Small Cap Value Report (Mon 3 Jun 2019) - LGRS, CAR, SCPA

Monday, Jun 03 2019 by

Good morning, it's Paul here.

There's very little of interest to me on the RNS today, so no pre-8am comments today. Other than this;

Scapa (LON:SCPA) - expect a fall in share price today, as it announces a big contract loss in USA, and what looks like legal action by the customer. Loss of profit not yet quantified, to follow.

Argo Blockchain (LON:ARB) - increased in bitcoin price recently has boosted performance for this crypto mining company. Doesn't interest me.

KCOM (LON:KCOM) - a higher takeover bid has appeared.

Ah, I've just noticed that I've duplicated MrContrarian's work (see comments below), which I hadn't noticed when writing the above snippets.

Loungers (LON:LGRS)

Share price: 220p
No. shares: 92.5m
Market cap: £203.5m

My video review of AIM admission document

It's quiet for results today, so you might want to check out my new video showing how I research an AIM Admission Document. This was a project that I embarked on last week, when Graham covered the report writing here.

Loungers is an interesting new float, on AIM. It operates a rapidly expanding chain of bar/cafe/restaurant hybrid sites across the UK. Therefore I'm interested in comparing its performance and valuation with Revolution Bars (LON:RBG) (in which I hold a long position). They're not direct competitors, as RBG is more focused on late night trade.

After studying its AIM admission document, my project was to review it on video. The purpose of my video is to encourage investors to read admission documents, who are perhaps too daunted by their sheer size (130 pages in this case), and the apparent complexity.

 This video is 36 minutes long, and covers my thoughts on about half of the admission document. If people find it useful, I will record a part 2 video this week. Please don't share this link elsewhere, as I'd like this to be for Stockopedia readers - since a small element of your subscriptions are paid to me in fees.

The format didn't quite work - in that I had hoped the text would be legible, but unfortunately the video compression has put paid…

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Loungers PLC is a United Kingdom-based company that is an operator of cafe and restaurants. The Company operates under the Lounge and Cosy Club brands.

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Carclo plc is engaged in the supply of fine tolerance, injection molded plastic components, mainly for medical products. The Company is also engaged in the design and supply of specialized injection molded light-emitting diode (LED)-based lighting systems to the automotive industry. The Company operates through four segments: Technical Plastics, LED Technologies, Aerospace and CIT Technology. The Technical Plastics segment supplies fine tolerance, injection molded plastic components, which are used in medical, optical and electronics products. The LED Technologies segment develops solutions in LED lighting. The Aerospace segment supplies systems to the manufacturing and aerospace industries. The CIT Technology segment manages its digital printing of conductive metals onto plastic substrates. The Company is a supplier of control cables in Europe. more »

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Scapa Group plc is a United Kingdom-based global supplier of bonding solutions and manufacturer of adhesive-based products for the Healthcare and Industrial markets. The Company has a global footprint, with production sites in Asia, Europe and the United States. The Company conducts the activities through two distinct and separate businesses: Healthcare and Industrial business units. The Company’s subsidiary Scapa Healthcare is a outsource partner in the advanced wound care, consumer wellness, medical device fixation and drug delivery markets. Scapa Industrial operates across a diverse range of market segments throughout Europe, North America and Asia, through the two business models of engineered products and commercial products. more »

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

45 Comments on this Article show/hide all

jules2k6 3rd Jun 26 of 45

Thank you for producing the video Graham.

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RedRon 3rd Jun 27 of 45

I know Paul you are not convinced by technical analysis but a look at the Scapa chart shows a marked price descent from the middle of May which put this share firmly in a stage 4 as defined by Weinstein and Minervini. This signal should have been enough to alert people that something was amiss and given time to make an exit prior to the big drop. Charts are not infallible but they sometimes react much quicker and show when others are getting out, possibly from inside knowledge. I would be wary of punting on this one until all the news is out.

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AdrianWilliams2611 3rd Jun 28 of 45

Brilliant video, with excellent insights on the details of a multi site operator.
Also good point on risk factors, I’ve also previously ignored these since they always contain every possible risk anyone can think if, but they really do provide a good start for considering the negatives yourself, particularly in such a salesy document.

Looking forward to the sequel.

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doublelutz 3rd Jun 29 of 45

In reply to post #480171

An option to buy at 11p? I know nothing about Hammerson but if so nothing unusual.

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doublelutz 3rd Jun 30 of 45

In reply to post #480191

Hi Red Ron, I love using charts and have done so since around 1968 but I know nothing of your stage 4 as quoted. Everyone seems to have their own terminology. I would say that the first warning if anyone did not get fed up of waiting for a break through of 500p from June 17 to April 18 would be the sharp breakdown through the top formation in April 18 followed by further disconcerting price action in October and November 18. I would like to think that had I held this I would have been out in April 18. I have used charts to save a vast amount of losses over the years. Of course, sometimes they bounce back and you have got to be ready to change your mind if you are really interested in a particular company. I have to say what I have got out of charts is the saving of losses rather than the making of profits.

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nquaile875 3rd Jun 31 of 45

HI Paul,

Thanks for the video, I think this is an excellent idea as it brings to life the investigation process much more so than reading it in a book or guide. If you were so minded it would be really useful at some stage to give us a walk through of a balance sheet/company results and/or how you would value a company. Perhaps you could get something like this onto the learning section of the site? I know a novice investor like myself would really appreciate this as your explanation here is very clear and pitched at the right level!


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Trident 3rd Jun 32 of 45

Aptitude Software (LON:APTD)

Does anyone have any comment/analysis on Aptitude (formerly Microgen)?

They have sold their interest in their Financial Systems division to Private Equity having previously said they were going to demerge it via a float on AIM.

The price they got is £51m, but this seems like roughly 25% of the market valuation for a business that was nearly nearly generating 50% of the companies profits. So it seems like a lose-lose in terms of value for shareholders as they also spent nearly £10m recently acquiring businesses to bulk up this division.

The market doesn't seem to view this as value damage, which I found odd. They want to focus on the remaining business which is growing, whereas it is arguable their demerged business wasn't despite what they said.

I think to some extent management has previously puffed up prospects for this demerged entity, when in reality it was underperforming.

Now they have flogged it off at a seemingly significant undervalue to the previous market estimation. All a bit niffy.

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Gromley 3rd Jun 33 of 45

In reply to post #480091

I think that Paul is bang on the money with the view that there is not enough information on the Scapa (LON:SCPA) position to take a sensible view.

However, it is interesting that the broker update refers to an earnings downgrade of at least 10%. Even accepting the use of the phrase "at least" that strikes me a very optimistic.

It looks like this contract represents c. 10% of the groups revenues.
At a group level they enjoy 40% Gross Margin, so taking this as a worst case that could be a c. £10m hit on PBT so say £8m PAT. Roughly equal to their total profit last year - although that was after £15m of exceptionals - so a fairer comparison might be that this is 25% of the 2019 forecast profit number pre this warning.

Obviously Cost of Sales is not the same thing as variable (avoidable) cost so on the other hand one could look at their Operating Margin of c. 10% and conclude that the overall impact on PBT would be less than £3m, ongoing with some exceptionals to be expected in order to  get to that as a run rate - that would be nearer to the 10% reduction cited by the broker.

However this all ignores the costs and substantial distraction that may arise from the legal proceedings.

The customer Convatec  is seeking a "declaratory judgment concerning the MSA" - I presume this to mean that they are seeking to assert the right to unilaterally terminate the agreement without any penalty for the outstanding term of the contract. Scapa argue that there is no case to answer. We can't possibly know the likely outcome of that.

The fact remains though that a customer representing c. 10% of the business no longer wants to continue the relationship (and it is unthinkable that this has come entirely out of the blue imho).

There are several possible reasons why this might be the case, but none of them I think point to the possibility of a heathy ongoing relationship - so it would seem to me the best case for Scapa might be to get some compensation (on the upside up to the full remaining contract value) for the contract break.

Convatec (assuming it is indeed the US entity of  ConvaTec (LON:CTEC) ) have not commented thus far - I presume they will given that $30m pa is more than 10% of the annual profit.

However there may have been some (very feint) pointers in their February FY results statement indicating the underperformance of the US business and including a couple of interesting quotes :

undertaken an extensive review of the business [IE at the group level not just the US] since my appointment as CEO and it is clear that swift and strong action is required

And specifically on the US :

Performance in the US continued to be below expectations, driven primarily by weak sales of surgical cover dressing [Which one would presume to be the product Scapa are supporting] and disappointing progress on the wound acceleration plan.

As an aside, I cannot quite work out my feelings on the  "disappointing progress on the wound acceleration plan."

So maybe, there is the hint of an explanation but I think it is much to vague to argue that these were warning signs for Scapa shareholders. The only possible red flag would be that they were dependent for c. 10% of their revenues from a single contract (I own shares in a number of businesses that have a similar 'weakness' ).

I'm afraid that the time you have spent reading this post is "time you'll never get back", because I cannot draw any firm conclusions, but my gut feel is that things will get worse (ie messier) for Scapa before they get better.

With a nod to the StockRanks - Stocko was "neutral" on Scapa (SR :47)

  • Quality Rank : 57 [That's likely toast]
  • Value Rank : 26 [ Will get worse when they next publish results]
  • Momentum Rank : 67 [ That will not survive the share price fall nor the earnings downgrades]

All this aside, I suspect that Scapa is strong enough to survive this challenge and I've now added it to my watchlist as at some point in the future I think there will be a good return to be made from the bounce back.

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slopsjon 3rd Jun 34 of 45

Enjoyed the video Paul

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Richard Goodwin 3rd Jun 35 of 45

In reply to post #480066

I have no inside info but could the link be the sudden 'stepping Down' of the CEO recently? Despite the results looking pretty good. Although the formal notice was filed today my guess is that the company absolutely knew it was likely sometime in advance. The may have been attempts to renegotiate or simply minimal call off volumes or some form of technical disagreement.

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JamesrWilson1989 3rd Jun 36 of 45

Woodford Funds Income fund has been suspended, with the fund down from £6.8BN a year ago to £3.7BN today!

He is going to have to liquidate alot of his holdings and the market is always going to punish a forced-seller.

Who say's making money in this market is easy eh?


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pkr1988 3rd Jun 37 of 45

Thanks for the video Paul. It's really useful to see someone in the know to go through a document like that

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abtan 4th Jun 38 of 45

In reply to post #480226

Re. Aptitude Software (LON:APTD) I had a quick (and first) look at the business after the disposal announcement last week.

I agree with your thoughts. I didn't understand why one part of the business was sold off at such a low price relative to the profits generated.

I was also getting frustrated analysing the business that would remain. It looked like the EV of the remaining company would be c£180m with an operating profit of just under £10m (I can't remember if this latter figure was before or after the previously apportioned head office costs were to be allocated wholly to the remaining business).

In any case that was enough for me to stop investigating further. I prefer lower EV/Profit multiples, unless there appears to be fast growth, but I will keep an eye on it going forward purely for curiosity.

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Paul Scott 4th Jun 39 of 45

In reply to post #480256

Woodford funds - the trouble there is, I think, that people who delay selling, could be left with the dross investments. Since they'll be selling the most liquid things, which are often the best investments, in order to raise cash for redemptions.

In the last financial crisis, I recall some funds created frozen "side pockets" of illiquid investments, so as to liquidate positions in an orderly manner, and be fair to all investors.

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Bonitabeach 4th Jun 40 of 45

In reply to post #480291

Paul, your memory about certain fund managers creating "frozen side pockets" of investments is correct. This is justified as being fair to all investors - who said the market was fair to all investors and where are the guarantees that these illiquid investments will be worth more tomorrow when unfrozen than they are today?

There was always too much of a cult about Neil Woodford for me to be tempted and reversion to the mean a real risk. Terry Smith courts less publicity but is not transparent about his funds.

The old advice of "don't buy the funds, buy the fund managers" has served me well over the decades.


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mercury61 4th Jun 41 of 45

In reply to post #480256

Burford Capital (LON:BUR) down the most so far this morning.

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simoan 4th Jun 42 of 45

I think we can all take some lessons from the Woodford situation. Hubris and illiquid investments are a fatal combination but just the sheer arrogance of naming a fund "Patient Capital" is enough for me to deploy a bargepole - as an investor I'll decide if I want to be patient, or not, thanks very much!

However, we all need to guard against our own personal hubris after such a long bull market because the force is a strong one when many boats are floating on a rising tide...

All the best, Si 

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Graham Ford 4th Jun 43 of 45

A significant problem that Woodford has created for himself as far as I can see is the lack of a viable exit strategy for many of the stocks he chose in the event that the investment case turns sour. By taking very large positions in companies he left himself with a situation where he could not sell out of these relatively quickly without crashing the share price. The huge size of his funds combined with a high conviction style was a dangerous combination.

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hayashi22 4th Jun 44 of 45

I believe Woodford had been selling down some holdings to meet redemptions...mostly probably including £IMPS which has now had a little bounce.
On £SCAPA I believe some hedge fund holders had done enough work to spot the likelihood of this event and managed to get a borrow on the shares. Put another way I think if you were in Scapa HQ then this did not come out of a clear blue sky.

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marklucas8809 4th Jun 45 of 45

In reply to post #480231

Great post!

I agree with yours and Paul's viewpoint. Scapa is an interesting company worth keeping an eye on but avoiding until there's more info. I'd say the exact same applies to Concvatec.

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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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