Small Cap Value Report (Mon 20 Nov 2017) - ACRL, BON, DPLM, QFI

Monday, Nov 20 2017 by

Good afternoon!

Quite a lot to get through today. I'm provisionally going to cover the following stocks, and will revise based on the comments:



Accrol Group (LON:ACRL)

  • Share price: 43.5p (-67%)
  • No. of shares: 93 million (pre-Placing)
  • Market cap: £40 million (pre-Placing)

Proposed Placing of £18m and Lifting of Suspension

This loo roll cutter makes a return to the market after suspension over its debt problems.

It listed in June 2016. Yet another reminder of the danger of IPOs. It's amazing how often that something goes wrong in the first year or two. It's almost as if the sellers tend to be better at timing their trade than the buyers!

Covering this back in July, when everything was still rosy, I failed to forecast that things would fall apart here as quickly as they did. Indeed, I thought the debt multiples looked "very safe". Net debt was at £19 million, or less than twice EBIT for the past two years. But since the company was still only a year on the market, I added:

[It] will probably get more interesting when something goes wrong and the shares can be bought for a recovery!

Well, today is our chance to do that!

I recall some readers thinking that I was a bit generous when I speculated that the existing equity might be worth c. 40% of the level it was at pre-suspension. The money is being raised today at 38% of the pre-suspension price, so perhaps I was indeed too generous!

The price action on the exchange adds a further discount, putting the existing equity at 33% of its pre-suspension price.

Accrol's Chairman tells us today the company "believes it is through the worst".

The proposal is for 36 million new shares at 50p each, raising £18 million.

Trading Update

As you would hope and expect, we get some news about what is going on with the company's business in the last couple of months.

Accrol's major input, hardwood pulp,…

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

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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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Bonmarche Holdings plc is a multi-channel retailer of womenswear and accessories. The Company offers clothing and accessories in a range of sizes for women through its own store portfolio, Website, mail order catalogues and through the Ideal World TV shopping channel. The Company's subsidiaries include Bluebird UK Topco, Bluebird UK Holdco and Bonmarch Limited. The Company has approximately 310 stores across the United Kingdom. more »

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Diploma PLC is an international group of businesses supplying specialized technical products and services. It is organized into three business sectors: Life Sciences, Seals and Controls. Life Sciences Sector businesses supply a range of consumables, instrumentation and related services to the healthcare and environmental industries. Seals Sector businesses supply a range of seals, gaskets, filters, cylinders, components and kits used in heavy mobile machinery and specialized industrial equipment. Controls Sector businesses supply specialized wiring, connectors, fasteners and control devices. It offers products and services for various industry sectors, such as aftermarket, industrial original equipment manufacturers and fluid controls. It operates in various sectors through Diploma Healthcare Group, a1-group, Hercules Fluid Power Group, IS-Group and Filcon Electronic GmbH. It also supplies clinical diagnostics instrumentation and consumables to the Pathology and Life Sciences sectors. more »

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

50 Comments on this Article show/hide all

Ramus 20th Nov '17 31 of 50

In reply to post #242948

I purchased Accrol after seeing a presentation not picking up they were a one product company or what it was. I sold shortly after realising my mistake. . My hat off to them for duping me on that .

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leoleo73 20th Nov '17 32 of 50

Daniel Thwaites (OFEX:THW). Found some swap details in the 2013 Annual Report - they have approx 18 years to run. Reading between various reports they no longer seem to exceed the level of floating rate debt and therefore I think the immediate benefit from rising interest rates (beyond the presentational) would likely be to the pension deficit. Of course if they wanted to reduce gearing in future then higher interest rates would help them.

I have been unable to find a figure for the total pension scheme size, assumptions used in coming to the deficit or sensitivity to long term interest rates / asset makeup. I think this information would have been made available for current members, so it may be just a matter of asking for it.

They do not publish like-for-like sales, margins or or cash flow details.

Overall, I think that a significant discount is justified due to the lack of information in today's and previous reports.

While I have reasonable confidence about the net asset values, I find it difficult to be sure how much free cash they are generating. Ultimately the low and static dividend puts me off.

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Samsgrandad 20th Nov '17 33 of 50

In reply to post #242933

Very interesting FREng, Liberty own Virginmedia. I've often toyed with the idea of Vm's network expanding into providing various cloud offerings such as Infrastructure as a service etc. Plenty of opportunity for growing their business into a competitor to rival present cloud providors, they already have their own independent national network infrastructure.

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FREng 20th Nov '17 34 of 50

Re MXC Capital (LON:MXCP)

I thought so too, Samsgrandad. Liberty is huge compared with MXC, so there's no shortage of resources for the JV. I wonder why they chose MXC - the announcement refers to "MXC's knowledge and understanding of the market". A business the size of Liberty isn't going to enter a JV with a loss-making micro-cap without some reasonable investigations.

The JV will be a buy-and-build operation, using Liberty's money and MXC's alleged market knowledge.

I'm considering a punt at 1.5p offer.

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DarwenLad 20th Nov '17 35 of 50

In reply to post #243013

Daniel Thwaites results were released last week. I cannot get overly excited about their short-term potential. They have exited the volume brewing business (sold to Marstons) and are now a mid-sized pubs, hotels and general hospitality company with some nice Shire horses. The recovery in profits in the latest period is all to do with the changing valuation of interest rate swaps which have been a millstone around the company’s finances for several years. Strip this out and pre-tax profits rose by 1.7% on a 9.1% increase in revenues in the latest six months. The company, which is controlled by the Yerburgh family, has no interest in investor relations (it refuses to post the slides from its AGM on its website ) and its chairman Anne Yerburgh has been on the board for 43 years whilst her son-in-law is chief executive. It has been years since it last raised its dividend. It has been expanding its portfolio of regional hotels with the recent acquisition of Middleton’s Hotel in York and the Langdale Chase on Lake Windermere. Both are elderly hotels, and would seem in need of quite a bit of money spending on them, and are in stark contrast with the group’s existing portfolio of modern regional hotels on the outskirts of Manchester, Leeds, Southampton and Bristol. The acquisition of the new hotels helps explain why net debt has almost doubled over the last couple of years, to £60.9m, which takes it back to where it was before the sale of the beer business. According to Stockopedia the shares look very cheap, compared to the likes of well managed family rivals like Fullers Smith and Young’s, trading on an enterprise value to Ebitda multiple of 7 compared with 12.3 times for Young’s and 11.2 times for Fullers. The big attraction is the 47 per cent discount between Thwaites’ 150p share price and its net asset price of 285p a share. By contrast Young’s and Fullers are trading on 1.4 times and 2 times NAV per share. If Thwaites was not controlled by the Yerburgh family it would have been snapped up years ago. However, the family shows no interest in relinquishing control. Indeed directors, who own 44.6%, have been increasing their stake.

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Samsgrandad 20th Nov '17 36 of 50

Just bought 50k at 1.41p

MXC approached Liberty I'm guessing. A few years ago I got involved with a company called Pinnacle (PINN)
They were connected with MXC in a roundabout way and the new CEO at Pinn came from Virginmedia. So I'm guessing the proposition was some mutually beneficial cloud business using Virgin fibre network.

Worth a punt to get back what they owe me.

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Wimbledonsprinter 20th Nov '17 37 of 50

In reply to post #243068

FREng. Your assessment that Liberty will provide the money must be the only plausible route - as the press release says that the company will "initially" undertake a series of acquisitions in order to create an enterprise of size and scale. But how this ties in with the last paragraph that says that the JV will be owned by both parties equally and each party will appoint two directors to the board of the company, I do not understand. Even, if the above is only initially, why would Liberty allow a non-capital-providing manager of the JV half the board seats?

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FREng 20th Nov '17 38 of 50

In reply to post #243088

I bought a few MXC Capital (LON:MXCP) at the same price, to get in before the market closed. They are Guernsey based, and it's an island with an interlinked business community.

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FREng 20th Nov '17 39 of 50

In reply to post #243093

Re MXC Capital (LON:MXCP)

A very good question, Wimbledonsprinter. Maybe Liberty have the right to buy out the JV?

Whatever the reason, it should inject some interest into "Sucker Stock" MXC, so it seemed worth a small stake.

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Chrisha100 20th Nov '17 40 of 50

In reply to post #243008

According to the 2016 Annual Report (Page 20), group sales were represented as follows:-

EMEA - 43%
Asia - 38%
Americas - 19%

Xaar's exposure to industrials (mostly ceramics) is reducing, but still at 55%. Is this a good buy in opportunity. I don't know, but hopefully!

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matylda 20th Nov '17 41 of 50

In reply to post #243038

Just a suggestion - Start your own discussion (it's really easy to do) and assuming it's interesting and others are interested you will I am sure get your discussion - Or not!

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Orangetree 20th Nov '17 42 of 50

Had a look at Bonmarche earlier today and I think the shares could return to their IPO price.
The other thing I noticed is that most of their receivables are made up of prepayments. Credit sales amount to 1% of group sales or £1.8m (2017). Although it constraints cash, the company has zero debt.

But the true winner is Sun Partners who took over the firm back in 2012 for £10m. After restructuring which resulted in the closure of 160 stores and over 1,000 jobs it floated Bonmarche for £2 per share valuing it between £100m+ in 2014. And Sun Partners sold 40% stake in the market for £40m-£50m.

Blog: Walbrock Research
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DavidWithers 20th Nov '17 43 of 50

In reply to post #243038

Thanks for the reply about Quadrise Fuels International (LON:QFI). Where did you get the information from?

The information was posted on one of the other bulletin boards where discussions are generally of very poor quality.  

Quadrise has been a jam tomorrow company for years and will run out of cash within a few months unless something dramatic happens.  They will struggle to raise funds without the Saudi contract, so I suspect this will resolve one way or the other by early in the new year.  

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Beginner 20th Nov '17 44 of 50

In reply to post #243013

Two things to note about Daniel Thwaites (OFEX:THW) are that it has sold off its brewing interests, and is therefore just a pubco with a couple of nice hotels. Secondly a large proportion of the company is still in family hands (the Yerburghs are descended from the Thwaites). And it is very illiquid. ( Marston's (LON:MARS) and Greene King (LON:GNK) also seem cheap to me, and offer a handsome yield).

[Edit: I just noticed DarwenLad's comments above.  He is well placed to comment, obviously!!!  I agree with every word.  this may not be the bargain it always seems to be!]

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Andrew niven 21st Nov '17 45 of 50

I bought into accrol few months back but once I did some further research and found the rats had left the ship baled out immediately and actually made a few quid . Just as well !!!

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Cisk 21st Nov '17 46 of 50

In reply to post #243183

You might want to look at Fuller Smith & Turner (LON:FSTA) also. I’ve held for a long time, price has come off quite a bit, but it’s well managed and a long term core hold for me. Held Marston's (LON:MARS) for a bit but the high levels of debt put me off. Could be that the fall in these stocks has been overdone - Fuller Smith & Turner (LON:FSTA) in particular are heavily weighted to the south east - most of their properties are in excellent locations and always busy as they also have a lot of tourist trade. To cap it off I like their beer. Obviously DYOR, just highlighting it as a sector that might start getting in to bargain territory at some stage.

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Beginner 21st Nov '17 47 of 50

In reply to post #243218

Debt is high at Marston's (LON:MARS) but that is the way in the licensed trade these days. Patrons demand pretty parlours. The debt is counterbalanced, to some extent, by the property holdings. Also it has a greater proportion of its assets in the brewing sector than most, and 'beer at home' is the way things are going. I agree the sector is unloved, and Fuller Smith & Turner (LON:FSTA) has many advantages, but it may still have further to fall from that PER of 14.

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timarr 21st Nov '17 48 of 50

One final point on Accrol Group (LON:ACRL) from me - no one has mentioned the Health & Safety issues. The extent of the potential fine - £550,000 to £2,900,000 was already known and the company makes it clear that the fine will make a material difference to its cash position. OK, not great but the odd accident does happen ... only they then add:

Since January 2016 (to the date of this announcement) Accrol Papers Limited has submitted a total of 11 reportable incidents to the HSE (excluding the incident referred to above) under the Reporting of Injuries, Diseases and Dangerous Occurrences Regulations 2013. Accrol Papers Limited has not received any communication from the HSE following these reports. The Board is of the view that this indicates that there is unlikely to be further prosecution.

I'm not convinced the board's opinion in this matter is entirely relevant.  They then add:

The Company is aware that the Local Authority is intending to inspect the Company's Skelmersdale warehouse which is operated by a third party on the Company's behalf. This is as a result of previous HSE concerns relating to the stacking of pallets at that site. Therefore, further investigations or enforcement actions cannot be discounted.

Risk capital, indeed :-(


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Trident 21st Nov '17 49 of 50

Anyone heard anything from Paul?

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Wimbledonsprinter 24th Nov '17 50 of 50

In reply to post #243013

Reasonable details of the Daniel Thwaites (OFEX:THW) pension are in the 2017 annual report (not the interim) - note 9. But I cannot find proper details of the IR swap - other than it is for £55 million notional and had a mark to market value of neg £21.8million (note 15) - so it must be of very long maturity - like the debt.

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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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