Small Cap Value Report (Mon 4 Mar 2019) - RBG, | Paul Scott

4th Mar '19 by Paul Scott

45 comments 15093 reads

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…

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robin66

4th Mar '19

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.

Snoo

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.

hawkipa

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

Ramridge

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.

peterthegreat

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.

TB_Investor

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.

mammyoko

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.

JonBirdy

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.

Fangorn

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.

oaktree

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.

psin

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?

Anthony Ashworth

Not heresy just simply plain truth.

BIACS

5th Mar '19

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.

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.

john652

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.

Dogon

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.

Appreciate the two pennies worth BIACS. Good to have a lot of my points countered. Thanks!

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.

LeeWilliam25

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?

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.

Small Cap Value Report (Mon 4 Mar 2019) - RBG,

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Paul Scott

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