Small Cap Value Report (Mon 29 Oct 2018) - W7L, GMAA, VCP

Tuesday, Oct 30 2018 by

Good morning, it's Paul here!

I've finally managed to work out how to put up my Bournemouth sunset picture from last week! Shrinking the file size dramatically seems to have done it - anyway, I hope you like the colours.



Volatile stock market conditions remain, driven mainly by the USA (rising interest rates, trade war with China/EU), but also factors closer to home such as Italy/Eurozone crisis, Brexit & Corbyn worries.

I recall that, a couple of years ago, the Fed tried to start raising interest rates, but it triggered a stock market plunge, so they back-tracked. Maybe we've had QE & ultra low interest rates for so long, that our economies are now addicted to cheap credit?

I don't see any particular reason why there would be a continued bear market (based on the information we have as of now). In my view things got very frothy, and this is a sensible (and long overdue) correction.

I'm also starting to see some genuine bargains crop up - companies that are reporting decent trading, but are on fairly bombed out valuations. Last week, Flowtech Fluidpower (LON:FLO) and Photo-Me International (LON:PHTM) struck me as good value (I don't hold either, but they're both on my watchlist). There are some attractive (and sustainable) dividend yields out there, which make some high yielding equities look rather attractive now.

I'm thinking about running some stock screens, to look for bargains, much like I did in 2016 after the Brexit vote. Over the weekend, I revisited a video I made just after the Brexit vote. I was correct at the time that it was a one-off plunge, which would recover. Although looking back at the stocks that came up on my "Brexit bargains" screen, it's amazing now how far some of the low PER + high dividend yield retailers shares have more recently collapsed (e.g. Debenhams (LON:DEB) ). So I might use different criteria this time around, more focused on quality measures.

The speed of the decline in some conventional retailer shares has really surprised me - operational gearing in reverse. It's made me realise that chasing the lowest PER & highest yielding shares is a dangerous strategy…

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Warpaint London PLC is a United Kingdom-based company engaged in color cosmetics business. The Company sells color cosmetics in the United Kingdom and overseas, principally under the W7 brand. The Company operates through two divisions: close-out and own-brand. The own-brand division consists primarily of the Company's flagship brand, W7. The W7 brand contains over 500 items, which are sold into high street retailers and independent beauty shops across the United Kingdom, Europe, Australia and the United States. The W7 brand focuses on the 16-30 age range. more »

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QUIZ plc is United Kingdom-based global women's wear brand company. The Company is focused on providing occasion wear and dressy casual wear primarily for 16 to 35 year olds and offers clothing, footwear and accessories. The Company’s occasion wear provides maxi and mini dresses, matching tops and bottoms, and footwear, bags and other accessories that are designed to complement a particular outfit. The Company’s dressy casual is designed to provide the latest on-trend clothes, shoes, bags and accessories that have a glamorous edge. In addition, the Company’s products includes denim, playsuits, shirts, tops and skirts. The Company also provides a range of outerwear such as faux fur jackets, parkas and biker jackets. Footwear offers dune River Island, missguided and ASOS. The Company’s brand operates in 19 countries through 65 international franchise stores, concessions and wholesale partners. more »

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Gama Aviation plc, formerly Hangar 8 PLC, is a global aviation services company. The Company provides management, charter, special missions, logistics, maintenance, design and fixed base operations (FBO) services to its business aviation customers. The Company's segments include US: Air, US: Ground, Europe: Air, Europe: Ground, MENA: Air, MENA: Ground, Asia: Air and Other. Its aircraft and fleet management service provides the operational management and control of the asset for clients to outsource their flight departments. Its special mission service provides the operational management and control of the assets for specialist fleet users, such as the emergency services, infrastructure providers, civil intelligence agencies and civil/military partnerships. Its maintenance service provides base and line maintenance support for aircraft. Its FBO service enhances airport utility by providing business aviation infrastructure and operational management. more »

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  Is LON:W7L fundamentally strong or weak? Find out More »

44 Comments on this Article show/hide all

peterthegreat 29th Oct '18 25 of 44

Quite agree with Paul's assessment that you need to assess the success of an internet sales based strategy before buying a retailer or retail related company. This is why I avoided Warpaint as their web site looks gaudy, cheap and cheerful to me and not at all distinctive. This also the reason I sold Walker Greenbank a while ago as they continued to deny that people would buy many of their products, such as wallpaper, on the internet, apparently failing to realise the value of digital/internet marketing. However, I think things are improving there now, although I worry about their sales in department stores.

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paraic84 29th Oct '18 26 of 44

In reply to post #413184

More detail now published:

It sounds like it will just apply to search engines, social media sites, and online marketplaces (which is about user-to-user transactions so maybe sites like AirBnB?). AO World (LON:AO.) and Boohoo (LON:BOO) are probably safe for now. Although it does set a precedent that could be later extended.

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sharmvr 29th Oct '18 27 of 44

In reply to post #413194


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sharmvr 29th Oct '18 28 of 44

In reply to post #413204

Ranting! - thought better of it and removed

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SundayTrader 29th Oct '18 29 of 44

In reply to post #413139

I was wondering to what extent £HSBC, and others, are starting to benefit from a changing interest rate environment. I agree about the rich valuations for the "challengers". How many of them are going to be able to compete successfully for deposits when the going gets a bit rougher?

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Gromley 29th Oct '18 30 of 44

In reply to post #413149

Thanks for that Dickshorty - a poster on ADVFN said something similar so it seems plausible.

Totally bonkers it seems to me - although the current shareprice only reflects a low about 4 months ago.

So did the "tip" from these people create a spike that is now bust or is their sell recommendation genuinely bearish?

I actually don't know, but I'm tempted to think is is a buy opportunity.

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Edward John Canham 30th Oct '18 31 of 44

In reply to post #413249

Did they get wind of IR35 being extended to the private sector? I'm not sure how problematic, in general, this is going to be to the recruitment sector, but had a significant impact when introduced into the public sector going from memory.


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Paul Scott 30th Oct '18 32 of 44

In reply to post #413179

Hi Hornblower,

The accounting changes, to bring retailers lease obligations onto the balance sheet, are completely nonsensical. I will just adjust them out.

If a store is profitable, then the future rents are not a liability. You should be looking at that store as an asset - because it's profitable. Why bring its future rents onto the balance sheet as a liability?  It makes no sense at all. There will be future sales which will pay the future rents, and if it's an overall profit, then that is not a liability, it's an asset.

The accounting proposals are total nonsense, and are likely to be binned quite quickly, in my view.

What we REALLY need to know is this - a table, which gives every store, anonymised for commercial reasons, together with revenue, profit, length of lease, current rent, date of next rent review, expected rental increase at next rent review, any break clause, etc.

Then below it, we need a total of store contributions, and below that, the central costs.

This information is the bare minimum we need to assess future profits of retailers. The accounting standards do not get anywhere near this, so they're utterly useless.

Next (LON:NXT) is the only company which has provided any meaningful information on this subject. It's probably the only one worth investing in too, for reasons explained previously - more than 50% of profits are now online - God knows how though! I bought 2 suit jackets & several shirts from Next Online recently. They turned up in 3 parcels over 3 WEEKS, and ever since they've been sending me marketing emails about womens bras & such like! They don't seem to be able to identify the gender of the customer. How ridiculous! I've heard about all this gender fluid business, but it's not for me!  I like being male, and certainly don't want to swish around in a bra! So NEXT can take a running, swinging, double-D jump as far as I'm concerned!!

Regards, Paul.

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matylda 30th Oct '18 33 of 44

Great stuff Paul on Victoria (LON:VCP) - Much appreciated

Blog: Briefed Up
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gus 1065 30th Oct '18 34 of 44

Thanks for the write up on Victoria (LON:VCP) . Never a holder, but interested watching its financially engineered rise and current fall in recent years under ex-City banker Geoff Wilding. Could never understand the attraction of gearing up an operationally leveraged business such as carpet retail with massive financial leverage to fund repeat acquisitions thereby compounding the risk that when the music stops ther whole edifice comes tumbling down.

A high yield bond issue might prove to be the rabbit from the hat (one of its few selling points is that its usually covenant lite and it may be the banks are getting nervous/starting to rein in the company’s activities), but such issues tend to come with strings attached (not least usurious PIK interest roll ups) that further ramp up the risks for equity holders. A particularly sharp falling knife for those inclined to try and catch it.


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Paul Scott 30th Oct '18 35 of 44

In reply to post #413309

Hi Gus,

Thanks for your comment re Victoria (LON:VCP) . 

I note that the head man at VCP banked £41.35m, selling shares in Aug 2018, at 827p/share. This is on top of £18.4m banked at 460p in April 2017, and £11.175m banked on 7 Aug 2015, at 1117.5p/share. Not bad going! Although he still holds a substantial stake of 18.16%, reduced from over 40% in 2015 - so he's more than halved his personal shareholding, which was amassed from a bonus scheme linked to share price, if my memory serves me correctly.

I met him in late 2016, and was very impressed with the strategy - to strip out working capital, and synergies/efficiencies, after buying up sleepy, family-owned carpet makers. Although I remember him being a bit too gung-ho about debt. I cautioned him on not taking on too much debt, and that under 2 times EBITDA struck me as a prudent level. He dismissed that, saying he could push it higher than 2 times, safely. I wasn't convinced.

Anyway, we'll have to see what the outcome of this bond issue is. Maybe they already have investors lined up to fund a bond? Although very little information was given in yesterday's announcements about why they are doing this. That's what makes me nervous.

Regards, Paul.

EDIT: I see from the RNS of 6 August 2018, that new banking facilities had been arranged. It's very odd that the group has now decided to repay these borrowings from a bond issue, less than 3 months later;

New banking facilities have been entered into alongside the Acquisition, provided by the Company's lenders, HSBC and Barclays. These include a new term loan of €445 million (£396.6 million) being used to refinance the previous Group banking facilities, to finance the balance of the Consideration not covered by the Placing, and to refinance existing debt in Saloni of €61 million (£54.4 million).

In addition, the Company has entered into a new multi-currency revolving credit facility of £60 million, which is undrawn on completion other than for certain ancillary facilities. The new term loan matures in 
August 2020.
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DJCP 30th Oct '18 36 of 44

In reply to post #413264

Paul - "They turned up in 3 parcels over 3 WEEKS, and ever since they've been sending me marketing emails about womens bras & such like! They don't seem to be able to identify the gender of the customer. How ridiculous! I've heard about all this gender fluid business, but it's not for me! I like being male, and certainly don't want to swish around in a bra! So NEXT can take a running, swinging, double-D jump as far as I'm concerned!!"

It MAY be that their marketing is more clever than you're making out. As a Sosandar (LON:SOS) holder, I presume you check out their website occasionally, and the cookie information from this could be used by Next (LON:NXT) - I've had numerous occasions where Facebook adverts have been quite specific (and irrelevant to me). I then realised someone else using the same router, had been researching things similar to the adverts I received - Train tickets and hotels in Liverpool (I think) - quite eerie/worrying that 'data' from their laptop was picked up by my laptop/browser.

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Ramridge 30th Oct '18 37 of 44

Re Victoria (LON:VCP) This has got to be one of the worst financial information presentation that I have seen of late.

The big red flag for me is the weak balance sheet. Looking at the debt position, a ratio favoured by the Naked Trader is net debt/ adj. operating profit. By my calculations, this ratio comes to 4.9. NT thinks anything above 3.5 is a good reason to move on.
IMO that combined with no moat, weak operating margin and a wobbly stock market is enough to look for better investment opportunities elsewhere.

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Gromley 30th Oct '18 38 of 44

In reply to post #413259

( Hydrogen (LON:HYDG) )

The poster over on ADVFN said that the tipsheet cited industry headwinds so that could have included a view on IR35.

Meanwhile, the company thought it was a buying opportunity too and bought back 98,000 shares at 45.6p.

Clearly opportunistic as they do not have an active buyback programme AFAIK. Or perhaps just a novel way to tell us that they have no unpublished share price impacting information.

I joined them in a small way.

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Trident 30th Oct '18 39 of 44

Victoria (LON:VCP)

I think as an ex investment banker, I suspect the CEO Gordon Gecko view of companies, namely that they are merely an accumulation of financial data that can be manipulated to unlock value. However, that mindset only seems to work if you pass the parcel asap to the next mug after squeezing your own value out of it.

I was impressed by the way he secured his significant holding- via a call option I think? Never seen that done before or since in a public company. But it struck me as too clever by half, and relies on the accumulation by an acquisition strategy to get the price up to activate the option. A fast acquisition strategy usually excites the market, when its animal spirits are up, but can all too easily follow the route of over-leveraging when the financials start to look less rosy. So in a way, its a bit of cliche when you look under the surface of the superficial cleverness.

Of course I am a bit of staid so-and-so. However, some of these things seem to follow a natural dynamic. I also thought the lack of any commentary by the CEO when posting the unaudited reports was odd, unless I somehow missed it. Of course a good way of obscuring a truth is by giving so much information that it bemuses the reader.

So a good job done by Paul, and I think he is right to start hauling up the red flag on this one.

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stockandy 30th Oct '18 40 of 44

Hi Paul and Graham. Thanks for all your comments As a novice reading VCP I would be easily fooled.Keep up the good work.

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hayashi22 30th Oct '18 41 of 44

Victoria (LON:VCP) always seemed too good to be true..almost based on an acquisition policy that seemed though the vendors were mugs. Alot of obfuscation in that statement I think.

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gus 1065 31st Oct '18 42 of 44

In reply to post #413324

Footnote, to the discussion on Victoria (LON:VCP). The company issued an RNS this morning “setting the record straight” on the background to the proposed bond issue. I note the comment 3 about one of the benefits of the bond is the “flexibility” (read loose or no covenants) it offers is a vis bank debt. Just because the lending banks are leading the bond issue (to repay themselves from the proceeds) shouldn’t necessarily prove they’re fully comfortable with their exposure and in any melt down debt holders will rank ahead of shareholders.

Glad that’s all sorted it then. Still think there’s a good chance the wheels might be working themselves loose on this one ....


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andrea34l 31st Oct '18 43 of 44

You captured a lovely sky in your photo, Paul!

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JohnEustace 31st Oct '18 44 of 44

The Victoria (LON:VCP) RNS reminded me of this latest video from Howard Marks and colleagues at Oaktree. They anticipate many businesses needing to refinance and having to pay more than they have become used to as the cycle turns.

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


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