Small Cap Value Report (Mon 22 Oct 2018) - FCCN, SDRY, SFE, D4T4, IGP, Share Options, CER, GFIN, CML, CSSG

Monday, Oct 22 2018 by
89

Good evening/morning, it's Paul here.

I'll be writing this week's SCVRs, with Graham also chipping in some extra sections on Tuesday.


Book recommendation

I hope everyone enjoyed the wonderful, mild & sunny weather over the weekend. I've been sunbathing on my terrace (in late October, this is madness!) whilst immersed in a great book, "Open Secret", by Stella Rimington, the retired Director General of MI5. It's a fascinating, and at times highly entertaining book - I recommend it to you.


Clothing retailers

This very mild weather won't be helping the embattled clothing retailers though. They really do need a cold snap in Sept/Oct, to get the sales moving of heavy & more expensive winter ranges.

As we know the whole sector is struggling, apart from online-only operators such as ASOS (LON:ASC) and Boohoo (LON:BOO) , both of which have reported excellent trading & growth this year.

Shares in Superdry (LON:SDRY) hit an all-time-high of £20/share in Jan 2018, but have since plunged to only 733p. I had a look at the figures & profit warning last week, and came close to dipping my toe in with an initial purchase. However, a forward PER of only 7.4 tells me that the market is expecting a further downgrade. It does look as if it may have another profit warning in it.

SDRY's profit warning here on 15 Oct 2018, blamed forex hedges, and warm weather for a lowering of profit expectations, saying;

... the summer and autumn to date has seen unseasonably hot weather conditions in the UK, Continental Europe and on the East Coast of the USA.  Critically, these conditions have continued through into September and the first half of October and have significantly affected demand for autumn/winter product, particularly sweats and jackets, which account for around 45% of Superdry's annual sales


The Sunday Times reported that the co-founder, Julian Dunkerton, wants to return to sort out the business, which he sees as on "a completely wrong path". I wonder if there might be some activism in the  offing, to oust existing management?

I'll be keeping an eye on this.



(this section was written on Sunday evening)

French Connection (LON:FCCN)

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Superdry PLC, formerly SuperGroup PLC, designs, produces and sells clothing and accessories under the Superdry brand in approximately 670 points of sale across the world, as well as online. The Company offers a range of products for men and women. The Company operates through three segments: Retail, Wholesale and Central costs. The Retail segment's principal activities consist of the operation of the United Kingdom, Republic of Ireland, European and the United States stores, concessions and all Internet sites. The Retail segment is involved in the sale to individual consumers of its brand and third party clothing, footwear and accessories. The Wholesale segment's principal activities consist of the ownership of brands, wholesale distribution of its brand products (clothing, footwear and accessories) across the world and trade sales. It offers a range of products, including t-shirts, polo shirts, hoods and sweats, joggers, tops, dresses, jackets, shirts, footwear, bags and accessories. more »

LSE Price
735.5p
Change
-0.7%
Mkt Cap (£m)
607.3
P/E (fwd)
8.6
Yield (fwd)
4.4

French Connection Group PLC designs and supplies branded fashion clothing and accessories for men and women. The Company operates retail stores and concessions in the United Kingdom, Europe, the United States and Canada and also operates e-commerce businesses in each of those territories. Its principal brand is French Connection, which designs, produces and distributes branded fashion clothing, accessories, such as toiletries and fragrances, shoes, watches, jewelry, eyewear, furniture and homeware through its distribution channels: retail stores, e-commerce, wholesale and licensing. Its other brands include, Great Plains and YMC. The Company operates in approximately 50 countries around the world. The Company's subsidiaries include French Connection Limited, French Connection UK Limited, French Connection (London) Limited, Contracts Limited, French Connection Group Inc., French Connection (Hong Kong) Limited, French Connection (Canada) Limited and YMC Limited. more »

LSE Price
52p
Change
 
Mkt Cap (£m)
50.2
P/E (fwd)
58.1
Yield (fwd)
n/a

Safestyle UK plc is a United Kingdom-based company engaged in the sale, manufacture and installation of replacement un-plasticized poly vinyl chloride (PVCu) windows and doors for the United Kingdom homeowner market. The Company's segment includes the sale, design, manufacture, installation and maintenance of domestic, double-glazed, replacement windows and doors. The Company has over 30 sales branches and approximately 10 distribution depots located throughout the United Kingdom. Its product range includes EcoDiamond WINDOWS, EcoDiamond UPVC DOORS, EcoDiamond BI-FOLD DOORS, EcoDiamond REPLACEMENT CONSERVATORIES, GuardDoor, Pavilion and Inspire. It has manufactured over 279,000 frames and carried out approximately 60,000 installations. The Company's subsidiaries include Style Group Holdings Limited, Style Group Limited and HPAS Limited. more »

LSE Price
88.48p
Change
-0.6%
Mkt Cap (£m)
73.7
P/E (fwd)
27.7
Yield (fwd)
1.3



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


31 Comments on this Article show/hide all

IGotPoesJacket 22nd Oct 12 of 31
6

The thing that puts me off French Connection (LON:FCCN) is I don't see its products for sale anywhere. For a while at the start of the millennium FCUK was everywhere, though the joke wore out there must be millions of moderately rich middle age males who see that and smile about the memories of nights out etc. I tend to buy clothes from brands like Ted Baker, Meyer, Tommy Bahama, Superdry - not cheap but not too expensive for everyday work and social wear. So, shops like John Lewis and HoF and other men's outfitters are where I tend to get my threads. I cannot remember the last time I saw FCCN products on their racks. Is the style wrong, the price wrong - why aren't they capitalising on their brand recognition? Seriously, how can they fail this hard?

This mini rant inspired me to look at their website. There was literally nothing I would want to buy. It seems they're targeting expensive clothes at a demographic with limited funds - the complete opposite of BooHoo, who target cheap clothes at young people, and the opposite of brands like Joules who target expensive clothes at 30+ middle class people.


Any purchase of FCCN shares would purely be a play on gambling on the takeover. I'm going to watch this one with interest from the sidelines..

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ridavies 22nd Oct 13 of 31
13

At the risk of being accused of spreading fake news, I would like to make the following comments on Safestyle UK (LON:SFE). I did spend quite a lot of time talking to a significant employee who has since left the company after a string of unfulfilled 'promises' probably not unrelated to the recent decline of the company, changes in management etc.

(By the way, this person is not one who bears grudges; he has been in this business with various companies all his working life, accepts it is a really nasty industry with extremely unpleasant, sometimes dangerous competitive practices - 'cutthroat' is used advisedly - with little or no company loyalty, and that is the way it is. that person had a job to go to the following week at a higher salary than he was being paid so he left and is getting on with his life after Safestyle UK (LON:SFE), personally disappointed with the person who attracted him to the company, but as I say not bearing any grudges.

Mr Misra was the largest shareholder and founder of Safestyle UK (LON:SFE) which came to the market in 2013. Mr Misra immediately sold out of his share of the business as part of the IPO process and left the business. My source told me that there appears to have been an agreement between Mr Misra and the company (probably through Mr Birmingham whose reputation has most recently been tarnished by admitting late last year that at the time of the IPO he bought shares in the company with an undisclosed loan from Mr Misra, but with strings attached. That loan and its implications were admitted by Mr Birmingham at the end of last year, who I understand has since left the company.)

My source says that the agreement would be that Mr Misra would not compete with Safestyle UK (LON:SFE) for an agreed period of time following the IPO. Surprise, surprise then - Safeglaze was set up at round about that time with the aggressive marketing (to say the least) since then which has hit £SFE's operations so hard. Within the company, it appears that the aggressive competition went far beyond marketing, with the stealing of IT records - customer records etc - and that they were used to get business. Significant numbers of staff were poached (or fired?) at that time too. The data were also used to undercut and 'slag off' £SFE's offering and service. When the new management came into Safestyle UK (LON:SFE) recently and injunctions etc started to fly around, Mr Misra appears to have departed stage left (ie left the country) to pursue other interests. Now he reappears as the guy who can really pull the strings at Safeglaze and be handsomely paid for taking the heat off Safestyle UK (LON:SFE). All of this is of course unofficial - the official bit came out in the court cases - but as the journalist often says, I have considerable faith in my source. I leave it up to the contributors on this site to come to their own conclusions; make comments; and hopefully add content of relevance to this sorry tale.

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Paul Scott 22nd Oct 14 of 31
2

In reply to post #410669

Hi Ajay,

Unfortunately, I couldn't make it to the MySale (LON:MYSL) meeting in the end. Sorry about that.

I got positive feedback from a friend who did attend the meeting though.

Regards, Paul. (disclosure: long position in MYSL)

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herbie47 22nd Oct 15 of 31

In reply to post #410679

Thanks Andrea, Yes there does seem to be some large one-off contracts. Outlook a bit reserved. I am tempted having missed out before, shares are now less than in February, yet EPS is about twice the forecast.

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Paul Scott 22nd Oct 16 of 31
7

In reply to post #410684

Hi Igotpoesjacket,

French Connection (LON:FCCN) isn't really about menswear, which is only a small part of its sales.

The womenswear is much more successful. So you need to ask women what they think of FCCN product. I've done that a lot, and they usually react positively about the styles, and brand image, but think it's too expensive.

Although interestingly, it's because the product is seen as expensive, and aspirational, that the company is able to make good profits from its brand licensing division.

Anyway, it doesn't really matter what any of us think about the product, as it's the numbers that matter!

Onerous lease expiries in the pipeline, mean that the company is set to move into profit shortly. So even if bidding interest comes to nothing, patient investors should do alright whatever happens. If it remains independent, then a resumption of divis is on the cards.

Regards, Paul.

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doug2500 22nd Oct 17 of 31
6

Great commentary on remuneration.

I always struggle to know how to vote on this so your guidelines will help a bit. To be honest I almost just feel like voting against all of them. Almost all policies look generous to me because I just can't believe that half decent people need these incentives to do their job when loads of people make a good effort just for their salary.

One practice I'd like to see would be holding the newly awarded shares in trust for maybe 10 years, with any dividends paid out possibly, with the ability to reclaim the shares in the face of a major setback in price. You could argue for it to be a company specific set back but frankly if price falls are not the fault of management, are price rises to their credit? This system based on EPS would be better, and it would stop directors just selling their shares which most of them seem to do.

So, in summary:
Less generous
Much longer term
Make them have more of their wealth tied up in the company for longer - should focus the mind a bit!

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mrosbiston 22nd Oct 18 of 31
1

In reply to post #410699

Croma Security Solutions (LON:CSSG) i think it is also perhaps the nature of the business - where they just provide ex-forces security to businesses - therefore its perhaps not a very exciting or scalable business. I could be wrong here - just trying to understand the lack of follow-through on the share price, also due to illiquidity, limited institutional trading, low volume.

financially - it looks great, its performing well, numbers are good, management seem competent, working capital is being well managed. I think two things might help - more analyst coverage, perhaps also a targeted acquisition if they have aspirations of becoming a larger group.

i hold - but cautiously.

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doublelutz 22nd Oct 19 of 31
4

Safestyle UK (LON:SFE) - I held this some time ago so watch with interest. I don't get it how they can let the former owner snatch the business, then correctly take at least partially successful legal action against the new company but then go back to the former owner and offer him up to 4 million shares and £2M cash to help them sort out their problems. I wouldn't touch it with a barge pole although had I done so a short while ago I could evidently have doubled my money!

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IGotPoesJacket 22nd Oct 20 of 31
5

In reply to post #410704

French Connection (LON:FCCN)

Thanks for the insightful reply Paul. Interesting point about the womenswear. On reflection, in a vacuum you would want the menswear division to play on its brand power but I can see an argument where targeting clothes at "dads" destroys the desirability of the brand in the core young female market.

I note that their products are significantly more expensive than Sosandar (LON:SOS) , which gives me more confidence that the criticism some people have of them having no sizeable market is completely flawed (especially as I think Sos customers are female me, bit of spending power and like nice things)..

It's an interesting story - good luck with the holding, hope the PIs get a nice outcome :)

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Zipmanpeter 22nd Oct 21 of 31
3

In reply to post #410704

Paul,

Re French Connection (LON:FCCN) I am a happy holder but disagree with you when you say

"patient investors should do alright whatever happens. If it remains independent, then a resumption of divis is on the cards"

I think it needs to sell to change the management decision maker (ie Marks). Without him gone, yes divis will resume but at low levels and the brand will likely slowly fade away as eventually his energy/vision will fade but there are no signs he can work without being completely dominant. The share price will follow so NOW is the moment.

That said, my model says the business can be worth 140-180p /share on a 10-12 PER within a couple of years to someone who can chop central overheads by 30%, exit all/most retail leases and concessions (some may be very profitable or worth it for awareness/branding ie as an advertising cost) and drive the wholesale/ecommerce business.

As previous commentator, Ashley with a 27% share has a spoiler role but a big enough offer will tempt him (or ALL other shareholders) to sell out or to see enough to make a winning bid himself.

I hope and believe Marks (and Ashley) will get a big payday north of 100p by mid-2019

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davidjhill 22nd Oct 22 of 31
7

£D4t4

Surprisingly little discussion on this one. We had some debate here, maybe 6 months ago at around the 120p level, so the share has done well since then. It seemed to be a bit of a "marmite" stock as for some reason last year they had the dreaded 2nd half weighted skew that makes even the most ardent supporter nervous!
I bought some around there following full year results and had pencilled in 190-200p as a target but am revising that upwards after todays update.

Data analysis (or end to end lifecycle management) is a big component of todays digital world and something many companies do not do well, or even really understand the mechanics. Hence, it is a space I can see growing and doing well for a while to come yet. Probably with some consolidation thrown in at some point so I'm not ruling them out as a bid target either.

Trading update today was excellent. As Paul says looks like it is warming us up for an earnings beat of some 10-15% whilst retaining optionality for an in-line if things tailed off towards y/e. That would put it on 13-14p eps. However, it has almost 20% of market cap in cash, so if you strip that out it is really trading on 11-12* PE multiple. Feels a bit miserly for a business with 15-20% eps compounding growth. I'd have thought a fairer rating was 15-18 * cash adjusted? What's that, somewhere between 235p & 290p?

Anyone else have any context or views?

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ridavies 22nd Oct 23 of 31
3

In reply to post #410709

I second that re your very good review of what management incentives should be based on, remembering they are also getting significant salaries for doing a good job in the first place, something that is frequently forgotten! You should be offering a bespoke service to many BOD Remuneration Committees.
As I think you say re social unrest etc, it is particularly important that remuneration is regarded as FAIR and FAIRNESS is critically important to the future of this country as never before. The opposite of/alternative to a fair Tory run economy which most of us are convinced is the best,/least undesirable system of management of the economy is socialism and frustration may well drive the UK into the hands of Labour and JC. For example, I hear reasonable people say 'nationalise the railways' out of frustration, not because they have thought it through and KNOW that it will be better - cheaper, better service - under Labour nationalisation, just that anything must be better than what they are having to put up with - whether it is largely the fault of the current government-owned element of the railways - Railtrack - and their disproportionate contribution to the recent timetable fiasco - or the union-driven cancellations using safety as a job-supporting mechanism on Southern and Northern, even though the industry bodies say guard-less trains are safe. As always, the 'anything must be better than this' is so frequently proven to be a fallacy.
I have been the subject of a significant loss in SP for Playtech (LON:PTEC) over the last two years, where it was one of my most profitable shares, and has become one of my worst performing. Over this time, the Remuneration Committee have blatantly ignored the shareholders at 2 consecutive AGMs. The latest AGM in May,18 those shareholders started to put their foot down but they are very reluctant to hit the red pedal and go above the 50%. The first in May 17 was a one-off payment for the CEO of £1m. The latest in May 18 was a backdoor rise of £60k a year for a Chairman who has presided over a SP fall of 55% in the last year and 45% since that AGM. Oh dear. Whilst this isn't the most publicised company versus the likes of Persimmon (LON:PSN), it reflects the same malaise - in this case, rewards for failure, versus £PSN's CEO's unwarranted 'reward' for success he has only partially contributed to.

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Weasel 22nd Oct 24 of 31
8

Great post on Management share options Paul.

Personally, I'm almost always against them. For me they are little more than management giving themselves another slice of the pie. They already get a very generous pay packet as well as a bonus, I'm not quite sure why they should deserve more. If the first two don't motivate them, why will the share options?
I would add the caveat that I have no objections to share options if management are truly exceptional or the company/SP have been on a great run.
But, all too often they are given out to all and sundry at incredibly generous strike prices, or even nil cost, and management then just sell them. That in itself is hardly a vote of confidence in the company's long term prospects or managements motivation. It just screams greed.

Then to round it off it seems to be the fashion of the day the exclude these payments from profit figures. Effectively management help themselves to an extra slice of the pie and would like us to just agree to pretend it didn't happen.

The Intercede (LON:IGP) options do seem very fair but almost every other example I can think of is overly generous to management and often based on KPI's that are all too easy to manipulate or meet.

I do like management who have a stake in the company they work for, but why should they be given it rather than having to buy it like the rest of us do!?

I may be alone here, but it's just snouts in the trough for me.

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ttjs4 22nd Oct 25 of 31
2

For Croma Security Solutions (LON:CSSG) holders, the company also posted its report and financial statements on its website. Always worth looking at the notes IMO.

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cholertonandrew 22nd Oct 26 of 31
1

Hi Paul, thanks for a great report. I too thought the options announcement at Intercede was good news and if I understood it properly, I think those targets have to be hit within three years although the holders can exercise the options for some time afterwards. I also get the impression that new management are playing things cautiously in terms of their communications and revenue guidance so I think this tells us that management are confident.

I’ve been a shareholder a long time here. Intercede started off working with smartcards but it’s their ability to put the credentials, including the authentication and cryptographic keys, onto smart phones and to reside within the chipsets that may be important in them being able to reach a much wider customer base. I think they’ve also been working hard to build the key partnerships to go to market in wider areas.

Here’s hoping.

Best wishes, Andrew

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iwright7 22nd Oct 27 of 31
1

In reply to post #410734

David - I like £D4T4 to, not least because it was one of the few shares that held up during the recent sell off, leading me to think that it is still good value. I topped up this morning and with an 5% lift today it seems others have too..

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tomps3 22nd Oct 28 of 31
1

Thanks Paul, as always an interesting read.

Here's a Cerillion (LON:CER) investor presentation from Mello earlier this year. (I think they'll be at Mello London too.)

Helps to get an insight to management and their business model.

https://www.piworld.co.uk/2018/06/27/cerillion-cer-investor-presentation-at-mello-south-june-2018/

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DJCP 22nd Oct 29 of 31

Re - Share Options - Many sensible ideas mentioned here.

As Graham recently found out (or struggled to !), the option targets etc. should be more readily available - see Tristel (LON:TSTL) on Wed 17th Oct SCVR. Ideally with examples on what would be needed for the beneficiaries to receive some (25% ? 50% ?) and the full amount of any incentive.

One annoyance, I recently came across was why/how option and warrant details can apparently change without any notification or shareholder agreement :
From this 31st July RNS:
https://investegate.co.uk/evr-holdings-plc--evrh-/rns/exercise-of-warrants-and-issue-of-shares/201807311646123725W/
To this correction 3 days later:
https://investegate.co.uk/evr-holdings-plc--evrh-/rns/exercise-of-warrants---issue-of-shares-correction/201808031640038359W/

Somehow 51m warrants have been extended by 7 years !

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ricky65 22nd Oct 30 of 31
7

"How can anyone possibly predict at what level a falling knife will bottom out at? They usually bottom out at a level far below what people initially imagine." Couldn't agree more.

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skinner66 1st Nov 31 of 31

re. safeglaze. pauls comment If you recall, previously Safestyle had a dispute with some renegade former management, who set up on their own as SafeGlaze. Or, "Pat Butcher's lot",. my dad was fortunate to cancel cheques with them as company has gone into administration. https://www.thetelegraphandargus.co.uk/news/17191282.more-than-130-jobs-lost-as-bradford-double-glazing-firm-ceases-trading/

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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 Stockopedia.com on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »

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