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

20th Aug '18 by Graham Neary

40 comments 11330 reads

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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letap73

20th Aug '18

I am going to suggest ARC Minerals (LON:ARCM). A small mining company which could be subject to a potential takeover?

This is sort of company that can be easily ramped. I have only suggested this company on the basis that those with a more discerning eye can look through the accounts and state the investment case for and against in a rational fashion.

Some of us are not confident investors - so a few comments here could be educational and useful.

runthejoules

Nah letap73, Graham doesn't cover blue-sky resource stocks liable to irrational exuberance.

In other news, Versarien (LON:VRS), loss-making 2-d miner, has announced a potentially game-changing RNS with AIXA, a SOuth Korean composites manufacturer, to build smart home panels, electric vehicles etc etc. https://www.investegate.co.uk/versarien-plc/vrs/collaboration-agreement-with-axia-materials/201808200700042241Y/?fe=1&utm_source=FE%20Investegate%20Alerts&utm_medium=Email&utm_content=Announcement%20Alert%20Mail&utm_campaign=Versarien%20PLC%20Alert

Albertos

"blue-sky resource stocks liable to irrational exuberance."

There is an argument if you take out "resource" that this is a pretty good description of Versarien.

Just another collaborative agreement - there seems to be very little actual current revenue from graphene - this is one I'll wait out until the numbers become more apparent.

Good Luck

Phil

Talking of "irrational exuberance" I'd be interested in Graham's thoughts on Mulberry.

Its aspirations to become a global luxury brand seems to have caught the market's attention and given it a very high valuation, but today's RNS seems to suggest it's just a struggling retailer - down 30% as I write.

I think I'll stop being provocative and go and have breakfast now.

Phil

danielbird193

I was surprised to see just how hard Mulberry (LON:MUL) shares fell on this morning's RNS. A £3 million hit would be 43% of last year's profit before tax, on top of which they report "challenging" UK trading, so not a pretty picture. On the other hand, they had £25 million cash in the bank at 31 March 2018 and no debt. This isn't terminal, and if the company can continue to report progress in international sales (which grew 20% in the last financial year) then I think this could become and interesting recovery play at some point.

One thing I've always liked about the company is that its accounts are very simple and straightforward, with a full reconciliation between adjusted and reported figures.

I don't currently hold but will be watching closely when they publish interims later in the year.

Michael Mortphew

On what looks like a quiet news day there might be a case (if he had the inclination) for Graham commenting on the 'difficulties' of junior resource stocks, using ARC Minerals (LON:ARCM) as an example. I'm sure it would be interesting.

Thanks as always for your informative, clear and very readable writing.

Howard Marx

The Mulberry (LON:MUL) Stock Report suggests that Sales have not grown in the past five years.

The p/e of 48x seems excessive in this context, no?

1James1n1

I know you are not so keen on resource stocks but if you have a chance to review and comment on Kenmare Resources (LON:KMR), I would fine it very interested in you assessment and analysis.

Janes

Graham Neary

Hi Phil - yes, planning to look at Mulberry (LON:MUL). Cheers. G

andrea34

I don't know why you got three thumbs down on your suggestion, it seems a bit harsh as everyone is surely welcome to make a suggestion on coverage, provided that it relates to an RNS on that (or very recent) day...? Maybe these people got out the wrong side of bed this morning. Anyway, I'll give you a thumbs up to try and soften the blow... especially on a Monday morning! If anyone doesn't like a suggestion, why not be nice and just ignore it? :-/

I had a quick look at the Kenmare Resources (LON:KMR) results (I don't hold), but although the financials look rather improved I think this is largely boosted by commodity price increases and quantity of ore shipped, the actual production figures look rather disappointing to me with every ore mined down - this was partly flagged in Q1 due to outage, but hasn't recovered properly from the looks of things. Closing stock of finished product is also vastly reduced, which doesn't quite stack up with the H2-upbeat tone. (I don't hold, and won't be doing so).

andyi

I think you can safely assume that the thumbs downs were because it was a resources stock which are not usually covered here.

sharw

So what was the rejected Remuneration Supertrough (thanks Mr. C) at Countrywide (LON:CWD) ?

As I read the ridiculously voluminous circular (315 pages - skip to page 292) at

https://www.countrywide.co.uk/...

it is all to do with mcap : "The hurdle is a compound annual growth in the market capitalisation of the Company immediately following the transaction, of 15% a year over the performance period" (3 years).

For this the maximum remuneration is shown as:

Chair £6.8m

MD £9.1m

CFO £8.4m

That is for the mcap moving from £40m to £61m over 3 years for a company whose share price is now less that a quarter of its level 3 months ago.

Bargepoles out - the plan may have been withdrawn but the people who thought it was a good idea are still there..

TamzinPiworld

Adept Telecom (LON:ADT) announce acquisition of Shift F7, which is earnings enhancing from completion. Turnover £5m EBIDA £0.7m. For which they are paying £5m less net debt and tax liabilities (est. £0.5m). Shift F7 offers outsourced managed IT & telecoms solutions (incl IT support, hosted IT, cyber-security, data connectivity and next generation IP telephony services).

The Adept Telecom (LON:ADT) strategy and vision is outlined in this interview by Judith MacKenzie, Downing LLP with Ian Fishwick, CEO.

https://www.piworld.co.uk/2018/08/20/judith-mackenzie-meets-adepts-ceo-ian-fishwick-july-2018/

As well as the £5 million initial consideration there is an earn out of up to £2.9 million payable based on business performance in the 12 months post acquisition.

Upto £7.9m for EBIDA of £0.7m is an 11x multiple - not eye-watering, but not exactly the bargain that the headline initial payment makes it seem!

FREng

Lawyers Pinsent Masons have drawn attention to the significant risk that a no-deal Brexit poses to the flow of personal data within and between firms. This may be a significant issue for many companies that are regularly discussed here (most e-commerce companies, for example).

Here's an extract from their report

Flanagan said: "Assuming we are not in the EEA when Brexit occurs, the UK will become a 'third country' for the purposes of EU law, which will potentially impact personal data exports from EU to UK. While an adequacy decision is likely to be the least disruptive option for UK businesses, the prospect of a ‘no deal’ Brexit makes the likelihood of an immediate adequacy decision unlikely, not least because to seek an adequacy decision a country must already be outside of the EU, and historically adequacy decisions have taken on average around 28 months to be granted."

While the UK has implemented the EU's General Data Protection Regulation (GDPR) in full via the new UK Data Protection Act 2018, the inclusion of exemptions around immigration and the existence of significant powers for UK authorities in relation to communications surveillance, as included the Investigatory Powers Act 2016, could potentially cause issues for the UK when seeking an adequacy decision, Flanagan said.

"With that in mind, we are increasingly seeing clients prepare for an outcome whereby no adequacy decision is immediately available on 29 March 2019 or indeed at all," she said. "The GDPR sets out that it is not permissible to transfer personal data outside of the EU to a third country without an adequate safeguard in place, and infringement of this provision could result in a fine of 4% of a business' annual global turnover or €20 million, whichever is highest."

handybrownone

But Ian Fishwick sticks his hands in his pockets and buys £38k - Ok not material but his holding is now 3%. I've held for 2+ years and very happy

Wol

You are right sharw. Performance related bonuses should relate to specific over-performance by the Board of Directors. The board of Countrywide (LON:CWD) need to be showing that they are doing better than the market as a whole (benchmarked to beat a relevant market indicator) and to be providing improved shareholder returns (benchmarked against a market comparator for eps growth, free cashflow...). Above all the target must not be something that directors will aim for to the detriment of the overall health of the business.
There was that nice phrase in Pink Floyd's Have a Cigar
"I'll tell you the name of the game, boys
It's called riding the gravy train"

andrewdb

Mulberry (LON:MUL) seems to fall down the gap between 'normal' and 'luxury' goods (- just my opinion).
They used to sell menswear - and I think still sell womenswear.

Until I read that 91% of the shares are held by 3 people, I really wondered what I was missing.
They are not hermes or burberry.
To make me interested the SP should be closer to 200 than 460 (- just my opinion)

Indeed, back in 2009, eps was 4.5 and the sp was about 70-100
In 2018, eps is 12.0 and the sp was ~460-1000

Yes shar - it's awful stuff.

On the numbers, though - I think the likelihood of those maximum rewards being achieved is very low, based on the upper limits:

"The incentive pool value will be limited to no more than 5 per cent. of the total value created, calculated as the growth in market capitalisation from the start to the end of the performance period."

(page 261/315)

So unless I am reading it wrong, the market cap would have to increase by several hundreds of millions of pounds over the period in order to trigger those max payments.

And increasing the market cap by 15% compound per annum would not trigger any AGP payments at all, let alone the maximum payments.

All the best

Graham

Based on recent experience of trying to sell a one-bedroom flat in suburban South-East London, I'd say that a 3.3% fall in asking prices seems to understate the actual weakness I have seen in the market. My property (along with lots of others) has been sat on the market for weeks and I've found it difficult to attract viewings, despite one price cut and the agent doing everything possible to drum up interest. I accepted one offer only to have it withdrawn a couple of weeks later due to the buyer having an offer accepted on another property.

Brexit and immigration will undoubtedly have something to do with it. I suspect recent changes to the buy-to-let tax regime (both mortgage interest payments and the new 3% stamp duty on second homes) have had quite an impact on properties like mine as well. All-in-all it's not a good time to be selling property, and I don't see that changing any time soon.

What does that mean for investors? Obviously bad news for the likes of Countrywide (LON:CWD) and Foxtons (LON:FOXT) which have already taken a hammering. Probably bad news for big-ticket consumer stocks like £AO as well, because moving house stimulates demand for white goods. Are there any companies could do well from a stagnating housing market? I'm tempted to take another look at Paternoster Resources (LON:PRS) and Grainger (LON:GRI) which are both property funds with exposure to "build to rent" developments... but in general I think a weak housing market is a bad sign for the economy overall.

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

Resource Stocks

Mulberry (LON:MUL)

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Graham Neary

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