Small Cap Value Report (Mon 4 Mar 2019) - RBG,
Good morning! It's Paul here.
I'm back from a fascinating trip to Zimbabwe, as a guest of a small, humanitarian aid charity, called ZANE. The purpose of my trip was to see their activities on the ground for myself. I'll tell you more about that later.
You didn't look after the market very well while I was away! The internet in Zimbabwe is surprisingly good, apart from when the Govt turns it off for political reasons (e.g. during the fuel riots earlier this year). However, my schedule in Zimbabwe was so busy, that I barely had time to stop & think, let alone look at the UK stock market.
It was actually very worthwhile, to almost completely tune out from the stock market, for the first time in many years. I've not even read the interim results from Revolution Bars (LON:RBG) yet, but have just realised that I have a meeting scheduled with the company at noon today. Please forgive me, as I'll need to prepare for that now. The share price has already indicated that people are not happy with the company's lack of progress, so I'll be asking some tough questions at the meeting today, and will have to read the interim results on the tube.
Most of today's report is necessarily going to have to be written later today, once I get back from my meeting in the City.
Tracsis (LON:TRCS)
Trading update
Looks fine - trading in line with expectations.
Group trading for the first half of the year has been in line with management expectations. Group revenues are expected to be ahead of the previous year at c. £19m (2018: £18.1m). EBITDA and Adjusted Profit are also expected to be ahead of the previous year (2018: EBITDA £4.3m, 2018: Adjusted Profit £3.9m).
Cash position is strong, which historically has funded lots of smallish acquisitions;
At 31 January 2019, Group cash balances remained strong at £18.7m (31 July 2018: £22.3m, 31 January 2018: £18.5m), which reflects continued excellent cash generation. This is after the cash outflow in respect of acquisitions made and the final contingent consideration in respect of the Ontrac acquisition from 2016.
The rest of the narrative today sounds encouraging.
Stockopedia shows a forward PER of 22.8, which looks about right to me, as it would come down to something like 19-20 once you adjust out the net cash.
Dividends - I often wondered why some growth companies such as Tracsis pay tiny dividends? I finally got the answer from chatting to Ideagen (LON:IDEA) - it's because some institutions are mandated to only hold shares in companies which pay divis.
It will be interesting to see how TRCS progresses under the new CEO.
I'll finish this report later today, once I return from meeting mgt of RBG
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45 comments
Hi Paul,
Welcome back and congratulations on your endeavour - very admirable!
It seems to have gone largely unnoticed (even by me, a holder) until now, but Triad (LON:TRD) made a late statement on 1st March regarding a court judgement made in Triad's favour. It appears that uncertainty over the case which has a lot of history and relates to the former CEO Mira Makar - has been weighing heavily on the share price despite fundamental improvements. The judge even mentioned harassment by the defendant conducted on ADVFN!
http://www.bailii.org/ew/cases...
The share price is now rising in sympathy.
Customer concentration still a risk but looks way too cheap to me, would you agree?
GOCO's Chairman Peter Woods has raised his stake to 29.9% after buying 17.8m shares. Shows confidence from a successful entrepreneur, also once he has finished selling esure I wonder if he could try to buy the company out? This is the floor for the share price in my opinion.
Really good reasoned arguments on both sides for Ramsdens Holdings (LON:RFX) one reason why I read this board everyday and not the other forums, I know I am not alone.
For me I have a holding in H&R & have been considering doubling it, or putting the cash into Ramsdens ?
Probably a whole new discussion, and I know Graham likes to own the market leader, but if you like a sector (and I do for steady income) do you buy the top two instead of one, especially in this case where so similar.
Time to revisit Ramsdens I think.
The £0.6m is a forecast only - looking at their current profits I think this would assume that they trade in line like an average Ramsdens store. Interestingly Liberum raised their TP to 241p from 214p.
I looked at The Money Shops accounts, or rather their parents. Was quite surprised to see they have a bigger store estate and also seemingly a bit of a basket case, having large losses funded by the parent account.
In that report they said that they were reducing 'uneconomic' stores out of the estate. So there would be some work to do here, assuming that these 18 stores fall under that category. I do think location counts for something, a store in a bad location is always going to suck whether it is The Money Shop, Ramsdens, or H&T. With the average type of customer they attract I think brand counts for little, much in the same way that a gambler wanting to play a FOBT is likely to choose a high-street bookmaker on location rather than brand.
One of the problems with these types of stocks is that they don't deserve high multiples, in my view. Ramsdens are well managed and conservative, but they need to be. If you look at average profit/shop there is not much room for error.
I hold, but more as a hedge against the economy and gold price, and some dividends as opposed to capital growth.
Thanks Snoo, extremely interesting.
Out of interest, do you think they don't deserve high multiples due to the business area or rather the potential for risks within the loan book in a downside scenario?
I think the FX part of the business has great potential, as the banks are extremely complacent with their FX rates generally and benefit from what could be best described as naivety from the man in the street towards the rates they can achieve. However, the possible issue that could really disrupt the Ramsdens Holdings (LON:RFX) foreign exchange proposition is fintech, in the form of a wider take up of the likes of Revolut. For now, I don't think this is an issue, but it absolutely could be.
I remain a holder but extremely wary.
Not too worried about the loan book - the APR on a loan is something like 150%, and that is before considering it is secured against something which should have a resale value. That part is great business, although I wonder if it might see regulations against it one day, potentially it could be seen as exploitative considering a person that chooses to borrow money like this will be one of the poorer groups in society.
I just think the multiples should be cheap, it is a well run business, but in a mature market where big organic growth is difficult to come by, unless the economy really tanks. Stuff like Shoe Zone, Card Factory comes to mind, these are similarly cheap but they are not going to be growing much any time soon.
I like the FX side and I agree the banks have been very poor at this. There is a good market here for them at present. But I just can't imagine that in 5 years time the best and cheapest way to get foreign currency will be to go to Ramsdens/H&T and buy it.
More likely will be some Revolut online card alongside some more technical innovations. Imagine at every airport there was some kind of cash funnel where you just poured in all your local currency and it got credited back to a currency card. That would solve the age old problem of having loads of low value foreign coins and notes.
Dividends - I often wondered why some growth companies such as Tracsis pay tiny dividends? I finally got the answer from chatting to Ideagen (LON:IDEA) - it's because some institutions are mandated to only hold shares in companies which pay divis.
Now this is interesting. Any way of finding out which institutions follow this rule?
AS others have mentioned it would be great to hear your views on Keller (LON:KLR) , up 15% today. Welcome back.
On of the best things you can do for animal conservation in Africa is to go on Safari.
Welcome back Paul
Bit off-topic, and you’re no doubt aware of this already as I belive you hold Intercede (LON:IGP)
I see that former Intercede (LON:IGP) CEO and founder, Richard Parris, and former Intercede (LON:IGP) COO Jayne Murphy have set up a new cyber security company https://aretiico.com/about/
Looks like he’s seeking to build a ‘family’ of cyber security entrepreneurs and with his (no doubt) extensive contacts list, help them reach new markets. Their FAQ page states that “Aretiico's main focus is introducing international companies to the US market.”
The US accounted for 71% of Intercede (LON:IGP) 2018 sales from their annual report. Richard Parris still owns 11% of Intercede (LON:IGP)
When he was at the helm, Intercede (LON:IGP) was qute jam tomorrow. Be interesting to see if he does better at Arettico, and it affects Intercede (LON:IGP) sales materially.
Thanks for publicising ZANE Paul and for the help you have given them. The part of Zimbabwe visited by my wife reminded her of the UK in the 1960s, particularly some of the shops. The country has such a wealth of minerals and tourist destinations that it beggars belief that it is so poor. I have met many Zimbabweans who have moved to the UK and it appears that most people who can move to the UK are already here or plan to move in the future, even though it splits their family up. It is difficult to see how this will change until the routine day to day corruption is stamped out. My impression is that the population is both peaceful and hard working, with most places being safer than South Africa. I can't help thinking that the fortunes of this country would revive rapidly if only its economic policies encouraged more inward investment to create more employment but with really basic problems, such as the fuel shortage (and shortages of everything), remaining unsolved I can't see this happening for a while. As I expect you are aware people actually travel abroad to neighbouring countries such as Botswana to buy their groceries in bulk because prices are so astronomical in Zimbabwe because of the shortages.
Litigation Capital Management (LON:LIT) A litigation capital company, a la Burford, has issued its first half-yearly report. The company IPO 'ed in December last. Based in Australia.
The market liked the results - it is 20% up on the day.
How does it compare with Burford? And is it a baby Burford about to grow spectacularly?
No idea! DYOR.
Another sign of stress in the restaurant sector (with implications for the food offering of Revolution Bars (LON:RBG) ) - Boparan is looking to a CVA involving closing about 40% of its Giraffe and Ed's Diner outlets with rent reductions needed to save some of the others:
https://www.bighospitality.co.uk/Article/2019/03/04/Boparan-to-close-27-Ed-s-Easy-Diner-and-Giraffe-restaurants
Welcome back Paul, what a great philanthropic adventure, most impressive.
Last Wednesday, you missed Beeks Financial Cloud (LON:BKS) H1 results. We recorded a results presentation with Gordon McArthur (CEO) and Fraser McDonald (CFO) last week, so you can catch up on it here:
https://www.piworld.co.uk/2019/03/04/beeks-financial-cloud-bks-h1-results-february-2019/
They're very excited about breaking into larger, Tier 1 clients, even if they take a bit longer to sell into than their traditional client base. Now, they have one reference-able client, which will really help. No doubt about Gordon's ambition!
Good work, will look forward to watching that later!
Revolution Bars
HI Paul, if you see this ahead of your meeting I’d be interested to know if management’s decision to halt the new opening programme has significant costs attached to it- I was thinking if they had signed any contracts or made any pre-agreements that they had to extricate themselves from.
Glad you enjoyed your trip. Interested to hear more.
Best wishes
Andrew Cholerton
I would've thought a few of us have Keller (LON:KLR) in our portfolios due to the fact it used to have a very high stockrank so could be a good one to look at Paul.
Slightly out of the small-cap range, but would be great to hear your views on Keller (LON:KLR) , up 15% today
Welcome back paul
Andrew ( barbados)
Would it be heresy to say that Zimbabwe was a more prosperous country and its citizens more contented when it was called Rhodesia. I have a good friend who lives there and he tells me that corruption is endemic.
No, you'd be spot on.
I lived in South Africa back in the day - 2 years either side of Apartheid ending.
Zim has been a basket case since it went the way of most African nations..
Mugabe has been a disaster. The new chap is no better.
Plus ca change.
Not heresy just simply plain truth.
Paul, fascinated to know how you came across Zane. It is a fantastic charity. I have never met Tom Benyon, who runs it, but am really impressed by his long distance walks across England, with wife Jane and Moses the dog, raising funds for Zane. A friend passed on a copy of 'Out in the Midday Sun', Tom's commentary on his walk from Bournemouth to Oxford last Summer, A very good read.
Good to have you back Paul.....will be interested on your Reabold view and Premier oil which posts results later this week......My 1st post here :)
Pennyledges
Just FYI - If you are wondering why there are little red thumbs down on your 1st post it is because neither Paul nor Graham look at any resource stocks. This discussion board is a resources company free zone.
Hi Paul,
I hope you enjoyed your trip to Zimbabwe and welcome back to the UK.
Id like to add a +1 to the calls for Revolution Bars (LON:RBG) even though it is from last week.
The "research" I did on Friday night would indicate demand is still strong
KR James
Paul Zim must be an eye opener! My parents lived in Kenya late 50s and 60s, so over the years met a lot of people from what was Rhodesia under Ian Smith and also South Africa more recently. I have heard so much about Zim over the years that I feel i know it although I have never been. It was referred to as the Garden of Africa at one time and it is heart breaking that we read so much has been destroyed there by incompetence and corruption. If only we could solve corruption we could solve poverty. Anyway what lies in mans heart.... To investment a number of your companies have taken a bit of a hit this year ( no this is not a knock Paul session), largely because you have done extremely well previously and investment performance can be played with to tell any story you wish (as many investment managers well know). However my theory is following the 2007 debacle from 2009 March on shares had a tremendous run. We know things became expensive and we know why, primarily low interest rates forced asset prices up across classes. I also recall you saying many times it was hard to find cheap stocks. I think you have ended up with a portfolio of weaker companies in your search for returns. By weaker not your normal ideal investment, my reading of your approach is balance sheet is very important and yet e.g. Intercede is weak. The one thing all your stocks have is a story and I would rate BKS, IGP, BoTB, SOS all growth stories which have taken a beating this year. Equally your sector retail has been in the wars FCCN you called exactly right but clearly Marks is having problems persuading others of its value in a difficult environment ( I might be wrong). And sure things like Mysale you just got wrong which is investment. Anyway I have been giving some thought to your stocks because whilst I dmor I also find your dummy portfolio interesting as a basis to do my own thing and I just wanted to say thank you for that.
Welcome back Paul. Graham's done an admirable job whilst you've been otherwise engaged :o) ... and also had time to do an excellent podcast with Duke Royalty (LON:DUKE)
For those who don't read the previous SCVRs, there's an interesting comment on Saturday by Luthrin (#65) about a fund possibly selling off due to potential administration. Many of their shares are not within the SCVR criteria, but there are some that have been mentioned here.
https://www.stockopedia.com/content/small-cap-value-report-fri-1-march-2019-duke-rbg-rmv-453208/#comments
Interesting to see that City Financial Investment hold around 10.24% of Ramsdens Holdings (LON:RFX) , wonder how this will play out if/when they have to dump their stake.
Re £RFG City Investment already sold 0.5% on 18th January. Some of my other holdings have been crashed by liquidation (e.g. £C4XD ) but then recovered.
Hi Paul and welcome back. Very much looking forward to hearing about the trip to Zimbabwe. I've met quite a few people from there over the years and it is incredibly sad to see what is happening to that country. If I may I'd like to second a call for views on Revolution Bars (LON:RBG)
Cheers
Andrew
Paul, Still be interested in your views on the RBG statement last week. Thanks.
An in line TU from Tracsis (LON:TRCS) this morning.
Nothing wrong in the update but I'm surprised to see the price up modestly this morning. It's a reasonably lofty valuation and in the present climate I would half expect a modest drop from this price for 'in line'
More importantly, the business seems to be growing steadily and there's no nasty surprises.
Opportunistic acquisition by Ramsdens Holdings (LON:RFX) of 18 stores from The Money Shop for £1.5m plus respective loan books. Acquisition and conversion to Ramsden's format, including IT systems, staff training etc. to be funded from cash balances and anticipated to be earnings enhancing from FY 2020. Existing staff to be retained.
Yes Ramsdens Holdings (LON:RFX) £1.5M acquisition looks interesting and it needed a catalyst to lift the price. Q score of 98 and SR of 91 makes it very attractive, but it lacks momentum. Was a 2019 ST Bargain share last month and is likely to be re-tipped, so I brought an initial holding @ 169p this morning.
I might be out of step with the current views on Ramsdens Holdings (LON:RFX) but I don't really see why this is a good transaction. 26% of the price was goodwill and there will be necessary conversion costs to come. Surely, at the moment new sites could be let from desperate landlords. I heard recently that lease free periods were incredible and it was now common to get conversion costs included. So, the cost of opening a new store is now negligible for those willing to take on leases of a certain length. On that basis, why not do it themselves?
The cost per store works out at £83.3k of which goodwill is £22.2k, so it doesn't seem likely that they are purchasing freeholds at that price, making me further wonder what assets they are getting. Furthermore, they state refit, rebranding and IT integration costs are all to follow, which implies to me that profitability for FY 20 is taken up by that number.
On that basis, why not start with new sites from scratch as a better way to deploy the £1.5m, as I can't believe The Money Shop customer base really has that much brand loyalty.
As an existing underwater holder this makes me further question management's mindset after last years botched share sales by management.
Appreciate I might be seeing this from the angle, so I would welcome the bull case for this transaction.
Hawkipa
Ramsdens Holdings (LON:RFX) acquire the MoneyShop loans book, so there will be some custome loyalty from that alone. They also get the staff, which will save on recruitment, and eliminate competition that would have been there if they had bought new leaseholds. Their RNS asserts that the purchase will be profit enhancing and it was paid from cash.
It looks like a reasonable deal to me, so I bought a few.
The good news is that some of the Money shops are quite similar in design to Ramsdens, so the conversion costs should not be that large.
These type of pawn shops are really local monopolies though (Ramsdens and H&T have sensibly decided not to compete with each other) so I do wonder why The Money Shop have let them go... if they can't make a fist of them why should Ramsdens.
Hi hawkipa
Ramsdens Holdings (LON:RFX) are forecasting PBT of 0.6m from the acquisition in FY 2021 and they are paying 1.5m. So assuming the forecast is achieved they are paying just 2.5x annual profits which seems cheap to me.
Perhaps I'm missing something?
Disclosure, I am a holder.
Thanks FREeng & robin66 for your messages.
Perhaps I'm not getting it, but I just think that they could secure attractive sites, recruit staff and build out sites over the coming 12 months and probably still add in the region of £600k for FY 21 without having to shell out £1.5m to get to that point. If they started today locating 18 attractive sites, they could be realistically be operating by the end of this year. That would still give them 3 months before year end FY20, to get them up to full operating efficiency.
Perhaps the value is in the loan book, which I did miss or perhaps I'm just being too cynical on the whole thing.
Regards,
Paul
Each to his own view, but just to add my two pennies worth:
(i) recruiting is not free, nor is it instantaneous;
(ii) the competition they would have faced from others in new sites would have made business much harder (they have with this deal simultaneously taken a competitor out of the market and expanded their own by taking over 100% of that competitor's market share - a double whammy);
(iii) there is nothing to stop them still expanding separately into brand new sites as well if they can identify suitable locations - I suspect that locating sites with the right local demographic and economic tiering and with no local competition from the likes of H&T, Money Shop etc. is not that easy - this was a ready-made 18-shop block fit with no overlap to current sites;
(iv) there is usually a slow start period building the business period for brand new locations where profits are lower (or non existent) for a time - for these 18 shops this shouldn't be the case as they already have a loan book built up at inception and they can hit the ground running - this will save a huge amount of startup 'cost' that would otherwise go into subsidising new branches;
(v) as has been pointed out - they've really not paid much for this acquisition (if I could buy a solid business generating 0.6m per year profit for 1.5m I would snatch your hand off...);
(vi) as RFX point out in their statement, they have a much broader offering than the Money Shop - especially when it comes to F/X, jewellery etc. so I suspect they are convinced they can ramp up the business that these sites are currently doing and make each site even more profitable based on the model they have followed elsewhere; and
(vii) yes - the loan book is definitely valuable - especially as often the holders of such loans won't be paying them off at the end and will want a rollover into a new deal - they tend to be quite 'sticky'. RFX have walked into an already fully operating book of business right from the off here and if they can grow that into selling those same customers new expanded services then bob's your uncle...
I hold and am quite happy with the announcement (you won't be surprised to hear, based on the above). I'm a bit surprised the market wasn't more positive, but then Mr Market hasn't been a fan of these sorts of stocks for about 6 months now (similar story with H&T and, until this week, Morses Club) - there seems some great value to be had here for the patient in my view.
Appreciate the two pennies worth BIACS. Good to have a lot of my points countered. Thanks!
Paul, your thoughts on RBG, Beeks, Intercede and M&S, in light of recent developments, would be much appreciated. Thanks
Trading Update issued by FFI Holdings (LON:FFI) this morning. A bit terse but have given a huge EBIT range of $7.5m - 11.5m. This works out for H2 to be $1.5m to $5.5m. That's against already lowered forecasts for the year of $16.5m. Will they make a real profit?... Doubt it!
The company has been around for decades but after recent IPO (June 2017) the company came to the markets, at around 160p/share, grabbed lots of cash and bought lots of companies to bolt on. Subsequently a string of profit warnings.
Share price last Friday 22.5p and likely to be much lower today.
My cynical view is that the incumbent Management and friends have engineered this performance to get a cheap MBO and/or delist after considerably overhauling the business for the future.
I realised a large 40% loss on this back in January (my largest single loss for some time). Am now happier about pulling the trigger on that decision. Will it bounce back? I have already moved on.
Ray Kelvin resigns as CEO of Ted Baker (LON:TED) - whilst nothing has been proven against him I think this is some kind of deal similar to that which got Sorrell out of WPP. The 'agreed to resign' bit suggests he was pushed, perhaps under some kind of threat.
Unsure how the markets will take this but suspect it will be bad.
My morning smallcap tweet: Tandem continues to go in cycles
Tandem (LON:TND), FFI Holdings (LON:FFI), Avingtrans (LON:AVG), Maintel Holdings (LON:MAI)
Tandem Group (TND) H2 rev up 6% after dreaful H1 so FY rev down only 12% and pretax marginally down. 2019 started very strongly.
FFI Holdings (FFI) warns of poor H2 with delays hitting EBIT by $6m. Guides FY U/L EBIT $7.5-$11.5m.
Avingtrans (AVG) wins £10m of steam turbines business for 2020 delivery. Option for similar.
Maintel (MAI) CFO will leave after long handover. He is thanked.