent sales and is typically empty, even on peak weekend trading days. This store is in Los Angeles, arguably there’s not much of a need of the heavy jackets etc the brand purports to be known for. And this location must be very expensive in terms of rent. But obviously you can’t extrapolate one store to the entire group!

I think the bigger concern for me (if I was a holder) is where the brand is heading and how valuable it actually is. From casual observation, their customers are not 20s or 30s but more middle aged dads, a market that has very different spending patterns and repeat business, as several have commented today. Clothing retailers can make money in this sector, but can also lose a lot - witness M&S spending years trying to turn around their menswear offerings.

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barnetpeter 15th Oct '18 This post is under review

In reply to post #408874

Maybe gambling on currency or even online poker. Near where I live on the South coast, three bank managers inc an area manager plus the wife of a stockbroker stole vast amounts to fund gambling on fruit machines and poker. Some of the jackpots are huge...5 million £ etc....and people empty their accounts chasing. I remember reading an article about a guy who had everything; nice home, business, family etc. He lost everything in weeks gambling online 20 hours a day. He even managed to borrow hundreds of thousands.....lost the lot.

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Howard Marx 15th Oct '18 42 of 51

In reply to post #408844

"If that sort of money was now in his back pocket you would expect him to be sunning himself in South America. I wonder where all the money went?"

Maybe he invested it into Patisserie Holdings (LON:CAKE) Put options?!

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Peter171 15th Oct '18 43 of 51

It beggars belief that such a fraudulent action could go unnoticed for how long? This is another instance of poor quality auditing and weak systems of internal controls, poor management?
It is also a reflection on the banks and there so called due diligence. Be interesting to see if CAKE take action against them.
Just glad I got out at the top. I don't subscribe to the view that 50p will be a support for the share price unless existing investors are going to average down big time....time will tell?

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sharmvr 15th Oct '18 45 of 51

In reply to post #408939

Not sure that is anything to do with Patisserie Holdings (LON:CAKE) specifically.
One of the senior partners at the firm released her appraisal to the FT (ridiculous and with partners with that kind of integrity, would you really trust their signature)
Apparently there was something of a civil war amongst the partnership and her desire to "pursue a socialist agenda".

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Bushranger 15th Oct '18 46 of 51

In reply to post #408819

Climate change does not mean "extreme weather". This world was a lot colder and a lot warmer at recurring times. It has gone through cycles, thus ever was and will ever be (at least to our puny existence). Human civilisation advancement has be correlated to these cycles. When the earth was in warmer phases industry, technology, population increased. In times when the earth was in its natural cold cycle (causing ice ages) human advancement slowed.

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runthejoules 16th Oct '18 47 of 51

Cake Box Holdings (LON:CBOX) - I'm told they only do eggless cakes because Hindus don't eat eggs, which means it has a limited, Desi, market. Now, if they were to expand their audience by offering a vegan option I think they'd be onto something big.

And as for Patisserie Holdings (LON:CAKE), I have no idea what the disgraced ex-CFO looks like or what he was up to, but for some reason the Viz comic character 'Fru T. Bunn, the Master Baker' springs to mind :-)

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runthejoules 16th Oct '18 48 of 51

In reply to post #408964

Bushranger - Cause: effect. Cause: effect. Small: far away. Small: far away.

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Metatron 16th Oct '18 49 of 51

In reply to post #408904

Beggars belief if people are chasing losses at fruit machines but online poker and betting exchanges are zero sum games.Whatever someone is losing out there someone else is winning .
If people believe in their ability at poker or picking sports winners it is not necessirily stupid to bet big as long as one is not stealing money to fund ones gambling

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herbie47 16th Oct '18 50 of 51

In reply to post #409249

Really, what about losing your house, getting divorced, losing your job, is that ok as well?

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herbie47 16th Oct '18 50 of 51

In reply to post #409249

duplicate post deleted

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

About Graham Neary

Graham Neary

Full-time investor and independent analyst. Prior to this, I spent seven years in the financial markets as an analyst and institutional fund manager. I'm CFA-qualified, also holding the Investment Management Certificate and the STA Diploma in Technical Analysis.Away from finance, my main interests are recreational poker and everything to do with China, especially Mandarin Chinese. more »


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