Small Cap Value Report (Mon 4 Feb 2019) - Monsoon, AIEA, WEY, TRAK

Good morning, it's Paul here!

Graham has rather foolishly passed the controls to me. As we know, anything can happen!

Looks to me as yet another big name High Street fashion chain is feeling the strain - Monsoon

Anyone asking for lower rents, and time to pay, is under financial pressure. Retailing is just so brutal at the moment, undergoing massive structural change. There's no alternative to rents coming down very substantially, and over-capacity can only be fixed by considerable numbers of retailers (and restaurants) falling by the wayside.

Peter Simon, the founder of Monsoon, is in my recollection, an arrogant so & so. Myself, and a couple of pretty harmless shareholders, turned up at a Monsoon AGM c.2004 in my Aston Martin DB7 - which was a sleek silver thing. We expected to sweep in, without a word. Not a bit of it! Monsoon had arranged for a snarling welcoming committee of registrars, who looked like a bunch of ugly, and very aggressive librarians. Demanding to know your name, and if you appear on the shareholder register, seemingly unaware of the nominee system.

I tried to storm the meeting, which sent them into a frenzy! Peter Simon hid behind them all. David Stredder was allowed in, and challenged Peter Simon - who seemed to be scared of shareholders! I've toned down this section a bit, as on reflection it was a bit too strident originally.




On to today's news.... 


Airea (LON:AIEA)

Share price: 62.0p (up 3% today)
No. shares: 41.4m
Market cap: £25.7m

(at the time of writing, I hold a long position in this share)

Trading update

Airea plc (LSE: AIEA), the manufacturer, marketer and distributor of floor coverings, announces the following trading update for the year ended 31 December 2018.


Trading & outlook both seem solid;

Revenue and Operating profit for continuing operations in the second half of the year exceeded the performance of the 6 months ended 30 June 2018 in line with management expectations driven by the continued growth in the order book and increased sales both in the UK and Internationally. 

The successful launches of our new ranges continue to gain traction in the market and further launches in 2019 are planned to continue the revenue growth.


Pension scheme - exceptional item

On 26 October 2018, the High Court reached a judgment in relation to Lloyds Banking Group's defined benefit pension schemes which concluded that schemes should equalise pension benefits for men and women as regards guaranteed minimum pension benefits.

The effect of this decision is still being assessed by the Trustees and our actuarial advisers, but is likely to impact the pension scheme liabilities by approximately £0.3m.

This will not have a significant impact on the pension schemes funding strategy and will have no cash impact to the group.


That's news to me. It sounds as if this ruling might affect other pension schemes too? Although there seems nothing to worry about re Airea.

Dividends are very good here. The yield should be about 6%+, and we got a 5p special divi in May 2018 as well.

Balance sheet is also good, with a £3.15m investment property. That roughly negates the pension deficit, the way I look at it.


My opinion - this should be in BMUS, as it's become one of my decent-sized positions, but I haven't to round to updating BMUS for a while. I've mentioned in previous articles here that I like this company, and explained why.

The investing case here is that a heavily loss-making carpets division has been closed down. Not very nice for the staff who lost their jobs, but its financial performance was dire, and clearly untenable.

That has left a nicely growing, strongly profitable, commercial floor coverings business - which seems to specialise in modern-looking floor tiles for offices. Here's the website

I can't find any broker research no this, so am a bit in the dark re figures & valuation. Looking back at my review of the interim figures here on 17 Aug 2018, I concluded that the share looks cheap, based on doubling interim profits, to get to my estimate of 6.4p full year EPS.

Given that today's update says that H2 was stronger than H1 (basic EPS was 3.18p), then that suggests to me that actual earnings should come in above my 6.4p estimate. But annoyingly, the company hasn't indicated by how much. That, combined with no broker coverage, is displeasing.

It looks as if the PER is below 10 for 2018, and with continued growth expected in 2019, this looks quite cheap on a PER basis.

We'll have to wait for the full year figures, due on 7 March 2019. Today's update reassures that those figures should look good. I'm therefore happy to continue holding. It seems to be a reasonably priced, decent little company, paying lovely divis. It's good to have a few of that type of share in my portfolio.

A clued-up investor who knows a lot about this company, is @Rhomboid1 on Twitter.

A takeover approach came to nothing a while back. Note from the 2-year chart that the price has held up very well indeed in very choppy markets of late. That suggests Airea has committed shareholders, large and small.

As with many micro caps, this share is illiquid, and usually has a hideously wide bid:offer spread, unfortunately. You can sometimes deal inside the spread though.


5c5837cd7e2f7Airea_chart.PNG




Wey Education (LON:WEY)

Share price: 6.1p (down 23% today, at 13:49)
No. shares: 130.7m
Market cap: £8.0m

Trading statement (profit warning)

Wey Education plc (AIM:WEY), the online educational services group is pleased to update the market on the result of a strategic review and current trading as well as advising of a potential acquisition.

The current financial year will end on 31 August 2019.

This is another tiddler, so just skip this section if the market cap is too small for you.

The forecasts had looked a bit wacky for a while here. Certainly the collapsing share price over the past year has been the market indicating that it doesn't believe the existing forecasts. Also,  the growth story no longer looks appealing enough to command a premium valuation.

How about this for a brutal chart;


5c584759b3cf0WEY_chart.PNG


Looking back at BMUS, I (stupidly) bought at 27p and 31p in Nov 2017, but then gave up on it in July 2018, retreating with my tail between my legs, ditching them at 15p. So not one of my better ideas. Still, that's the way it works - some shares do well, others do badly. Everyone makes mistakes, and people who claim not to, are not credible. In retrospect, I got caught up in the bull market frothiness of late 2017, and overpaid for a share that was over-valued. Everything else in my portfolio was doing so well at the time, that I let standards slip.

Despite that, I still like the concept, of online education. Research I've done has led me to believe that this is an interesting growth area. There's a lot to be said for an online school, and it can work very well for e.g. ex-pats, or children who for whatever reason find traditional schools problematic (illness, disability, bullying, etc). 

Profit warning - the group is falling a long way short of forecasts at the revenue level;

Following this strategic review, Group turnover for the year to 31 August 2019 is expected to be substantially below current market expectations. Turnover is, however, expected to be in excess of £5m, representing an increase of over 24% on the year ended 31 August 2018.

Existing (now defunct) consensus forecast was for £7.5m revenues. Reality has been a third less, but still a decent increase on prior year.

How about profitability? This was forecast at £2.4m profit after tax (which always looked like pie in the sky, even before today);

Expectations are that the Group's loss before tax for the year will be somewhat greater than in 2018 due to the factors described above. The costs of the overseas and business expansion ventures will therefore not impact future years, leading to expectations of profitability on an ongoing basis from the financial year to 31 August 2020


Last year the group made a loss before tax of £229k. What does "somewhat greater" mean? Who knows, maybe something between £250-500k loss this year? That's a guess. I really need some broker guidance. There's a brief flash note from the house broker, but it just says that forecasts will be re-worked to reflect today's update.

With such a big miss announced, it begs the question why inaccurate forecasts were left out in the market for so long? Although some of the shortfall seems to be due to the following:

Strategic review - this seems quite an incoherent announcement today. I think what it's trying to say, is that overseas operations are being shut down or restructured? The main focus in future is to be its online schools, InterHigh and Academy 21, which are said to be trading well.

... trading in InterHigh and Academy 21 has started strongly in this financial year. The Board does not believe that this new business focus should prevent it from being ambitious in growing InterHigh and Academy 21 and part of this year's costs will be attributed to increases in expenditure on sales and marketing activities.


Cash position - looks good;

The Group is extremely well funded, having in excess of £4m cash at bank as at 31 January 2019 and is expected to be cash generative from ongoing activities.

The last balance sheet was strong, in my opinion.

Acquisition - a small (not stated what price) acquisition is impending.


My opinion - I'm amazed that the share price has fallen this low. However, the growth story has unravelled, so perhaps it's not such a surprise.

With half the market cap as cash in the bank, and only small losses forecast (which include one-off costs), I'd say this is starting to look interesting again. The problem is lack of liquidity in the shares. I'm tempted to buy back in, but with all the macro problems at the moment, and just 2 months away (supposedly) from Brexit, should I really be opening new positions in tiny, illiquid shares? Probably not.

The other issue is how much credibility does this company now have, having missed profit forecasts completely? Although it should be mentioned that the tragic death of David Massie, Chairman and CEO, was the key factor in requiring this strategic review.

I'll keep an eye out for revised forecasts.




Trakm8 Holdings (LON:TRAK)

Share price: 27.5p (down 10% today, at 15:15)
No. shares: 50.0m
Market cap: £13.8m

Trading update

Trakm8, a leading telematics and data supplier to global markets...

This update is for the company's Q3, 3m ending 31 Dec 2018, and year to date.

Key points;

  • Q3 order volumes (not sure if this is the same as order value?) 10% greater than H1 run rate
  • Shipments restarted to major automotive customer
  • Q4 orders & shipments expected to grow further
  • Jan 2019 - orders for 30,000 units received
  • Brexit uncertainty is delaying some fleet orders
  • Full year revenues will be 25-35% below last year
  • H2 will be profitable, due to cost cutting
  • Loss for the full year as previously expected, providing mix of revenue is as expected (this sounds a bit wobbly to me)
  • Microlise partnership - may take some time to deliver results
  • Costs recently cut by £2m annualised


Outlook -

The Board is confident that this significantly reduced cost base and the increased revenue run rate will result in a measurable improvement in performance for financial year ending 31st March 2020.


My opinion - when I've given this company the benefit of the doubt in the past, it's cost me money. So even though the market cap is low, erratic performance & repeated disappointments justify that being so. Hence I'm not tempted to revisit this. 








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