Small Cap Value Report (Mon 20 August 2018) - MUL, CWD, Housing Market, KWS

Monday, Aug 20 2018 by

Good morning! 

Many executives and financial types are lying on a beach somewhere as I type, leaving us to soldier on without quite as many game-changing RNS announcements as we normally do.

Still, we have a couple of things worth looking at:

  • Mulberry (LON:MUL) is down significantly after 'fessing up to its House of Fraser exposure (£3 million), so let's take a look at that stock.
  • Countrywide (LON:CWD) has been rebuffed by shareholders after trying to introduce a new remuneration policy along with its refinancing.
  • Keywords Studios (LON:KWS) has made another acquisition, so it's a good day to catch up on developments there.

Resource Stocks

There are requests in the comments for me to look at some resource stocks. Long-time readers will know that my policy is to avoid the sector. Sorry about that.

Mulberry (LON:MUL)

  • Share price: 462p (-19%)
  • No. of shares: 60 million
  • Market cap: £277 million

House of Fraser and UK Trading Update

Another retailer comes clean on its House of Fraser exposure.

Earlier this month, Paul contributed a comment on French Connection (LON:FCCN), suggesting that its bad debt exposure to HoF was up to around £2 million (£50k at each of c. 40 stores).

Mulberry now says that it anticipates £3 million of exceptional costs, or about £140k per concession. This is a mix of bad debt, loss of value in fixed assets and potential restructuring costs. Perhaps this is a bad sign for French Connection - whose shares are down by about 3% today.

Mulberry's £3 million hit is, however, much smaller than its total decline in market cap today.

We also have a nasty trading update: the UK market remains "challenging", and if these trends continue in H2 then profit for the full year will be "materially reduced". No numbers are given, so investors are left to guess at how bad the situation might be.

My view

I've been interested in this share for a while. The problem is that it has always had such a high rating, it's been beyond the levels where I could justify a purchase.

But the share price is now at the cheapest level…

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

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Mulberry Group plc designs, develops, manufactures, markets and sells products under the Mulberry brand name. The Company operates through two segments: Retail and Design. The Company's Retail segment includes sale of Mulberry branded fashion accessories, clothing and footwear through a range of shops and department store concessions. The Company's Design segment includes brand management, marketing, product design, manufacture, sourcing and wholesale distribution for the Mulberry brand. Its product range includes women's wear, accessories and footwear. It offers products under various categories, including leather accessories, such as bags; small leather goods; shoes; soft accessories, and women's ready-to-wear. The Company distributes its products through over 120 stores in approximately 30 countries; its digital site,, and selected wholesale partners. The Company has operations in the United Kingdom, Rest of Europe, Asia, North America and Rest of world. more »

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Burberry Group plc is a manufacturer, wholesaler and retailer of luxury goods. The Company also licenses third parties to manufacture and distribute products using the Burberry trademarks. The Company's segments include retail/wholesale and licensing. The Retail/wholesale segment is engaged in the sale of luxury goods through Burberry mainline stores, concessions, outlets and digital commerce, as well as Burberry franchisees, prestige department stores globally and multi-brand specialty accounts. The Licensing segment is engaged in the receipt of royalties from the Company's partners in Japan and global licensees of eyewear, timepieces and European childrenswear. The Company's product divisions are Womens, Mens and Childrens apparel, Accessories, and Beauty (which includes fragrance and make-up). Its subsidiaries include Burberry Latin America Holdings, S.L, Burberry (Suisse) SA, Burberry (Taiwan) Co Ltd, Burberry (Thailand) Limited and Burberry FZ-LLC. more »

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Countrywide plc is an integrated, full service residential estate agency and property services company in the United Kingdom. The Company offers estate agency and lettings services, together with a range of complementary services, and has a presence in areas and property types which are promoted through locally respected brands. The Company operates through four segments: Retail, London, Financial Services and Business to Business (B2B). The Retail network combines estate agency and lettings operations. The London division revenue is earned from both estate agency commissions and lettings and management fees. The Financial Services division receives commission from the sale of insurance policies, mortgages and related products under contracts with financial service providers. Business to Business services comprise all lines of business, which are delivered to corporate clients, including Surveying Services, Conveyancing Services and revenue from Lambert Smith Hampton. more »

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

40 Comments on this Article show/hide all

peterthegreat 20th Aug '18 21 of 40

In reply to post #391914

Yes I have to agreed Edward about Versarien, it seems to announce game-changing deals every few weeks, but in nearly every case without any significant financial details. It wouldn't surprise me if most are worth a few thousand pounds and most will have vaporised within a couple of years.

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danielbird193 20th Aug '18 22 of 40

In reply to post #392029

Agreed, it needs to fall a lot further to look invest-able (or the international expansion needs to really take off at pace).

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barnetpeter 20th Aug '18 23 of 40

I think its stuff like Countrywide that is so disgusting. Here is the price two years ago:

24/08/2016 271.40

So shareholders have lost around 95% of their money in two years, the share price is now just 14p and the directors want a huge incentive? Those who bought in 2014 or prior have been wiped out completely.

The stock market has far too many "lifestyle companies" as it is, where the sole objective seems to be to pay large director salaries often through yet another placing.

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FoolishBen 20th Aug '18 24 of 40

In reply to post #392044

Peter, if you did some in-depth research on Versarien (LON:VRS) , rather than just reading their RNS's, it is likely you might come to a rather different conclusion about their prospects.

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Beginner 20th Aug '18 25 of 40

Anecdotal material here. I work in a bar and chat to a lot of guys in the building trades. They tell me the work is now in the north and midlands. The wages on offer in London are no longer sufficient for the expenses of working there.growth seems to continue but outside the capital.

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Graham Neary 20th Aug '18 26 of 40

In reply to post #392069

Thanks for that! G

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runthejoules 20th Aug '18 27 of 40

In reply to post #391914

That was the joke, Mr. Canham.

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hawkipa 20th Aug '18 28 of 40


re MUL   (sorry can't get tickerisation to work)

A little scuttlebutt(ish) I know but hopefully still worth mentioning. My wife used to frequently buy Mulberry handbags and very much liked the price as they were 'affordable luxury'. They were still an unbelievable (to me) £500-£1000 each and seemed to have the status that made them appealing to my wife's generation of thirty-somethings.
I believe they then went up market and tried to go to a much higher price point. This failed as if you are going to spend a lot, apparently you buy Gucci/Burberry/Prada etc, so they went back to where they were. The net effect is that demand apparently is gone, as the previous must have bags ie 'The Alexa' have just lost their lustre. The main thing I'm feeling right now is I know way too much about handbags!
Nevertheless, add into that the fact that they sold through House of Fraser, which never seemed to have a defining shopper to me, I see little to make the Mulberry product, which is essentially handbags, appealing as they have lost their traditional (profitable) market with the attempted change of strategy and never reclaimed it. So for my money a traditional luxury company eg Burberry (LON:BRBY) is a much more appealing investment before you even compare valuation as their product is well defined, proper luxury and has global appeal and most of all has enduring appeal.

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bluecurve 20th Aug '18 29 of 40

Just some background comments on the housing market as a whole.  I agree with Daniel that there will be a negative impact on many businesses connected to the housing market in the next few years.  This is due to a number of economic factors and government policies which are intended to "slow down the market". (Note, I invest in both shares and buy-to-let property).

There is a widely followed theory in the property investment world called the "18-year property cycle", which is based on Ray Dalio's thinking on "how the Economic Machine works". He has a really nice 30-minute video on YouTube (search Ray Dalio How the Economic Machine Works), and for those who haven't heard of Ray Dalio, more here For more on the 18 year property cycle, this is a good place to start

According to the cycle theory, property is now entering the "mid-cycle wobble", a time when it will become harder to sell property, and prices will fall slightly, but not crash. This mid-cycle wobble is thought to be down to a number of factors: Brexit uncertainty, a slowdown in economic migrants (as you point out), stamp duty increases, changes to buy-to-let tax-relief rules and increased scrutiny of LTV ratios for portfolio landlords. Many of these changes together make high-priced, low-yielding property unattractive to investors.  It will become attractive to investors again when prices fall or rents rise.

On the other side, the lower pound has encouraged overseas investment (especially in Manchester and Liverpool), low-rate credit has been readily available and the internet has made it easier for people to be flexible in where they work, supporting migration of people and companies to areas of the country where property costs are lower.  Hence, prices in the North of England rising faster than the South.

Help-to-Buy also plays a significant role at the lower end of the market. This has helped to push up prices of lower priced new-build property by increasing the supply of low-rate credit to first-time buyers.  The first-time buyers who use help-to-buy are taken out of the market for similarly priced second-hand property, reducing demand for those properties even further.  One beneficiary of this is quoted housebuilders, who's shares have all enjoyed a good run since the Brexit vote.  There was a noteworthy share-price wobble in the sector last August when it was rumoured that the government was scrapping help-to-buy.  More here 

Finally, Stamp Duty has a big part to play in all of this as well.  A £500,000 property will incur £15k stamp-duty for a home buyer and £30k for an investor, thanks to the 3% surcharge on all additional properties.  This puts London at the bottom of the list for any investor.  And for anyone moving houses at the £500k+ level, Stamp Duty is a major cost, and sometimes a factor in deciding whether to move at all.  

This does make it more attractive to extend your house rather than move. Witness the number homes that have been extended in your area.  Beneficiaries of this trend are consumer-focussed building supplies firms like Norcros (LON:NXR) (I hold) and Howden Joinery (LON:HWDN). 

So, sellers of certain types of property will be negatively impacted by a lack of buy-to-let investors, a lack of first-time buyers AND a lack of economic migrants.  One bright point is that the cycle theory says that the next 5-7 years will see even faster growth in property prices before we get a crash.

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ISAallowance 20th Aug '18 30 of 40

In reply to post #392084

Since we're talking about handbags today, IMO £KORS (I hold) is the standout value proposition in the affordable luxury space. They have very reasonable P/E and P/FCF compared to some in the sector, cracking ROCE, ROE and stockrank, neglible debt (were debt-free prior to purchasing Jimmy Choo recently, and are now paying that down), and appear to be on the cusp of returning to growth.

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danielbird193 20th Aug '18 31 of 40

In reply to post #392104

And to add to the handbag discussion... for my money Paris-listed LVMH is a decent alternative to Burberry (LON:BRBY). It trades on a 25x PE multiple (Burberry (LON:BRBY) is around 32x!) and you get some diversification in terms of brands and products (they own some big-name champagne houses, luxury watch brands as well as fashion and leather goods). Like an upmarket £ULVR!

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paraic84 20th Aug '18 32 of 40

In reply to post #392039

I've enjoyed your macro thoughts on the FTSE and the housing market over the last couple of days Graham. Much appreciated.

It's worth keeping in mind that some of the shares affected by the housing market also depend on the number of housing transactions and not just house prices. Transaction numbers did hold up for 2017-18 and the latest monthly data in fact gets published tomorrow (Tuesday) so that might be worth taking a look at too!

I also wouldn't be surprised if transaction numbers become affected by the number of first-time buyers who then can't afford to trade upwards - e.g. move from a flat to a house. I live in a two bed flat in zone 4 Greater London and the chances of me buying a house in the same area are nil unless I get lucky in the marriage stakes!

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Graham Neary 20th Aug '18 33 of 40

In reply to post #392144

Thanks for the insights Paraic! G

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Graham Neary 20th Aug '18 34 of 40

In reply to post #392089

A valuable comment, thank you. G

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Edward John Canham 21st Aug '18 35 of 40

In reply to post #392079

Apologies Joules.

Humour gene not working at 8am - must remember to take more caffeine.


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Gromley 21st Aug '18 36 of 40

In reply to post #392064

Peter, if you did some in-depth research on Versarien (LON:VRS) , rather than just reading their RNS's, it is likely you might come to a rather different conclusion about their prospects.

The rub is though that the same could be said of any number of "story stocks", some of these will no doubt go on to be the best thing since … 

Equally though many will not. It is not unreasonable therefore imho to take a cautious approach and wait for some material evidence of profitable commercialisation and a demonstration that these companies have a funding path through to profitability.

(Not specifically a comment on Versarien (LON:VRS) , just the "type")

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smatthews1 21st Aug '18 37 of 40

This was a particular interest to me regarding the housing market.

The number of EU-born workers in the UK increased by 7,000 from Q1 2017 to Q1 2018, compared with an increase of 148,000 from Q1 2016 to Q1 2017.

With the numbers of migrant workers decreasing, the number of new builds still going up are we likely to see a shift from supply and demand swinging the other way? I will personally watch this space closely, if that is the case then house builders may be in for a decline.

Does anybody have any information as to whether the new builds are for social housing or first time buyers?

We are at an interest time whereby there are various changes happening that may depress house prices in the near future (I say depress and not crash as that is a little extreme). For example, Net migration decreasing, interest rate rises, uncertainty towards brexit, and a whole host of tax hurdles from the government to make it harder for landlords to add to their portfolios.

Interested to hear others thought on this subject.

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Alexgedla 21st Aug '18 38 of 40

Keyword Studios

I share your ambivalence on this one Graham. I want them to succeed, but can’t help feeling there are too many deals here. 99pc of the time acquisition vehicles in any sector, crash and burn. It looks to be on a pe of c35x- so valuation multiple v.high. Any Sellers out there ?

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Howard Marx 21st Aug '18 39 of 40

In reply to post #392359

"99pc of the time acquisition vehicles in any sector, crash and burn"


Is this fact or opinion?

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hawkipa 22nd Aug '18 40 of 40

In reply to post #392109

Good suggestion danielbird193! Having watched Burberry (LON:BRBY) performance and been slightly concerned by how much market faith is being placed in the new management/creative team a quick comparison to LVMH (MC FP) has thrown up (vs £BRBY):
A market cap of 14.7x that of Burberry (LON:BRBY)
A cheaper PE, EV/EBITDA, P/BV etc and most importantly when looking at historical ranges not so extreme vs historical average.
Interestingly, a quick chart comparison over 2 years shows that Burberry (LON:BRBY) has in fact only just been playing catch up during 2018, so over 2 years they have performed about the same.
My conclusion, thanks for flagging the alternatives as it has prompted me to think further on Burberry (LON:BRBY) and whilst I will continue to hold Burberry (LON:BRBY) I like the idea of having an international switch idea to ponder on.

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 Are LON:MUL'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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