Small Cap Value Report (Mon 21 Oct 2019) - BON, BVXP, MIND, BEG, TRI, ANG, WTG

21st Oct '19 by Graham Neary

33 comments 8429 reads

Good morning!

Today I'm looking at:

Bonmarche Holdings (LON:BON) (in administration)
Bioventix (LON:BVXP)
Mind Gym (LON:MIND)
Begbies Traynor (LON:BEG)
Trifast (LON:TRI)
Angling Direct (LON:ANG)
Watchstone (LON:WTG)

Bonmarche (BON)

There is going to be a lot of politics today, to distract us from the markets.

One story where I'd like to add a footnote is Bonmarche, which is now in administration.

Paul and I covered this stock many times over the years - see the archives.

In September 2018, I noted that it was "cheap on conventional metrics" and "could be worth a look, as a contrarian play", while also noting that the company had no plans to reduce its large porfolio of more than 300 stores. This stance I described as "complacent".

Things went from bad to worse since then, and I grew increasingly wary of the company's outlook.

The Chief Executive has now admitted in a statement:

"We have spent a number of months examining our business model and looking for alternatives. But we have been sadly forced to conclude that under the present terms of business, our model simply does not work," she added.

For my point of view, Bonmarche has (or had) three major problems:

online sales much too small relative to store sales (c. 12% of total).
no planning took place to reduce the store estate, if necessary.
the brand identity doesn't jump out.

For now, the stores continue to trade as normal and the website is still live. No redundancies have been made, according to the BBC. The business is being marketed for sale.

Philip Day's investment vehicle, which owns 95% of BON shares, says it is "disappointed with the result of our investment in Bonmarche."

My view - if Philip Day can get it wrong, and if a company which looked cheap on conventional metrics can go under very quickly, this provides further confirmation to me that we need to be extremely cautious when it comes to the retail sector.

The trend of legacy retailers collapsing shows no sign of abating. I wonder…

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ambrosia

21st Oct '19

the comment meant, very few people will read what the deal actually says or the source material, and to be honest it would be unreasonable to expect them too, that leaves everyone vulnerable to whoever is putting a spin on it.

over the last 3 years my trust in the politicians and the media has reached a real low and i've realised that politicians want chaos, it gives them a profile and an angle, they try to make us think theyll come along and save us, and somehow we all forget they started the chaos.

that says my post is getting negative likes so it looks like i'm on my own here

the narrative is how to do brexit, thats on both sides, theres nothing about whats the benefit of it is, the fight is who owns brexit not what it will do for us. "lets get brexit done as its hurting business" like it was you who started it and its not your fault we've had 3 years of it!
all i see is they the politicians benefit from chaos.

TamzinPiworld

Video: Everyman Media (LON:EMAN) H1 19 presentation given to investors, at end of September. This was delivered at the Everyman Kings Cross. Both CEO Crispin Lilly and new CFO Elizabeth Lake (who joined from Science in Sport), are presenting. Gives a good overview of the company, and of management. c.50 mins.

timarr

I think the point is that it's not investment related, other than in the most general sense that everything is investment related. Discussing how your beliefs are affecting how you're investing would be relevant.

I remain of the opinion that there's no way of predicting the outcome of events around Brexit and therefore the safe approach is a balanced portfolio. I'm holding a mixture of cash (30%, unusually high), gold (5%, ditto), a range of private equity vehicles (5%), short-dated corporate bonds (10%, arguably a cash proxy), overseas equities mainly through ETFs (20%), some very undervalued smaller UK equities (5% mainly, but not exclusively REITs) and a mixture of "quality" mid and small cap UK stocks mostly with significant overseas earnings.

Once a decision has been made I'd expect to commit most of the cash and cash equivalents into the market quite quickly. However, what I commit into will be determined by the actual decision. As an investor probably the best outcome would be an unexpected no-deal exit followed by wholesale market panic - but that's probably the worst result for the country.

Uncertainty rules, I don't think there's a predictable outcome here, 1214 days on the referendum result.

bryans1311

Surely with technical advances in recent years, the general public could replace government and MPs? Why not have an online secure and verified voting system, where we can vote on everything from Brexit amendments to tampon taxes? At least we won't have to put up with another sh** shower like the current lot, and have to pay their expenses for the pleasure.

Laughton

I suppose for the same reason that we entrust our investments to a Board of Directors.

Who would propose the Brexit ammendments or individual taxes (or everything else for that matter) for us to vote on?

A fixed term parliament seemed like a good idea at the time (to me at least). Now, not so much. If it wasn't for that then we would all have had a chance by now to make our feelings known and hopefully have got rid of a lot of that shower you mention.

PS - I wish Stocko could add a spellchecker to the site as part of their upgrade - I'm a useless typer and re-reading and correcting takes an age.

laurie

Marks and Spencer (LON:MKS) I had a surprising answer to a question that I asked a group of people in their 20s. The question I asked was 'Where do you buy your clothes?' The people asked were mostly at university, academically successful, dressed neatly, with some high-powered parents. They all said 'mostly Marks and Spencer', but they said it quietly as if they suspected that it would be better to have a different answer.
Superdry (LON:SDRY) Have you looked at the re-vamped website? There are changes happening. The previous offering was full of scruffy kid stuff. What is shown now looks good/fashionable/desirable. disclosure: I own some shares in SDRY. I am not in the intended demographic.

point taken. my original post was meant to be the possible next stage of brexit and the chances of whats going to happen next. i was struggling to assess the chance of another vote and i got distracted and sucked in.
although in my defence i tried to keep away from either side and only express my hatred for politicians of both sides, i hate them both equally, a career politician is socially as damaging as a career criminal (bugger, there i go again i cant help myself, even while apologising i'm doing it. I will now shut up and stop posting)

pj8

Just to be clear, the deal as proposed only increases the uncertainty, since what would happen next would be months of negotiations with potential trading partners - lack of agreement on a trade deal with the EU could easily result in a No Deal Brexit if the Government keeps to its December 2020 deadline. (Hence the Letwin amendment on Saturday.)

The investment outcome depends on second guessing how others will react (eg a knee-jerk euphoria for UK stocks if the deal is agreed by Parliament, followed by reality kicking in when it's realised that No Deal remains a real possibility?).

Housemartin2

- providing the spell checker is in British English .........

cmpeckham

Technology has advanced but the way that technology serves democracy has gone backward. It's true in this country but if you want to see the issue with a little perspective look across at the US, fake news n' all.

It's one of many reasons why representative democracy is the worst possible form of government, apart from all the others.

Nick Ray

My posts are spell-checked by the browser (Firefox). Maybe see if there is a feature you can turn on somewhere in yours.

hayashi22

I'm sure that if anyone is at a lose end this evening the Panorama programme would be worth watching. Why investing with fund managers can be risky..starring you know who!

peterthegreat

Further to bryans1311 comment about the general public replacing government, I would suggest that a more practical approach would be to start a non-political party which would base its decisions and policies on expert analysis, including scientific analysis. It would have no political views in much the same way that many voluntary organisations and some companies have have no political views. Perhaps it should be called the rational party. I would vote for it!

Vsihv

So this is funny:
@ a BBQ last summer (2018) when Brexit was going to work out great or not at all (times change but not Brexit), I proposed a party called the rational decision making party.
At the time i was asked what the party would do about Grenfell (I said nothing - 70 people dying is sad but not relevant to a government responsible for more than 70m people), the council should handle Grenfell and if there are any decisions around building regulations, the party would consider the information and respond accordingly.
Admittedly it was my wife's friend's BBQ (are double apostrophe frowned upon like double negatives?), But suffice it to say it would not have won many votes.

As per my right honourable friend (above), the minister for Peckham, technology is about as good for democracy as democracy.

Winston Churchill put it best when he said, the problem with democracy is the average voter (a gif that was shared (many times) among remain brethren).

Then we have the rational decision making party without elections, which is a dictatorship, notwithstanding a successful and not politically compromised dictatorship - not dissimilar to Singapore.

#fullcircle

Trident

Yes, the 'public' likes to blame politicians for everything, and let's face it the current crop haven't done themselves any favours.

But whose votes made for a minority Govt. Who also punished the liberals when they sought a middle ground with the Tories.

Time for a check in the mirror methinks.

doublelutz

Peter - who are these experts going to be? Many economic forecasts finish up being nonsense. Look at the forecasts of loss of jobs in the City following the Brexit vote. I suggest your guess and that of many people on here would be just as good as any "experts".

WDWombat

I like Bioventix because of the superb returns on capital. I don't pretend to understand the company business very well, and Graham's points of possible concern are direct from the horse's mouth, but managemnt are quite open on all fronts, and correctly (imv) charge ALL R&D to the P&L account a la any self-respecting Japanese drug company. This is a company run entirely without hype, self-conceit and misplaced over-ambition.

Robert Smith

Crumbs, you're optimistic. We'll never see the process agreed in our lifetime. It will drag on and on, like the Jarndice Will in Bleak House, until everyone has forgotten what the initial aim was.

Gromley

I like Bioventix because of the superb returns on capital.
....
and correctly (imv) charge ALL R&D to the P&L account

There is an interesting paradox there imho.

By not capitalising their R&D, they are arguably understating their Capital, also obviously understating their Return, so that is not intended as a criticism.

But this reminds me that I feel ROCE can sometimes be a deceptive measure.

The Bioventix (LON:BVXP) results show that they have capital of £10.9m and a ROCE of 64%.

That would be truly sensational IF I believed that they could deploy an additional £10.9m and double their profits - I don't believe that is the case. (In fact in the year just gone R increased by 1% whilst CE decreased by 2%)

Theirs is not a business driven by capital, but rather by intellectual property. (Whose value does not appear on the balance sheet.)

As per Stocko the market cap is £183m and as per today's results the NAV is £11m.

You can argue that "the market" values their IP at £172m. If they had had to buy that IP in from a third party it would sit on the balance sheet as an intangible. If that were the case ROCE would be a meagre 4%.

With a PE ratio of somewhere in the low 30s one has to assume the notional value of that IP includes the pipeline of developments as well as those already launched and bearing fruit.

It is certainly the case that R&D at Bioventix (LON:BVXP) thus far has made a fantastic return on capital (creating a huge implicit IP asset).

However the question now has to be can they continue this in to the future? A 10% forecast increase in earnings for next year (which may be reduced on the back of the caution in today's statement) is quite modest for such a high PE multiple. But can they deploy more capital to accelerate future growth in earnings?

By no means am I trying to knock Bioventix (LON:BVXP) as an investment - it has been a fantastic one thus far ; but I do think the high ROCE could be a deceptive comfort blanket, unless they can make the same scale of breakthroughs in the next five years as they have in the previous five. I do not know where they are on their potential growth curve.

ISAallowance

I actually think the headline ROCE of 72.6% (BVXP stockreport at the moment, might change as the results filter in to it) is a pretty good approximation of their incremental ROCE over the last few years.

As you point out, they don't capitalise R&D, so the headline capex is no good for an incremental ROCE calculation, instead if I sum up EPS over the last 6 years 2013-2018 I get cumulative 434.9p eps. Then if I sum up cumulative dividends I get 320.7p dividends (including the 40p and 55p specials in 2017 & 2018 respectively.) Hence I figure that ~114p/share of profit has been re-invested in the business over that time frame. The net result of that is that eps has increased from 40.5p in 2013 to 112p in 2019, so approx 71p increase for 114p invested, or about 62% return on the incremental capital. Very rough and ready I admit.

Now, I agree absolutely that high incremental ROCE is then made irrelevent if they cannot continue to grow. However, I am sure that Troponin will meaningfully ramp up over the next few years, and in the background they continue to work on projects for further in the future. So whilst there are no guarantees, I see no reason why earnings should not continue to grow with minimal capital expenditure, and the beauty of the sky-high ROCE is that we can continue to enjoy a majority of earnings dropping through as divis and specials even whilst they develop the antibodies for the future.

Small Cap Value Report (Mon 21 Oct 2019) - BON, BVXP, MIND, BEG, TRI, ANG, WTG

Bonmarche (BON)

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Graham Neary

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