Small Cap Value Report - Part 2 - Wed 26 Apr 2017 - CRAW, PHD, WAND, REDS, HMLH, R4E, DSG

26th Apr '17 by Paul Scott

39 comments 18847 reads

Good afternoon, it's Paul here.

Today I've covered:

Crawshaw (LON:CRAW)

Proactis Holdings (LON:PHD)

WANdisco (LON:WAND)

Redstoneconnect (LON:REDS)

Plus brief comments on: HML Holdings (LON:HMLH) , £D4E , and Dillistone (LON:DSG)

Crawshaw (LON:CRAW)

Share price: 23.75p (down 21.5% today)
No. shares: 79.2m
Market cap: £18.8m

Final results - for the 52 weeks ended 29 Jan 2017.

This is a chain of butchers + hot takeaway food, mainly based in the North and Midlands. The company added 11 new sites in the year, taking the total to 49 sites at year end.

As is clear from the figures today, this is a roll-out that has gone wrong. We already knew that though, as a series of poor trading updates have already crashed the share price from a peak of about 95p 18 months ago, to just 24p today. It's been even lower too - I sold mine near recent lows and only got something like 16-18p for them, from memory. Poor timing, as usual on sells! It's just so difficult to decide when to sell, I'm hopeless at that aspect of investing.

A few key figures from today's results;

Revenue up 19.3% to £44.2m
Operating loss of £1.4m (prior year £0.4m loss)
EBITDA of £0.1m positive (prior year £1.0m positive)

So a clear deterioration in performance - which isn't what's supposed to happen when you're doing a roll-out. Each new store is supposed to bring additional profit, so clearly things are not working out very well here.

New sites - opening 11 new sites will definitely create additional pre-opening costs, and so the company does what Tasty (LON:TAST) did recently, and massages the figures to report a supposedly higher underlying EBITDA performance.

I think it's fine in principle to flag up genuine pre-opening costs (e.g. wages for staff being trained, before the site actually opens), and perhaps some Head Office costs related to new site openings. However, the same as with Tasty, I think Crawshaws has been way too aggressive with this process, and hence the numbers lack credibility.

Crawshaws says today;

*Adjusted EBITDA is defined by Group as profit/loss before tax, exceptional items, depreciation, amortisation, profit/(loss) on disposal of…

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Maddox

26th Apr '17

Hi herbie,

BOO was certainly included in the research as a profit warning - however, I regarded it as an expectation failure rather than a profit warning. BOO was growing extremely strongly at the time. Possibly a semantic difference but excluding would make the findings even more conclusive.

MichaelFBS

Boohoo.Com (LON:BOO) My pennyworth on whether to sell or run a winner or top slice, which surely depend on so many factors:

- your time horizon. Mine for Boohoo.Com (LON:BOO) is 10 years plus
- whether you have a better idea. So if something better comes along (as Paul points out about £G4M)
- whether you want to trade in and out of the share or whether you see yourself more along the lines of owning part of a business.
- whether you like to be fully invested all the time or hold cash and try to time the market.

I made my first purchase in Nov 2015 and made three additional purchases in the following 6 months. Boohoo.Com (LON:BOO) now represents 19.2% of my ex-cash portfolio. I am happy to sit any falls in the share price out, particularily as the management seem to have a good plan for future growth.

I like to be fully invested (I am about 7.5% cash now). I really don't feel that I can time the market and that if it is a sound company time/patience will see the investment turn out right.

goingbroke

Any thoughts on ULS Technology Paul. It has a few people excited

Rusty2

ricky65

27th Apr '17

Paul, thanks for the marathon report.

After making a great call on WANdisco (LON:WAND) I'm surprised that you've sold all your shares. For me it's a hold for now - it looks like the Fusion product is gaining traction, and technically volume has been higher on up days and lower on down days which is a positive sign.

runthejoules

Thanks for the WAND thoughts Paul, can't blame you for banking the dosh! Think I'll see where it goes with the new customer...

Paul Scott

Hi goingbroke,

Yes, I've just been reading the update from ULS Technology (LON:ULS) . Am too tired now to properly report on it.
However, it looks good - ahead of expectations.

I looked at this company a few months ago, and remember thinking that it looks potentially interesting. I tried out their websites, etc, but didn't quite understand it properly, so in the end gave up & moved on.

It looks worthy of further research though, definitely. I'm not really looking to open any new positions personally at the moment, so will pass on it, but for other people I'd be interested in your findings, if you do research it.

Regards, Paul.

Hi ricky65,

re WANdisco (LON:WAND) - I suppose that I don't feel qualified to judge its prospects. For me, it was a trade based on improving newsflow. I doubled my money almost in 3 months, so that's a good result.

It wouldn't surprise me at all to see the shares go bananas, as we're in a raging bull market, and it does seem to tick a lot of the boxes that speculators look for in a bull market.

So I may well be kicking myself in future for having sold too early!

Also, my personal circumstances are that I've got too much gearing, so wanted to reduce my overall market exposure. So I've been cutting back on non-core positions like WAND in recent weeks.

Good luck with it, I think WAND looks potentially interesting, and who knows, I might revisit it at some point in the future perhaps?

Regards, Paul.

iwright7

Re Crawshaw,
One point to watch is that 2 Sisters don't load Crawshaw (LON:CRAW) with cheap/suplus chicken thereby artificially inflating Crawshaw (LON:CRAW) profits, until such time as the share price reaches 40p and the 2 Sisters warrants kick in @ 15.2p giving them 50% of the company. Thereafter it’s entirely possible that 2 Sisters chicken will return to a realistic market price. Unusual trading opportunity to 39p, but one that doesn’t fit my investing style, so I am going to pass.

InvestedGeordie

Hi Paul,

Thanks very much for the write up.

RE: WANdisco (LON:WAND) 'Fusion'.

In my day job, I work for a global leader in, amongst other things, infrastucture cloud delivery, and fail to see the application for 'Fusion'. DR (Disaster Recovery) must always be an exact mirror of the Production (Live) environment. Why would a client want to move data from one to the other manually? This concerns me that the DR solution isn't in fact a 'hot' DR at all (you would need a hot DR for mission critical apps so you can switch between datacenteres if one failed).

In my experience you don't want the client going anywhere near DR, and in fact at our company, it is treated the same as Production. Why they, an application would seemingly allow client root access is beyond me.

WANdisco (LON:WAND) claim that Fusion is "deemed to be the only enterprise-grade solution able to support critical Cloud and Big Data applications." This is simply not true, hence the bold section.Deemed by whom? The client, I hope, because if WANdisco (LON:WAND) believe this, management really are delusional!

The company I work for host mission critical cloud apps 24/7 365 on 99.999% uptime. We are talking the types of critical Govenment applications which, if failed, have 'rioting' & 'severe social unrest' as documented risks. Why WANdisco (LON:WAND) believe they can indicate that they have excelled in this area, when their own RNS' show their lack of understanding, is a mystery.

Ramridge

Re. WANdisco (LON:WAND) When I was active in technology management, I would look for a Gartner Report for whatever major technology product that a vendor was pushing. Gartner's magic quadrant is very useful in identifying the competitors, leaders, best in class, etc.
Wandisco has a number of products and Wandisco Fusion is only one of them. The fact that Wandisco Fusion appears not to be covered by a Gartner report would reduce my interest considerably. Not a show stopper but definitely a red flag.

No position long or short. This stock is too erratic for the good of my health.

Yes - I should add, for clarity, I have no position in WANdisco (LON:WAND) whatsoever, and no plans to initiate any.

FREng

I'm long Dillistone (LON:DSG) mainly because Mike Love is Chairman and I admire the way he has run SCISYS (LON:SSY) - conservatively and effectively for many years. If he can replicate that with DSG, the dividend (currently forecast at 4.77%) should be safe.

whitmad

"if WAND's software is so special, how come the major internet companies out there seem to be able to function fine without it"

Paul, a very broad generalisation, but the systems operated by financial institutions run under very different constraints than the major internet companies. The former are looking for absolute accuracy and consistency under any failure scenario, the latter require broad resilience but can be quite sanguine about losing the odd shopping basket or social media post. This difference has huge implications for system design and management. I have no idea how good WANDisco's product is and I do not hold, but the problem you describe that they are trying to address is genuinely a hard one.

Samsgrandad

One of the last innovations I got involved with in IT before I retired was storage area networking (SAN) where mirrored data was stored at two sites using point to point fibre connections with no single point of failure. Fusion apparently achieves the same effect of data consistency at multiple sites around the world whereas my experience was limited to 10 Kms and as far as I can tell by just a software "plug-in". Neat trick if it does and they seem to have a long list of partners but at current price plenty of time to do further research.

johnrosier

28th Apr '17

Crawshaw: Yesterday I attended a meeting with Crawshaw management. I am sharing my notes on the meeting. My conclusion is purely my opinion and is not advice. I could be wrong, I often am!

Crawshaw Group (Aim All Share, Market capitalisation: £23m, 29.5, 2.4% of JIC Portfolio and 7.6% of JIC Top 10):

Meeting with management:

I attended a meeting with Noel Collett, CEO and Alan Richardson, FD earlier today

Conclusion: Having listened to the management I can understand why, after yesterday’s initial drop in the share price, buyers are coming in. The arguments about Boparan holding all the cards and being able to ‘screw’ Crawshaw shareholders in the future are difficult tom refute but is that really his primary motivation. It might be but one must ask why. It makes more sense for him to gain both the soft, and hard, benefits from a successful Crawshaw in his distribution business and from his 50% shareholding in the business. It’s likely that once he exercises his warrants he might try and take the rest of the business off shareholders at a cheap price but I think that is something to worry about later.

What to do now? This is a different story from when I first invested in November 2013 or indeed from when Noel Collett was appointed CEO in 2015. Would I buy it if I didn’t already own it? Most probably not. But I do own it, have made good money out of it and want to maximise the returns from my current 2.4% holding. (I have realised profits of £10,333 and after today’s rally, have unrealised losses of £1,284 on the remaining 30,250 shares in the JIC Portfolio). My judgement is that over the next year the benefits of this deal will become more apparent and the share price will make progress towards 40p. I will most likely sell some, or all (depending on news from the company), before 40p but 38p for instance, is still 30% higher than the current share price of 29.5p. I feel more comfortable about the deal after today’s meeting and am Holding on!

Main points:

The deal with 2 Sisters, Mr Boparan’s company, was the result of a strategic review that the Board was undertaking.

They concluded that if they were going to do something they should do something meaningful. They already had a supply relationship with 2 Sisters. The new agreement should be seen as a 50:50 partnership.

The initial three-year agreement covers most of Crawshaw’s chicken requirements. We are talking 40,000 odd birds per week. This is a small fraction of Boparan’s total production of 7.5m birds per week.

What’s in it for Crawshaw? Significant cost savings which are fixed for 12 months and renewed in years two and three, negotiable on a formula based on the prevailing market price. It also brings in £5m initially and hopefully, if the share price exceeds 40p, £7m more in a year’s time to help fund the business. In due course, Crawshaw is likely to source other meats, (red and other white) from 2 Sisters.

What’s in it for Boparan. Makes use of stock which might otherwise go to waste (landfill), which is good from an economic and corporate responsibility angle. There is also the potential to supply Crawshaw with red meat and other products from his businesses such as Bernard Matthews, Hollands, Matthew Walker and perhaps even Fox’s.

They talked a lot about the “Spirit of the Partnership”. The share price was 15p when they were agreeing the fine points a month or so ago. That was why it was struck at 15p. Boparan wanted 50%, to make it a 50:50 partnership. Crawshaw insisted on the inclusion of warrants that were only exercisable when the share price is above 40p.

They said they could have come to market to raise more cash but that might not have been so popular at 15p and in any case, it wouldn’t have come with this “transformational deal”.

They banged on about the transformational nature of the deal; “benefits are huge”, “with the deal, Crawshaw gets bigger returns, quicker and with less risk.”

Richard Rose first bought into the business 10 years ago and felt it was time to leave the Board. He still owns 5m plus shares. Jim McCarthy, Rose’s replacement as non-exec chairman, the was part of the succession planning and he was “on board” before the 2 Sisters negotiations began. Research I have done suggests McCarthy is an excellent appointment for Crawshaw. I understand that in the past he tried to recruit Collett to Poundland.

Ken McMeikan, who joined the Board as a non-exec last year, is also leaving due to other commitments. He stayed on to help with the 2 Sisters deal. It was interesting to see that his parting gesture was to buy 150,000 shares yesterday at 26p. Of course, that might just be a case of averaging down after his purchase last year or perhaps, he likes the deal and thinks the shares cheap!

The company is confident that it can open 200 of its fresh Meat Factory shops where the returns are compelling and it is experiencing performance significantly ahead of its base model economics.

" Would I buy it if I didn’t already own it? Most probably not."

A few brownie points from me for such candour.

dmjram

Thanks for the write up.

What it seems to boil down to is (unspecified) cost savings for 12 months on chicken purchases after which it reverts to market price.

In return for which existing shareholders have given up to half their company for 15p a share which most definitely wouldn't have been possible in the open market. Plus the buyer gets to sell other products in with no discounts.

The story is fundamentally the same but with significant existing shareholder dilution - do you believe the management can execute an effective, profitable rollout of the format, or will they just burn the funds received on poor operational decisions, high pay, high costs and share awards as previously?

I think the discount is quite large and will give a decent boost to margins and sales. I don't think it reverts to market price at end of year one. It will be at a discount to the prevailing market price, so still giving Craw a competitive advantage.

As I said , it is a different story from when I first bought but I think by accident or design they have stumbled on a format that gives good returns. Those returns should get even better with cheaper sourcing.

In short I think the management can execute an effective, profitable rollout of the format. The lessons of the last year, although painful have been taken on board and I would still give Collett and Richardson the benefit of the doubt.

The big question must be over Boparan's real objectives. The appointment of Jim McCarthy gives me some comfort on that front. Nice to see he bought 190,000 shares yesterday.

Things have moved on as they do in computing and Fusion is designed for use on Apache Hadoop Distributed file system which is an open source software framework for distributed storage and processing of big data sets. Something like Raid but implemented on multiple nodes across a network instead of on multiple disks on one. The main investment risk is that most of the functionality is open source software with a patented software plug in which competitors could possibly develop independently. Too risky at present valuation imho. This Wiki article will tell you more than you can possibly want to know I'm sure.
https://en.wikipedia.org/wiki/Apache_Hadoop

Small Cap Value Report - Part 2 - Wed 26 Apr 2017 - CRAW, PHD, WAND, REDS, HMLH, R4E, DSG

Crawshaw (LON:CRAW)

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Paul Scott

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