Small Cap Value Report (Mon 8 Oct 2018) - ramblings, FCCN, AMO, QUIZ, SPE, ANG

Wednesday, Oct 10 2018 by

Good morning, it's Paul here!

The first couple of sections were posted last night. Today's news follows below.


I've tried to avoid commenting on this, as it's polarised, and political.

I've come round to the view that most people (including me) believe what they want to believe. Therefore it's completely pointless discussing these issues, now that most people have formed fixed positions, largely based on defending how they voted in the Referendum (not in my case though). We'll just have to see what happens, and most people are talking rubbish, in my view.

Looking through the politics, and engaging our common sense, what is most likely to happen? The bottom line for me, is that the UK is a large net importer of physical goods from the EU. Therefore it is ridiculous to suggest that the EU will try to impede trade. One way or another, trade will continue very much as before, possibly with some short term disruption.

As regards services - companies in the EU don't use London for their financial services out of the goodness of their hearts. They use London because it's competitive for their needs. The feared exodus of jobs from London, in preparation for Brexit, simply hasn't happened, or only in tiny numbers.

Last week, I had drinks with some European bankers, who told me that German & Dutch clients are terrified about losing easy access to the UK. Some are setting up UK subsidiaries as a cautionary measure. That's the mirror image of scare stories going the other way - of UK companies setting up a nameplate subsidiary in Dublin, or Frankfurt, just to be on the safe side.

Bottom line - it's all going to be fine. All these issues will get ironed out, probably quite soon, as it's in everybody's interests to reach agreement. Therefore, I am coming round to the view that Brexit is probably far less of an issue that I previously thought. It could even be an opportunity to pick up some bargains maybe?

As usual, this is just my personal opinion, and please feel free to agree or disagree. I think we'd all prefer that the comments section does not fill up with a load of strident, partisan, political comments - that's best done on Twitter!

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French Connection Group PLC designs and supplies branded fashion clothing and accessories for men and women. The Company operates retail stores and concessions in the United Kingdom, Europe, the United States and Canada and also operates e-commerce businesses in each of those territories. Its principal brand is French Connection, which designs, produces and distributes branded fashion clothing, accessories, such as toiletries and fragrances, shoes, watches, jewelry, eyewear, furniture and homeware through its distribution channels: retail stores, e-commerce, wholesale and licensing. Its other brands include, Great Plains and YMC. The Company operates in approximately 50 countries around the world. The Company's subsidiaries include French Connection Limited, French Connection UK Limited, French Connection (London) Limited, Contracts Limited, French Connection Group Inc., French Connection (Hong Kong) Limited, French Connection (Canada) Limited and YMC Limited. more »

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Amino Technologies Plc is engaged in providing Internet protocol (IP)/Cloud video software and device solutions. The Company develops a range of products and solutions designed to help broadband network operators deliver entertainment and associated connected home services to the consumer. It operates through the development and sale of broadband network software and systems segment. The Company and its subsidiaries specialize in Internet protocol television (IPTV) software technologies and hardware platforms that enable delivery of digital programming and interactivity over IP networks. It is also engaged in the sale of IPTV set-top boxes and associated customer support services. Amino Communications is a wholly-owned subsidiary of Amino Technologies PLC. Its other subsidiaries include Amino Holdings Limited, Amino Communications LLC and Amino Technologies (US) LLC. 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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117 Comments on this Article show/hide all

aflash 8th Oct '18 58 of 117

In reply to post #405209

Tried to post an Excell spread of variables but did not work. Anyone know how to do that?

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Gromley 8th Oct '18 59 of 117

In reply to post #405254

It is a pity that the Daily Mirror editorial team are not allowed to write Reach (LON:RCH) ‘s trading updates, they are metronomically tedious.

The Board remains confident that performance for the year will be in line with market expectations*.

  The last dozen or more Q1,2&3 trading updates have been “in line”,with Q4 being either also in line or slightly ahead.

They helpfully tell us that in line means PBT in the range £132.1 – 133.9m which looks to be consistent with the forecasts shown on Stocko.

In fact though the broker forecast have trended upwards during the year, so it seems to me that three quarters of “in line” represent as slight beat on the original expectations.


There is, actually, also one change in wording in today’s announcement. Every TU I can recall describes the market as challenging or volatile (or both).  Neither word is used today! I, however, take the view that they have decided it is too obvious to be worth mentioning rather than an indication of an improving market.

Their strategy is described as Optimise, Grow & Commercialise.

Optimise is essentially about moving towards “last man standing” in the printed press arena (following the recent acquisition of Northern & Shell , they publish the Mirror / Record / People and the Express and the Star together with a raft of regionals – they also do the printing for the Gruaniad [it wasn’t them that made that famous mistake!] and others).

Of the N&S acquisition they tell us :

We remain on track to deliver integration savings of £2 million in 2018 and at least £20 million per annum by 2020.

I am inclined to trust that figure – they have form!

I maintain the view that the current share price is more than under-witten by the cash being thrown off by the rundown of the legacy businesses. A healthy portion of that cash is being returned to shareholders via the “ridiculously high dividend” (forward yield of 9.25% and a target to increase by at least 5% pa).

It is only however “ridiculous” when compared against the share price, when compared against the profits, (and with depreciation exceeding capex) more-so the cash flow, it actually seems quite conservative.

(I do understand of course that the high yield reflects that the market considers them a bit of a basket case).

The target for the legacy business is to contain declines to single digit declines in circulation revenues and no worse than the market for print advertising – they are hanging in there with these two objectives.

Grow & Commercialise

Are essentially about digital (although could in time include new revenue streams).

Here their target is for Publishing digital display and transactional  revenue growth of at least 20%pa.

They are currently missing on this target. Growth here was down to 12% in H1 and only 7% in Q3. However in the first half they reported their “digital audience being negatively impacted by the changes in algorithms undertaken by Facebook and Google during the period.”

I read that as being a “one-off” step change downward and if so we will not be able to really see the underlying growth from this lower based  until Q1 next year.

I remain somewhat sceptical on digital growth and would also note that it currently represents c. 14% of turnover so it is a long way before even in the optimistic case it begins to outstrip the legacy business.

Never the less, from my perspective digital is valued at less than zero currently.

So I remain a holder, with the view that Reach (LON:RCH) is “worth” a significant re-rating – the trouble is that I have no view on the trigger for that or the likely timescales.

Stocko rates it currently as style neutral, with strong-ish value but relatively poor momentum and quality.



In actual fact I suspect that the both the value and quality measures are 'understated' given that Stocko recognises the increase in shares & market cap resulting from the acquisition but not yet the increases in the business metrics acquired. Also the fact that they reported a statutory loss in H1 due to writing down some of the legacy intangibles (as they do from time to time) , obviously these write downs are in a sense  “real” but they do not affect the cash generation being achieved.

So I think it is probably more likely to be a value trap or being more optimistic a contrarian play , which I think it was last time I wrote on the subject.

Just a bit of a footnote on cashflow (I should have included this above in reference to the dividend).

Last year they generated FCF of 16.5p / share which compares healthily against the dividend of less than 6p. In the near term cash is a little more constrained due to the cost of acquisition, plus additional cash commitments resulting, however they should get over this lump in the second half of next year.

In the meantime they disposed of “The Communicator Corporation Limited” for £7.6m (£6.8m in cash now the balance in 2018) which eases any current cash concerns. Also although they have not yet issued a statement on the subject they are reported to have sold the Liverpool Echo building.

I have no idea of the price and it seems odd to me that whilst this is reported in one of their papers, it has not been subject to an RNS (nor even a mention today). Perhaps contracts have not be completed?

Personally I’m looking forward to the final results statement in March as I think we will get a much more cogent view of what the combined group now looks like (and perhaps that will be a trigger for the re-rating I have been impatiently waiting  for).  [Q4 trading update also due in December]


DISC : As mentioned above, I hold.

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Gromley 8th Oct '18 60 of 117

In reply to post #405509

Tried to post an Excell spread of variables but did not work. Anyone know how to do that?

You can either include it as an image or mark it up with html "<table>" (etc) flags and post it in a text.

If you wanted to do the latter, I can send you a sample spreadsheet if you PM me.

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rlyoung 8th Oct '18 61 of 117

Off topic WARNING for those without anti-virus the JS/ Trojan will result from the link (or it seems any other links on that site and there's no contact email so they can't be easily informed:

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PauloMS 8th Oct '18 62 of 117

Well done Paul for having the courage to write so openly about both Brexit and the current Labour leadership. On the former, I believe there will be a Brexit deal but it'll be such a political fudge that it may take many years for us to recognise whether it's a good or a bad deal for the UK. Whether one is a fan or not of Teresa May, we do have to give her credit for resilience and guts and I believe she'll get such a deal through the House of Commons.  But it's hard to escape the conclusion that even a 'favourable' deal will do damage to the UK economy in the short and medium term.  On the prospects of a future Corbyn / Macdonald led Labour government, as a survivor of the 1970's I share the view that this would be an utter economic disaster; all the sacrifices of the past decade of 'austerity' undone almost overnight and then some. 'Momentum' is just 'Militant' in a new suit - and it was the Kinnock leadership that called them out - i.e. from within the party.  Another election defeat for Labour could see the back of the Corbinistas and perhaps the return of sanity with a new Leader (Uma/Benn ?) cleaning out the Augean stables again. So it is possible to  envisage some positive scenarios.

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MSR Bruce 8th Oct '18 63 of 117

I think,Paul, you are a bit optimistic on Brexit. The complexities are such that I doubt anyone can truly master them or judge the consequences of any particular course of action.Ireland gets in the way of many attempted solutions.

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paraic84 8th Oct '18 64 of 117

In reply to post #405504

Actually I apologise. I got confused with Shoe Zone (LON:SHOE). My bad! I blame the boozy wedding at the weekend. Although I still think this profit warning from QUIZ (LON:QUIZ) is more of a bump in the road rather than a fundamental reversal of its growth prospects (as suggested by the rapid decline in the share price)

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Robin Little 8th Oct '18 65 of 117

I share Paul's concerns, although I think the uncertainties of Brexit will be negative.

A mitigation strategy I am considering is putting some money in overseas markets. A bit off topic but has anyone found a good way to invest in Australia/New Zealand/Canada without being gouged on fees, charges etc? Any suggestions on brokers in these domiciles who accept UK investors?

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Beginner 8th Oct '18 66 of 117

In reply to post #405519

Cracking stuff Gromley. Thank you. Regarding property, there have been a number sell-offs by newspapers (eg. ). Such real estate tends to be located in central commercial districts, and with the gentrification of certain areas of the grim North, they should be of considerable value. BUT I was under the impression when Reach (LON:RCH) took on the Local World assets, much of the property had actually been retained by Daily Mail and General Trust P L C (LON:DMGT). Perhaps they are the better bet for future growth.

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martinji 8th Oct '18 67 of 117

In reply to post #405469

>> The thumbs thing on Stockopedia only shows the net figure, so you can't tell the overall number of ups and downs.

Yes it is a net figure, however if you hover over the number (at least on desktop) it tells you the number of positive or negative votes so you can deduce the other from the net figure. Eg hovering over Paul's OP vote count which is currently net 69, says 77 positive votes suggesting it has also received 8 negative.

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Roger Lawson 8th Oct '18 68 of 117

Paul: Pretty much agree with your comments on Brexit and Corbyn. Incidentally I had a letter published in the Financial Times today on the subject of Brexit, which was very kind of them as I effectively criticised their editorial policies. It was headlined “Please – no more letters from moaning Remainers” and was in response to two previous letters from clearly biased correspondents. You can find it on the FT web site.
As regards Corbyn and his bolshevist tendencies it could definitely be grounds to depart to another country, or another world, if he got into power. Just read a book on post-revolutionary Russia as I have just done and you will understand the menace.

Website: Roliscon
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Paul Scott 8th Oct '18 69 of 117

In reply to post #405489

Hi dgold,

Paul, I'm trying to understand why you think French Connection (LON:FCCN) should be worth £1 or more per share. 

I think it hinges on several factors. An acquirer could look at FCCN and see a business that could be moved up to annual profits of c.£10m p.a., based on what it is already doing;

1) Central costs could be cut deeply - especially if it's a trade buyer, which would be able to bolt FCCN's operations onto its existing accounts, HR, and management infrastructure

2) Onerous leases are close to expiry, so the retail division should be moving closer to breakeven

3) The brand value is very considerable, as evidenced by the successful licensing activities. I think an acquirer would be looking to really expand the licensing side of things, which attracts a much higher valuation multiple than retailing operations.

4) Online potential - an acquirer with existing online operations & marketing expertise could potentially stimulate growth here. I think there is also an opportunity to lower price points, and make FCCN more accessible to mainstream consumers.

5) Balance sheet strength - the current market cap is only a little above FCCN's own working capital! So the business & brand are basically thrown in almost for free.

Remember this is a well-known, international brand. Who knows what potential there is, if new management and creatives are brought in to revitalise it? It's sometimes surprising what high valuations medium to high end brands can attract.

I like risk:reward here a lot. The business is moving into profit already, and that should improve considerably in the next 2 years, as the 3 worst shop leases expire.

In the mean time, the founder, and 42% shareholder, is motivated to sell for the best price. He has a big enough stake to block any sale, if not happy with the price.

We'll have to wait and see what interest arises in the company from potential acquirers. In an ideal world, we might see competitive bidding interest. Worst case scenario, no bid occurs and the business moves into profit & starts paying divis again (which was hinted at in the last results).

Regards, paul.

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DJCP 8th Oct '18 70 of 117

In reply to post #405614

I've had a <40p alert on French Connection (LON:FCCN) for a few months, but didn't take any action when this triggered at the end of Sept. :o(

Perhaps I've been frequenting other sites too much (the FAANG stocks would own every company if what I've read were to come true ! lol), but have briefly considered who'd be interested in buying French Connection (LON:FCCN) that's already in their sector.
Next (LON:NXT) - As a small add-on, but working along the same lines(?) - reducing high street and expanding online
Boohoo (LON:BOO) - A Brand, so the type of thing that they like, but possibly not the same clientelle - which could be good or bad. Would they want the stores, even though they could wind them down completely with help of existing management.
Superdry (LON:SDRY) - The Brand aspect again. Conflict or addition ?
ASOS (LON:ASC) - If they wanted a Brand to work with/expand - Higher margin ?

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dgold 8th Oct '18 71 of 117

In reply to post #405614

Thanks Paul, a lot of good points there.

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Gromley 8th Oct '18 72 of 117

In reply to post #405589

Thanks begginer,

BUT I was under the impression when Reach (LON:RCH) took on the Local World assets, much of the property had actually been retained by Daily Mail and General Trust P L C (LON:DMGT).

I think you are correct, but this building pre-dates the Local World transaction, it is from when they acquired the Liverpool Post and Echo (then called Trinity I believe) and Mirror Group Newspapers [MGN] became Trinity Mirror [TNI].

I can't remember exactly when that was but it was last millennium, either the 80s or 90s (anyone remember Cap'n Bob Maxwell?)

Anyway, interesting reference to Daily Mail and General Trust P L C (LON:DMGT) I have to confess I've never really looked at them in detail, perhaps I should, I recall years ago totally ignoring them because I presumed they were some kind of investment trust (what's in a name eh?)

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Catstycam 8th Oct '18 73 of 117

Paul, thanks for your comments. I agree with much of what you say regarding Brexit or more, the threat of a Labour government. That is very disappointing because I feel all the good that previous Labour administrations did to make it a more electable party for the masses seems to have been undone. I seem to remember someone, Neil Kinnock was it or Tony Blair?, that to carry out their policies a party had to be in power rather than in constant opposition. The vocal minority of the left wing extremists seem to have learnt nothing. Enough of politics.

I think the greater risk to the general market at present is not Brexit but rather the actions of the Italian popularist government. It is basically sticking 2 fingers up at the ECB/EU regarding its' huge proposed increase in spending and debt and "putting Italy and the Italians first". This is potentially far more serious than the Greek debt crisis of some years ago and is already having some negtive effect on the stock market. We must all decide for ourselves what action to take depending on our own individual circumstances but is why I am now mostly in cash. My circumstances have changed very recently and my risk appetite has had to change accordingly.

Regards and good luck to all


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Dinocras 8th Oct '18 74 of 117

Hi Paul

You knew I'd have to respond to your Brexit comments didn't you ;-) You know my view that Brexit will be highly damaging to the UK; short-term disruption followed by long-term relative decline (like it was before we joined in the early 70's) but I would challenge your premise that a Corbyn/McDonnell government would be more damaging than Brexit. I agree a Corbyn/McDonnell government would be damaging but at least we get the chance to vote them out in 5 years time; Brexit will last a lifetime (for me anyway).

Secondly I would argue that Brexit, and the chaos it has caused within the Conservative party, has made a Corby/McDonnell government far more likely. So even on your analysis Brexit is highly damaging.

But for me the key issue regarding the deal, if we get one, is democratic legitimacy. Very few Leave voters would have expected us to be in our current position having been told "they need us more than we need them", that a deal would be "the easiest in history", that there would be "no downsides to Brexit only upsides". 'No deal' as an option wasn't even mentioned during the referendum campaign but now looks like a serious possibility. Whatever the deal is, if it is driven through Parliament (and it will have to be driven as there is no obvious majority for any of the proposed forms of Brexit) without the explicit agreement of the electorate it will have no democratic legitimacy. Whichever way you voted that would be a very bad outcome. A final say on the deal would give any deal legitimacy, or clearly show it's not what the people wanted; either way it is the only route I can see to give democratic legitimacy to such a huge decision with such profound impacts on our constitution.

From an investment point of view I have been moving increasingly into cash as I am nowhere near as sanguine as you on the impacts of leaving the EU, particularly if we are out of both the single market and the customs union, as it appears we would be with either no deal or a variation on Chequers.

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DaviStoVest 9th Oct '18 75 of 117

The whole Brexit saga and the ongoing leave vs remoaner debate are a bit of a side-show, it seems to me. I do think Brexit will eventually turn out OK for the UK, although not as OK in the medium-term as it might have done if Mrs May had been more prepared to embrace Brexit (once the decision was taken) and taken a bolder approach in negotiations with Brussels.

But this is by-the-by. I think the main and most worrying thing that Brexit has not created but has significantly revealed is the depth and the breadth of the underlying schism in British society. Whether they manifest themselves as hatred or just as utter disdain, the differences between leavers and remainers are going to take a long timeto resolve.

I've lived outside the UK - in Africa - for the last ten or more years. I can probably fashion the opportunity to make this permanent. More and more, I feel like this would be the right thing to do.

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SharesMagSteve 9th Oct '18 76 of 117

Paul, I missed y/day but worth pointing out Sopheon figures/forecasts in dollars, so $0.483, not 48.3p, and $0.552, not 55.2p. FYI, it will obviously alter the PE a bit.

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counterpoint 9th Oct '18 77 of 117

If you don't want the comment section to fill up with politics, please refrain from such talk as calling the Laffer curve an economic theory. It's patent baloney with a political slant and has no respectable evidential support.

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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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