Small Cap Value Report (Mon 25 Sep 2017) - SPRP, ELCO, FISH, XPD

25th Sep '17 by Graham Neary

32 comments 12275 reads

Good morning!

Sorry for the slow start today.

Candidates for coverage:

Sprue Aegis (LON:SPRP)
Elecosoft (LON:ELCO)
Fishing Republic (LON:FISH)
Xpediator (LON:XPD)
Trifast (LON:TRI)

Any other requests? Please let me know. (Edit: Switched in Elecosoft (LON:ELCO) to the above list, took out Spaceandpeople (LON:SAL) as too small.)

Cheers,

Graham

Sprue Aegis (LON:SPRP)

Share price: 210p (unch.)

No. of shares: 46 million

Market cap: £97 million

Half-year report

This is a maker and marketer of fire alarms and carbon monoxide detectors which has been making decent share price gains in 2017 (up from c. 180p in January).

It had some damaging inventory problems in 2016 which it now appears to have moved on from, and has recovered to profitability. Basic EPS is 2.8p per share, up from a 1.3p loss in H1 2016.

Highlights:

Group revenue of £26.0m (H1 2016: £25.9m)
Adjusted operating profit* of £1.5m (H1 2016: operating loss* £0.9m)
Gross margin pre-BRK distribution fee up by 6.2% to 31.7% (H1 2016: 25.5%)

Note that the BRK distribution fee is a specific payment to one of its suppliers in exchange for the right to distribute that company's products. The agreement with that supplier is ending next year, so it's probably irrelevant to analysis of Sprue's future value!

Sprue has net cash of £10 million and the dividend is maintained.

Adjusted operating profit is before £0.2 million of share-based payments, so I would make sure to also deduct them from the profit figure.

The highlights also mention that inventory has reduced - making the probability of another stocking mishap less likely! Continuing to reduce inventory remains an objective, so hopefully the probability will reduce even further.

I won't pretend to be an expert in the alarm industry but the strategic report sounds quite promising, with new partnerships and products on the way, e.g. "Europe's first domestic battery powered gas alarm"!

Today's share price is unchanged because ultimately, today's numbers and the outlook are in line with expectations:

Our product roadmap out to 2020 provides…

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HollandSmith

25th Sep '17

I would be interested in what you think about Vitec (LON:VTC)

Its never been discussed here, but with a 5.2% increase today whilst having a "Conservative" flag and very high stocko rating, today might be the day. :)

Julianh

Zoo Digital and Elecosoft updates both sound very positive. I would like to requests for these two.

handybrownone

Safestay PLC? Improved numbers

ithomson1

May want to mention the Stonegate/Revolution Bar offer today!

rustle2

News today??

Trident

Currently don't expect any further new re:Revolution Bars (LON:RBG) until after 3rd Oct to 10th Oct. Deltic are still pondering the valuation of RBG but sound hacked off their merger proposal wasn't mentioned by the Director of RBG in their statement of the Stonegate announcement. Bit surprised Deltic are bemused by no statement regarding a merger, as there is no public offering of Deltic shares, so how is a merger perceived as anything other than trapping RBG shareholders in a non-quoted vehicle?

They need to come up with a cash offer at least for a comparative to any merger proposal, or the current Stonegate cash offer to be taken seriously.

Graham Neary

Hi, I covered it for you!

Cheers,

Graham

Covered it for you ram, good luck with it! And thanks for pointing it out, hadn't seen it before.

Cheers

Graham

gus 1065

Self storage specialist REIT Safestore Holdings (LON:SAFE) announced another bolt on acquisition after hours today for £56m funded through debt. More scale to spread central overheads across and with a claimed 7.7% earnings yield on the acquisition compared to a current 3.6% dividend yield for the company itself it should be immediately earnings enhancing.

Gus.

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Safestore Holdings plc ("Safestore" or "the Group")

Acquisition of Stork Self Storage (Holdings) Limited (trading as Alligator Self Storage) for £56m

Earnings accretive from completion, further consolidation of UK market

Highlights

· Exchanged contracts to acquire Stork Self Storage (Holdings) Limited ("SSSHL"), the eleventh largest self-storage portfolio in the UK with 12 stores.

· Consideration of £56m (subject to a potential working capital adjustment) to be funded from existing Group debt facilities

· At the consideration price, the SSSHL portfolio has an implied first year net operating income yield of c.7.7%2

· Expected to be earnings accretive from completion of the acquisition

· Acquisition expands Safestore's portfolio to 146 stores, consolidating its position as the leading self-storage operator in the UK1

Frederic Vecchioli, Chief Executive Officer commented:

"Over the past fifteen months, Safestore has cemented its market leading position in the UK, investing £100m in two earnings accretive acquisitions, and opening 4 new sites with a further 2 stores in the pipeline. These transactions have supplemented the organic growth being delivered by the existing business.

With the acquisition of Alligator Self Storage we have acquired a complementary portfolio of largely freehold stores across the UK which demonstrates our ability to source, fund and conclude significant acquisitions.

Following this acquisition, Safestore will have a total of 146 stores, of which 120 are in the UK and 26 in Paris. When combined with our acquisition and development activity in Paris, we are continuing the consolidation of our leading positions in both markets."

Acquisition of SSSHL

Safestore is pleased to announce it has exchanged contracts with a company controlled by funds managed or advised by York Capital Management to acquire, Stork Self Storage (Holdings) Limited ("SSSHL") trading as Alligator Self Storage (the "Acquisition"). The consideration of £56.0m (subject to customary working capital adjustment) will be payable in cash on completion of the Acquisition, expected to be 1 November 2017 ("Completion").

SSSHL is the eleventh largest self-storage portfolio in the UK with 12 stores with a maximum lettable area of 563,000 sq ft. SSSHL's stores, which are geographically complementary to the existing estate, are located in London (Camden), the South East of the UK (Fareham, Farnham, Luton, Southampton and Winchester), Birmingham (three stores), Bolton, Bristol and Nottingham. Ten of the SSSHL stores are freehold or long leasehold and two are leasehold stores with an average remaining lease length of 15.4 years.

The Acquisition will reinforce Safestore's position as the UK's largest self storage group by number of sites with a combined total of 120 stores, 67 of which will be in London and the South East. The SSSHL portfolio is currently operating at 68% occupancy (of maximum lettable area).

Pro forma EBITDA after rent is currently c. £4.3m per annum on turnover of £7.5m. At the consideration price, the SSSHL portfolio has an implied first year net operating income yield of c.7.7%.

The SSSHL business, which had pro forma gross assets of £56.4m at 30 September 2016, will be acquired on a debt and cash free basis. The Acquisition will be funded from the Group's existing debt facilities, with the Group's £60m accordion facility converted into a committed revolving credit facility. On a pro forma basis, the Group's Loan to Value ratio post completion of the Acquisition would be c.35% compared to 32% at 30 April 2017 (as adjusted on a pro forma basis for our May 2017 refinancing).

The Acquisition is expected to be immediately accretive to Group earnings per share from completion and will support the Group's future dividend capacity.

WarrantStar

Hi Graham. I found your comment in the Xpediator (LON:XPD) section very interesting ie "Broker forecasts are missing (always a good thing, since it means fewer people are looking at the stock)" I can see that having no broker forecast might get you a lower entry price. But does it not also mean that you get a lower exit price? Or is the hope that a broker will start providing forecasts in future? What are other people's thoughts on this? Do any of you actually search for companies that have no forecasts? How well does it work out in the long run?

Richard Goodwin

This is Peter Lynch favorite from his book 'one up on Wall Street'.
The logic is to find firms with poor analyst coverage and minimal institutional shareholdings on the logic that as they are successful both of those elements appear which in turn drives up the price.
Of course it does rather rely on the firms being successful and the PI holding for long enough to get the benefit.

Ramridge

Re. Xpediator (LON:XPD) thanks a lot Graham. Yes, the operating margin is only 2.7% , against a sector average of around 5%. Too thin for my liking, so I will just hold my initial position to see how it turns out. Will sell at first sign of weakness.
Regards, Ram

Paul Scott

Elecosoft (LON:ELCO) (in which I hold a long position) - good results, but it looks expensive - in a nutshell!!! Sorry for lack of detail, but I'm lolling by the side of Dubrovnik harbour, listening to Hot Chocolate - everyone's a winner, baby!!

that's alright!

dgold

Deltic's proposal is that Revolution Bars (LON:RBG) buys Deltic with Revolution Bars (LON:RBG) shares and Revolution Bars (LON:RBG) remains quoted.

I am trying to work out what they mean by "evaluating a cash offer" which they have been doing for about a month now. Does it mean they are trying to get bank finance at a reasonable price and not necessarily managing yet? In which case there might not be any cash offer forthcoming, meaning that the Stonegate offer will probably be accepted as opposed to the merger proposal, however good Deltic think it is.

Or maybe they do have the cash available but prefer the merger idea, in which case they will try to float a merger proposal and if they see it won't be accepted only then announce a cash offer?

Cleeve

26th Sep '17

Graham would be interested in your view on space and people as a few of us have followed here from much higher levels thanks

Lotus Elan

me too!

simoan

o UK promotions £489k (2016: £385k) - Up £104k

o UK retail and MPK £106k (2016: (£169k)) - Up £275k

o German promotions £16k (2016: £145k) - Down £129k

o German retail £90k (2016: £1k) - Up £89k

o Head office and other (£528k) (2016: (536k) - Up £8k

FWIW my opinion is that they should learn how to subtract in their results highlights. Hopefully it wasn't the FD that did the sums! There are not many areas I'm personally less interested in currently than tiny market cap, high-street retail based marketing companies.

All the best, Si

sharw

18th Nov '17

I have just been researching Elecosoft (LON:ELCO) as a result of it coming 4th in Ben Hobson's list of shares that fit the Slater profile. The numbers may say one thing but I find a big red flag in the boardroom. The company is dominated by Executive Chairman and major shareholder John Ketteley but after that the revolving door leaves me giddy:
29/6/15 FD leaves
18/4/16 CEO leaves after less that 2 years (not replaced)
6/1/17 FD leaving
21/8/17 FD (appointed February) has left

hayashi22

Yes that has put me ELCO as well.Don't think seriously high calibre people will fancy working there. The obvious exception is probably Dart where Meeson runs the show as Exec Chairman but it has been a star performer.

Small Cap Value Report (Mon 25 Sep 2017) - SPRP, ELCO, FISH, XPD

Sprue Aegis (LON:SPRP)

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Graham Neary

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