Small Cap Value Report (Mon 19 Mar 2018) - ACRL, MCRO

Sunday, Mar 18 2018 by

Hi, it's Paul here. Graham's busy, so I'll be writing Monday's report, at a leisurely pace, throughout the afternoon.

Today's biggest faller is;

Accrol Group (LON:ACRL)

Share price: 12p (down 57% today)
No. shares: 129.0m
Market cap: £15.5m

Trading update (profit warning) - I'm sorry to be the harbinger of doom, but this share is unravelling in much the same way that a faulty batch of its products (toilet rolls) might unravel, if a corner of the inner ply gets stuck, and you mistakenly rotate it many times, with the paper dividing into two different widths of single ply, neither of which is well suited to its original purpose, and have to be discarded. I've resisted the urge to write a more vulgar metaphor.

There was some Director selling recently, which looked like rats deserting a sinking ship.

This sounds absolutely horrendous to me;

As previously reported, the Group's trading performance in the current financial year has been significantly impacted by three major issues -
- an escalation in internal costs,
- input costs and
- adverse foreign exchange hedging.

The magnitude of the escalation in costs (circa 50% higher than in year ended 30 April 2017 ("FY17") has only, very recently, become fully apparent to the Board.

Also, the pace of progress in pricing actions to mitigate margin pressure has been slower than forecast but is now picking up pace.

The increased impact of these issues is expected to affect the performance of the Group materially in the year to 30 April 2018.

Some of the corrective, business critical remedial activities (outlined below) have been hampered while the Board transitioned to its new supportive composition.

The new management team believes firmly that the challenges facing the Group are resolvable, given time and experienced handling.

The successful resolution of these issues, however, will be a demanding task and one not without execution risk.

I don't know what to say. Other than, if you still hold this share, then you haven't read the above properly.

This has to be one of the worst outlook statements I've ever seen;

The magnitude of internal cost increases in 2017, combined with ongoing margin pressures, has impacted the Group's financial results and cash flow in the short term. As a consequence, the…

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Accrol Group Holdings plc, formerly Accrol Group Holdings Limited, is an independent tissue converter manufacturing toilet rolls, kitchen rolls, facial tissues and away from home products (AFH). Its AFH products include Centrefeeds, Hand Towels, Hygiene Rolls, Toilet Tissue, Wiping Rolls, Standard Jumbo and Mini Jumbo. Its Consumer Paper Products include Envirosoft, Facial Tissues, Handy, Mega, Mighty, Sofcell, Softy, Thirsty Bubbles and Triple Softy. The Company supplies a range of Independents, Discounters and Multiples, as well as a range of AFH customers throughout the United Kingdom. It imports Parent Reels from around the world and converts them into finished goods at its manufacturing, storage and distribution facility in Blackburn, Lancashire. The Company has 15 converting lines in operation providing capacity of approximately 118,000 tons per annum. Its subsidiaries include Accrol UK Limited, Accrol Holdings Limited and Accrol Papers Limited. more »

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Micro Focus International PLC is a United Kingdom-based global infrastructure software company. The Company is focused on enabling organizations to run and digitally transform its business with solutions spanning four areas: Enterprise DevOps, Hybrid information management (IT) management, Predictive Analytics, and Security, Risk & Governance. Its software solutions provides tools to build, operate, secure and analyze the enterprise. Its offered products and solutions includes, analytics and Big Data, application delivery management, application modernization and connectivity, business continuity, collaboration, information management and governance, and IT operations management services. The Company also offers Micro Focus software as a service (SaaS) and Micro Focus government solutions. more »

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

51 Comments on this Article show/hide all

sharw 19th Mar '18 32 of 51

With regard to Accrol Group (LON:ACRL) Paul makes the point that: There was some Director selling recently, which looked like rats deserting a sinking ship.

Even more telling when you look at the detail - there was actually a buy (215,168 @ 36.00p) by the Executive Chairman. The selling was by Purchasing Director Colin Platt and Sales Director Gary Earle. They were not board directors but kept the title 'Director' having been on the board before the IPO.

To me this points to those being nearer the coal face being more aware of reality than those in the boardroom as was the case with Conviviality (LON:CVR) - as Paul wrote last Wednesday: Director buys - the Directors genuinely didn't seem to know that trouble was brewing. This is evidenced by 5 Directors collectively spending about £583k buying shares at around 300p on 5 Feb 2018.

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hayashi22 19th Mar '18 33 of 51

Conviviality (LON:CVR) is one of the biggest corporate disasters of all time ..ranks with Marconi for all round incompetence.

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JakNife 19th Mar '18 34 of 51

I understand from twitter that Paul is suggesting a 30p placing for CVR whilst Graham is at 10p. Any comments as to the veracity of such prices bearing in mind that it can't be insider info whilst the stock is suspended!

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herbie47 19th Mar '18 35 of 51

Re: profit warnings, this is the latest quarter: "UK quoted companies issues 81 profit warnings in Q4 – the highest quarterly total since Q4 2015"

The first quarter will be out in about 2 weeks time. Yes there do seem to a lot this year already. But some companies are doing well hence the high values for instance Fevertree Drinks (LON:FEVR), Burford Capital (LON:BUR), Focusrite (LON:TUNE) etc. But quite a few have fallen back this year so they are not so highly rated. Some sectors due to consumer spending or lack of are struggling at the moment, this could get worse in the next year or 2. But other economies seem to be doing well, so I'm not sure what will happen, the markets fell in January but many shares have bounced back.

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ed_miller 19th Mar '18 36 of 51

In reply to post #341338

Re excuse for the Micro Focus International (LON:MCRO) CEO quitting - is that code for " do something he is less sh*t at"?

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mammyoko 19th Mar '18 37 of 51

RE Miton (LON:MGR) - here are my forecast calculations for FY18 EPS:

AUM opening 4,057
Inflows - assume spread evenly 200
Performance (500)
AUM average 3,657
Revenue (assume constant bps margin) 23.7
Admin expenses (assume FY17 + 10%) (15.9)
Share-based payments - say (0.7)
Amortisation (assume constant) (0.3)
Exceptional expenses - say (0.3)
Operating profit 6.5
Finance revenue (assume constant) 0.0
PBT 6.5
Tax @ 20% (1.3)
PAT 5.2
Diluted shares in issue @ 31/12/17 163,362
Share buybacks - say 10m in 2 tranches (5,000)
EPS - pence 3.3
P/E multiple - say 12
Implied price - pence 39.6

Obviously, this calculation is highly sensitive to inflows/outflows and performance. Assuming a less pessimistic performance of flat and leaving inflows at a cautious £200m gives the following calculated EPS and potential price:

AUM opening 4,057
Inflows - assume spread evenly 200
Performance -
AUM average 4,157
Revenue (assume constant bps margin) 27.0
Admin expenses (assume FY17 + 10%) (15.9)
Share-based payments - say (0.7)
Amortisation (assume constant) (0.3)
Exceptional expenses - say (0.3)
Operating profit 9.8
Finance revenue (assume constant) 0.0
PBT 9.8
Tax @ 20% (2.0)
PAT 7.8
Diluted shares in issue @ 31/12/17 163,362
Share buybacks - say 10m in 2 tranches (5,000)
EPS - pence 4.9
P/E multiple - say 12
Implied price - pence 59.3

You can see how sensitive the price is to the performance - a 12.3% variation in the performance causes a 50% variance in the sp.

I am long. I think the risk/reward is fair. Although I think there will be another 10%-15% correction within the next three months, unless there is the start of a bear market, I expect UK small caps to out-perform.

I think this is undervalued as it is a bit old-school and key-man dependent but its low multiple and track record give it some downside protection.

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dahokolomoki 19th Mar '18 38 of 51

In reply to post #341403

My question on PCI- PAL (LON:PCIP) is this - payment processing is, in my opinion, becoming more commoditised. What makes them stand out from the competition?

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ed_miller 19th Mar '18 39 of 51

In reply to post #341453

Re your comments on IT implementation in relation to Micro Focus International (LON:MCRO) woes - that was my experience too in about 15 years of being on the receiving end of IT support by EDS/ HP to the FTSE 100 employer I worked for. Unfortunately they were much better at writing contracts than was my employer. They really held us over a barrel with that bloody contract, which gave them licence to be utterly crap and then charge the Earth for the privilege of being treated terribly - much like BT treated retail customers in their monopoly days.

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grumpy5 19th Mar '18 40 of 51

Some well-informed buying in Bloomsbury (LON:BMY) from 1500 this afternoon. RNS giving "earnings above expectations" did not come out till 1637. Sniffy!

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jonthetourist 19th Mar '18 41 of 51

In reply to post #341623

It's a fair question. The corporate answer is this:

Each major economy in the world has specific data protection legislation, such as the forthcoming GDPR regulations in the EU. As a result, it would be illegal for say, a payment card transaction in the US to be sent to the UK for processing unless a privacy shield agreement has been established. Without a privacy-shield arrangement personal data is not allowed to cross international borders. Therefore, if we are to provide a solution in the US we would have to have available an in-country instance of our service. The same issues apply in Canada, Australia, China, etc.

There are few international providers of PCI DSS compliant solutions to contact centres, and we believe that PCI Pal is the only one with capability within AWS to deliver services globally whilst adhering to local data sovereignty rules and regulations. Therefore, we believe we are well positioned to capitalise on the global demand for our services so long as our technology remains easy to access and easy to use.

. . .

We believe that most of our competitors still either provide a hardware solution that needs to be installed at each contact centre or supply a service using similar technology to our first-generation platform hosted in a third-party data centre. We believe that true-cloud delivery is the future.

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Edward John Canham 20th Mar '18 42 of 51

In reply to post #341658

Bloomsbury Publishing (LON:BMY)

Obviously leaked - they haven't done a trading update in the past as far as I can see.

Having said that, going from the US markets, it looks like there will be blood all over the horizon tomorrow, so this might ease the pain.


EDIT: £25m in cash sounds exceptional.

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Steves cups 21st Mar '18 43 of 51


I was wondering if you are going to do any more on monday's report since if says it's "to be continued".

I was particularly interested in your take on Spectra Systems (LON:SPSY), whose result in line with guidance have not exactly wowed the market

Many thanks for your continued guidance


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Paul Scott 22nd Mar '18 44 of 51

In reply to post #341568

"I understand from twitter that Paul is suggesting a 30p placing for CVR whilst Graham is at 10p. Any comments as to the veracity of such prices bearing in mind that it can't be insider info whilst the stock is suspended!"

Neither of us was suggesting anything. Just repeating comments from City types (in my case) and the Evening Standard (in the other case). As you say - when a share is suspended, it doesn't really matter what people speculate about. Very different to price manipulation that we often see from others, when a share is freely trading. Sadly, then it's only the City insiders who get to clean up, not pond life like me & Graham. As you know!


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JakNife 22nd Mar '18 45 of 51

As I recollect, wasn't it us investment bankers who were the "pond life" :-)?

I think that I posted my question before the Evening Standard article but I've seen the comment since then that they're looking to raise at 10p. It's an incredible story, you worked in a finance dept before and must know that the idea that someone might miss a £30m tax payment (I assume VAT) that's due at the end of the month implies incompetence way beyond any level that I've ever encountered before.

You have to assume a certain basic level of competence when making an equity investment and it's quite incredible to see that assumption smashed at CVR.

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xcity 22nd Mar '18 46 of 51

In reply to post #343418

Most frequently thought to be a duty payment to Customs, but seen nothing authoritative.

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JohnEustace 22nd Mar '18 47 of 51

In reply to post #343463

Yes, duty payable on taking product out of bonded warehousing seems the best fit but that’s speculation. It’s still almost incredible incompetence. From reading their interim results they were finishing putting the acquired businesses on their JD Edwards ERP system so perhaps that’s part of the story.
Also they said they were managing the business segments by adjusted EBITDA so there’s another reason to mistrust businesses that do that and risk forgetting about real profits that flow through to cash.
Their auditors were KPMG.

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xcity 22nd Mar '18 48 of 51

In reply to post #343748

I think that's quite a kind interpretation. It could, maybe, explain the very different errors. However, I can't see how extending payment times can be done by accident and without awareness. Ditto probably for their revolving credit facility, depending on precisely why they chose to negotiate it originally. Feels to me as if they'd introduced all the little tricks they could think of and had reached the point where it was no longer possible to keep all the plates spinning and it was just chance what set off the general collapse.
I'm not convinced that they'll be able to get the placing away, given the numbers mentioned. Suppliers are probably too much on the hook already to be anything other than supportive.

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Lordyjordy 23rd Mar '18 50 of 51

RE Accrol

Couldn't agree with you more Paul. I bought in here on a Simon Thompson tip, but sold on the first profit warning so not horrendous. Any time I here Zeus capital are involved I now steer clear. The Wajid family made a nice few quid by ripping us off in my opinion. GYG is another float (July 2017) by Zeus and 6 months later provides a profit warning.
Absolute joke.....

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timarr 23rd Mar '18 51 of 51

In reply to post #343818

I'm not sure GYG (LON:GYG) is quite the same - repairing super yachts is inherently a lumpy business but has the attraction of being immune to cyclical pressures, billionaires not usually seeing the need to economise in recessionary times. I didn't think the relatively mild profit warning was anything other than business as usual in the timeframe since the IPO.

Accrol Group (LON:ACRL) though is just a complete disaster - I'm still picking over why I bought the thing in the first place. I also can't understand why anyone would still be holding it, I was incredibly grateful for the opportunity to sell as soon as it came back from suspension.

Also Zeus' record is not uniformly bad - they were behind Boohoo.Com (LON:BOO), Purplebricks (LON:PURP), Watkin Jones (LON:WJG) and a bunch of other successful fund raises. I get the impression that their success has, at least temporarily, outrun their ability to conduct full due diligence, but I wouldn't immediately consign any Zeus sponsored stock to the scrapheap.


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About Paul Scott

Paul Scott

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »


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