Small Cap Value Report (Mon 25 Feb 2019) - ALY, PFG/NSF, FIF, QTX

Good morning!

I hope you are all feeling refreshed and energetic. Plenty to chew on today.

Today's report includes:

• Laura Ashley Holdings (LON:ALY) - update on media speculation (re: takeover)
• Provident Financial (LON:PFG) - response to offer by Non-Standard Finance (LON:NSF)
• Finsbury Food (LON:FIF) - interim results
• Quartix Holdings (LON:QTX) - final results

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Laura Ashley Holdings (LON:ALY)

• Share price: 3.76p (+16%)
• No. of shares: 728 million
• Market cap: £27 million

Update on media speculation

We discussed Laura Ashley last week, and my conclusion was:

"Not worth dabbling in this until there is a sale/liquidation planned, as the brand seems to be dying a slow death under current management."

Three business days later and the company is suddenly at the centre of takeover speculation!

The Sunday Telegraph reported over the weekend that Michael Flacks "is to approach Laura Ashley's Malaysian controlling shareholders in the hope of taking it private and reviving it".

Today, the Chairman of LA says that no approach has been made and also that "as major shareholders, we have no intention of divesting our shareholding".

The group of controlling shareholders is centred around Khoo Kay Peng and his MUI Group (Malaysian United Industries), with c. 60% of the shares.

Speculating on takeovers is very difficult, in my experience. In this instance, a takeover bid has not yet been made and the controlling shareholders are indicating that their stake is not for sale. So we have some fairly obvious reasons for caution.

A controlling shareholder is always a huge roadblock when it comes to getting a change of direction, e.g. see French Connection (LON:FCCN) which should have been transformed many years ago. My comments last week were on the basis that the current controlling shareholders might some day want to move on.

Buyer background check - Looking into the background of the rumoured bidder, I see that he does have a track record in this sort of activity and so the rumoured bid is probably not just a publicity stunt.

In 2012, he led a group of investors who bought the struggling Irish fashion retailer A|Wear out of receivership.

That probably didn't work out too well for him, as A|Wear fell into receivership again the next year. No rescue was possible and it ceased trading in 2014. I'm sure he has learned some important lessons from that experience!

My view

If I was a small shareholder in Laura Ashley, I would of course be pleased by the takeover interest. If nothing else, it hints at some inherent value - perhaps only brand value at this point - which could be converted to profitability under the right management and with the right plan.

But how and when could the takeover happen, and at what price? Being early is indistinguishable from being wrong and it could take any length of time for a takeover at Laura Ashley to finally be approved.

Or if Khoo and MUI are determined not to sell out and not to change course, then nobody can ever force them out (excluding the long-rumoured sales needed to satisfy his divorce settlement).

I have no information apart from what they have said in the public domain, so I have to presume that they will not sell and that Laura Ashley will proceed with the current strategy and under current management for the foreseeable future.

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Provident Financial (LON:PFG)

• Share price: 589p (unch.)
• No. of shares: 253 million
• Market cap: £1,489 million

Response to Offer by Non-Standard Finance

Another topical update. We discussed the offer by Non-Standard Finance (LON:NSF) to take control of Provident Financial (LON:PFG) last week, too.

Provident comes out fighting, calling the bid "unsolicited and highly opportunistic", and expressing disappointment that Non-Standard Finance didn't engage with the PFG Board.

That first paragraph is immediately questionable: Non-Standard Finance already approached the PFG Board last year, and was rejected! So why would NSF have approached the PFG Board again, since it knew the Board's stance?

I won't go through the list of reasons given by the PFG Board for their opposition to the offer, which would presumably result in all of them losing their jobs.

Interestingly, they hit back at NSF management with counter-criticism of their own, questioning the track record and ability of NSF, which they describe as a "significantly smaller company". They point out that the Non-Standard Finance (LON:NSF) share price has been a poor performer since its IPO in 2015.

Split loyalties - today's statement by the PFG Board points out that the large institutional PFG shareholders who back the offer are also large shareholders in Non-Standard Finance (LON:NSF), and suggests that what's good for them might not be good for other PFG shareholders. That is a reasonable question - are there any PFG shareholders here who agree?

My view

I'm a little bit surprised that the Board are so steadfast in their opposition to the offer. It's as if shareholders representing just over 50% of PFG shares hadn't already expressed their support for it!

I wonder if this might turn into a much larger version of the Flybe (LON:FLYB) situation where a Board appears to "go rogue" and rebel against the wishes of the majority of its shareholder base? It has been suggested by one esteemed analyst that the PFG Board could try to dispose of its Home Collected Credit business, as a defense against the offer.

If that happens, we might end up in a situation where Woodford, Schroders or Marathon might want to take on a more activist role to take control of the situation.

I expect the deal to go ahead. To get the 75% of votes which I assume will be needed and ensure that most of the remaining shareholders vote for it, I suppose the current offer could be sweetened, if necessary?

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Finsbury Food (LON:FIF)

• Share price: 80.5p (-2%)
• No. of shares: 130 million
• Market cap: £105 million

Interim Results

This is "one of the largest ambient cake manufacturers in the UK".

Unfortunately, this hasn't translated into an exciting investment idea and it remains really uninspriring.

• modest operating margin of 5.5%
• balance sheet stuffed with intangibles, lots of M&A
• historically had a lot of exceptional costs (although the exceptional costs were thankfully rather low this period)
• £36 million of net debt
• doesn't seem to own any powerful brands (although it makes branded cakes under license from brand owners)
• like-for-like revenue growth tepid at 0.5%

It's not a terrible company by any means, it's just so hard to get excited about it.

Even the StockRanks are bored, giving it a rating of 65 out of 100. Let's move on before I fall asleep.

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Quartix Holdings (LON:QTX)

• Share price: 245p (+1%)
• No. of shares: 48 million
• Market cap: £117 million

Final Results

This telematics supplier is much more interesting!

I've noted before that it has a great record when it comes to generating good margins and returns for shareholders, especially in comparison to Trakm8 Holdings (LON:TRAK).

Results today are in line with expectations.

Revenue is up 5% (including 10% growth in the Fleet division, which has been prioritised) and this translates to a 21% increase in operating profit.

Operating margin is 31%. The company has deliberately focused on high-margin activities.

A high operating margin can be seen as something which reduces risk - because the company is likely to remain profitable, even if costs rise a little or sales fall a little.

Note that adjusted EBITDA is £8.3 million while statutory PBT is almost the same, at £8.1 million.

This sort of "clean" reporting with high profits on both an adjusted and statutory basis helps us to understand why Quartix enjoys a Quality Rank of 99.

Around the world - Quartix is making progress in France and the USA is also rolling out in new European markets.

Cash flow/dividends - limited capex requirements and a tidy balance sheet mean that there has been lots of spare cash with which to pay dividends: nearly £12 million has been paid out to shareholders over the last two years.

There is a reduction in the final dividend this year from 4.3p to 3.8p, but this is supplemented by a special dividend. A few quick calculations inform me that Quartix is again paying out c. £6 million to shareholders for this financial year.

Outlook - in line with expectations. The company enjoys recurring revenue streams from customers and combining this with high margins, it should enjoy better visibility than the average small-cap.

Analysts have nudged up their adjusted EPS forecasts for FY 2019 and FY 2020 to 11p and 11.6p, respectively. 

Shares are expensive on a PER basis but I have a sneaking suspicion that forecasts might be beaten. And the overall quality of the performance to date looks like it deserves a high rating. So I view QTX as fairly valued.

The main imponderable question for me is how rapidly the telematics industry might change in future. Will technological changes come along and disrupt the existing providers? Or will existing suppliers oversee future change? If the latter is true, I would see a bright future for QTX shareholders.

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I'm afraid I've run out of time for today - apologies! I might circle back to these companies later in the week:

• Tristel (LON:TSTL)
• Taptica International (LON:TAP)
• Dialight (LON:DIA)
• CMC Markets (LON:CMCX)

Cheers

Graham