Small Cap Value Report (Thu 12 Oct 2017) - EHG, NXR, RNO, RBG | Paul Scott

12th Oct '17 by Paul Scott

94 comments 22295 reads

Good morning! It's Paul here.

I read an astonishing article in the weekend press. It stated that the cost of tax relief for private pension contributions has now risen to a staggering £53bn p.a. - enough to wipe out the entire Govt spending deficit. Bear in mind that this is mostly going to the affluent, and I don't see how the present arrangements can possibly be justified, or continued. So I think we'll see another raid on private pensions by the Government fairly soon.

I have an ancient SIPP, however it's a system which makes me very nervous. The money is tied up for years, and in the meantime who knows what awful policies successive Governments might implement to raid my savings? ISAs seem much more attractive - at least you could grab that money & wire it abroad, if a hostile Government were to be elected.

Elegant Hotels (LON:EHG)

Share price: 84.8p (up 5.7% today)
No. shares: 88.8m
Market cap: £75.3m

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

Trading update - for the year ended 30 Sep 2017.

This company owns & operates 7 freehold "upscale" hotels, plus a restaurant, in Barbados. Note that renowned entrepreneur Luke Johnson is a NED, and owns 12.5% of the company.

Rather surprisingly, things seem to be going well;

Trading since the interim results in June has remained in line with market expectations. Whilst the Group is only 12 days into its new financial year, it is pleased to report that bookings are currently tracking ahead of the same period last year.

I say surprisingly, because this company is heavily reliant on tourists from the UK - who make up something like 70% of its revenues. So my main worry was that the post-Brexit plunge in sterling might trigger a reduction in British tourists visiting. Apparently not!

Also, the refubishment of one of its hotels is going to plan, with re-opening scheduled for the start of the peak tourist season.

Valuation - this share looks strikingly cheap, which makes me worry that there might be something wrong?

Zeus are forecasting 8.1p EPS for the year just finished, 09/2017. That's a PER of 10.5 .

For y/e 09/2018, they are forecasting 10.4p EPS, for a PER of 8.2 . …

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Zipmanpeter

12th Oct '17

Re Norcros (LON:NXR),
personally, I think like Paul the pension issue is manageable especially if nothing dramatic happens soon since they are close to peak payout and the scheme is mature plus finally there are signs interest rates may rise

Personally, my biggest fear is South Africa (now roughly 1/3 of the business) which faces a critical election in another year. If that goes badly (economic idiots or crony capitalists win power) then the currency may tank and capital controls may be put in place. This may also be deterring the investment in new capacity there, partly driving the profitable current full utilisation!

Nevertheless I personally think the risk is in the price and happily hold

What Norcros (LON:NXR) really lacks is a reason to re-rate and break free from the range it has traded in for some time. Since they have acquired well recently, perhaps this is one of those occasions where a substantial acquisition or merger could unlock a lot of value. For instance, NXR does tile retail in SA well and had just mothballed a kiln in UK; Topps tiles is bigger and drifting down all the time. Do their ranges overlap, does it make sense to merge. Would a snitary wear producer make more sense. Frankly, no idea but it is something like this that is needed to move Norcros (LON:NXR) from boring shower maker with imported bathroom bits to dynamic growth story.

In the meantime I will collect the dividends!

simoan

As a small shareholder in RBG, how/where can I vote?

To be honest, Matt. In my experience of these situations it doesn't really matter how small shareholders vote. I realise I will get flamed by ShareSoc now but the reality is it's the men from Artemis, Man and Merrill Lynch who will determine the outcome. So I wouldn't worry about it too much. I can't imagine they've built up their recent stakes to now flush it down the toilet by not accepting the Stonegate cash offer. I expect to receive 203p (not a penny more) for the rest of my holding.

All the best, Si

personally, I think like Paul the pension issue is manageable especially if nothing dramatic happens soon since they are close to peak payout and the scheme is mature plus finally there are signs interest rates may rise

Yes, this is why I hold Norcros (LON:NXR). It's a play on UK interest rates rising and the pension deficit slowly ebbing away. It's also a nice hedge to other holdings that will be adversely effected. In the meantime you have a company that is trading well and paying a well covered 4.5% dividend. One of my holdings that I don't lose any sleep over :)

Tortoise investor

Historically (as a holder for a number of years here) the share price has done well when there has been interest rate rise speculation. The recent comments from the BoE don't seem to have done much this time but perhaps the actual expected rate rise will. Norcros (LON:NXR) seems to be trading very well right now, despite the various turmoil in South Africa, and seems like a good play on interest rates.

abtan

I held Elegant Hotels (LON:EHG) until the last trading update when a few figures spooked me enough to warrant a sell. Here are some of my notes for those who are interested:

Static/decreasing revenue over the last 3 years (2015: $60.1m, 2016: $57.0m) (2015H1: $36.6m, 2016H1: $36.4m, 2017H1: $35.8m)
The revenue decrease is despite an increase in room numbers from 483 (2015) to 588 (2017)
Occupancy rates have decreased over the last 3 years (2015H1: 71%, 2016H1: 69%, 2017H1: 66%)
Revenue per available room static/declining over the last 3 years (2015: $255, 2016: $238) (2015H1: $319, 2016H1: $320, 2017H1: $279). I've noted that there has been an increase in the number of budget airlines flying into Barbados, hence the squeeze on prices.
Low cash - unsure how they will maintain dividend in the short term

raggedtp

Rather agree with you, leoleo, except that our ISA strategy of putting in everything spare into a self-select stocks and shares ISA is why I'm now in early retirement, not withdrawing anything for years and compounding that way. I have felt the investment flexibility of recent ISA regimes to be so liberating (no CGT or income or even SA reporting concerns), that I expected, on retiring, to eat down my SIPP first. However, George Osborne, completely unprovoked, I believe, made a parting gift of allowing SIPPs to be passed on to children. So suddenly DCPs and SIPPs gained a dimension, given that, like most lucky bs of my generation, I see no pensions swelling for my children. So pensions and ISAs are in balance again for me, although it then means you're working for your children.

But it's certainly too complicated for most, and I agree, allowances, for both Pensions and ISAs, are higher than strictly necessary. I would expect Labour also to put a capital limit on ISAs, as for pensions, but I'm hoping no-one will dare make this retrospective.
Moral for all, use all allowances you can for both forms while you can. I can't see the pension higher-rate allowance or £20k ISA lasting more than a couple of years.

pka

Due to the inheritance tax advantages of SIPPs introduced by George Osborne, my current plan for when I retire is to take income from my ISA and leave my SIPP untouched for as long as possible. Of course I might modify that plan if the rules for ISAs and SIPPs should change in the future.

Apadappa

Hi,
You need to select the corporate actions page in iWeb and then read the information pertaining to the action required. It should ask you to vote "yes" or "No". You do not need to go to the meeting.
A

gsbmba99

The Scheme vote has two conditions both of which must be satisfied - 75% of the number of shares voted and 50% of the number of shareholders voting. Obviously, Artemis has you beat on the first condition. The second condition is more interesting. The Artemis (for example) shareholding may only be a single line item on the register. You and your holding potentially count as much toward the second condition as Artemis. If you have a holding across multiple accounts (ISA/non-ISA/SIPP) or across multiple platforms, you would probably get multiple "votes" for the second condition. I've heard of particularly angry shareholders who dematerialised their shares (converted to a share certificate) and got the registrar to issue multiple certificates for that one holding to Mr. A. Jones, Mr. Andrew Jones, Mr. Andy Jones, Mr. Andrew Jones Esq. etc. at multiple connected addresses. A concerted effort of small shareholders could potentially block an unpopular scheme.

CliveBorg

Thanks for the advice, Apadappa. Unfortunately, the corporate action notification didn't have any vote buttons, (see the full text below), although I accept I might have missed something. I couldn't find anything about voting on RBG's website either. However, thanks again for your reply all the same.

REVOLUTION BARS GROUP - Important Information

Acquisition by Stonegate Pub Company Limited.

GBP2.03 for each Revolution Bars Group PLC Ordinary share held.
On 24th August 2017, Revolution Bars Group (Revolution) and Stonegate Pub Company (Stonegate) announced that they had reached an agreement on the terms of a recommended cash acquisition of the entire issued, and to be issued, Ordinary share capital of Revolution by Stonegate. The Acquisition will be affected by means of a Scheme of Arrangement (Scheme) under Part 26 of the Companies Act.

The Scheme Price represents a premium of approximately 62.4 percent to the Closing Price of GBP1.25 per Revolution share on 28th July 2017, this being the last Business Day prior to the commencement of the Offer period.

The Board of Revolution, having been so advised by Numis, considers the terms of the Acquisition to be fair and reasonable.

The Scheme is subject to shareholder approval at a General Meeting and Court approval at a Court Meeting both to be held 17th October 2017. The Scheme will then be subject to Court sanctioning at a Court Hearing to be held 20th October 2017.

Subject to acquiring the necessary approval, the Scheme is expected to become effective on 23rd October 2017.

Prior to the Scheme becoming effective, an application will be made to the London Stock Exchange for the cancellation of listing of the shares on the Main Market of the London Stock Exchange. Subsequently, the cancellation of admission to trading is expected to become effective on 24th October 2017 with the last day in dealings expected to be 20th October 2017.

The Scheme Proceeds are expected to be credited to your account within two weeks of the Effective Date i.e. before or shortly after 6th November 2017. Should you retain your holding of Revolution shares, we will notify you when the cash has been credited to your account.

Before making any decision please take into consideration all relevant factors of the event including the current share price and any possible tax implications. If you require any further information in making your decision please contact an appropriate professional advisor.

Should you wish to find more information about the Scheme, please visit the Revolution website, www.revolutionbarsgroup.com/.

Samsgrandad

At the moment as a "retiree" from a large American computer company 15 years ago I'm getting by on my final salary pension BUT it was based on my basic salary which was low enough to encourage me to work all the hours to support customers who always needed help out of normal hours. The next BUT is that after 4 takeovers I effectively worked for one company for 25 years and the last company after taking on a fully funded pension scheme, have put in the bare minimum and refuse to make any increases to pre 1997 pension because like so many, particularly US companies, they have no legal requirement to do so. Bloody annoying when government with their gold plated pension can't make a slight change to the law to say to these companies "if you're making profits and paying dividends, then do the right thing for your pensioners", and treat pre 1997 entitlements the same as post 1997. A campaign is starting soon, I wonder what Theresa will do. Answers on a £20 note please.

JonBirdy

I just contacted my broker who hold my ISA to vote on Revolution Bars (LON:RBG). For £24 they'll vote for me. I declined their offer ;)

sharw

To vote on this matter with iWeb refer to 12.1 of their T&Cs:

http://www.iweb-sharedealing.co.uk/PDFs/terms-and-conditions.pdf

The initiative is on you to contact them to tell them how you want your shares voted, Check if there is a charge. 15 months ago I attended an AGM and they sent me a letter of authorisation free of charge - many brokers will ask you for £25 for that. (as JonBirdy in the post above has found out!)

Hi CliveBorg,

Very strange!? I would contact iWeb either by phone or Livechat and inform them that you wish to vote. I purchased my shares in £RGB through another broker but I have had many corporate actions in iWeb and each time I have been given the opportunity to Vote. Hope they sort it out.

doublelutz

EHG has substantial assets and Barbados will always be a popular destination but to me the figures are irrelevant compared to the fact that Luke Johnson has invested £10M during the past year.. That is the sort of thing I look for with, for example, Communisis being one of my largest holdings for little other reason than the £20M+ investment of Richard Griffiths. I then look for such investors selling down and keep my eye on the charts. It worked well when Bob Morton took a large shareholding in Vislink and I got out the few minutes after he sold a chunk of shares at their peak prior to the company going into a downward spiral.

xcity

The private pension system is designed as a deferred tax system, incentivising people to save for retirement so that they do not become dependent on the state when they are older. It has a side benefit of increasing the national savings rate (much needed in the UK) and increasing investment monies available for UK companies (and government). In generational terms it increases governmental costs for current tax payers and reduces costs for future tax payers.

Winners from the system include people who pay in at a higher rate than they take out, and the few non-earners who can pay in £2880 (net) a year. Losers include most people who pay higher rates on their pension (the vast majority will have made some contribution at standard rates). The system also benefits people whose earnings fluctuate dramatically.

Ironically, given that the system was established to help the working man (mostly men then) provide for his family's future, the system has been under sustained attack from the left. Firstly with Gordon Brown disabling the company pension side and more recently by reducing the lifetime and annual allowance and widescale publicity arguing that it is a system that only benefits the wealthy.

George Osborne introduced a large number of changes; only half thought-through, as was typical of him. The original justification was to avoid the problem of pensioners being forced to take annuities at a time of very low interest rates (largely caused by quantitative easing). They included freedom to withdraw large amounts (increasing the current tax take) and taking residual amounts out of IHT.

Most of the changes I have seen recommended are likely to have adverse consequences down the line. Only allowing relief at standard rates, means that there is a disincentive to higher rate payers to save in a pension (although, of course, the government could make pensions compulsory). A 33% rate has the same disadvantage, but smaller, and is an expensive giveaway to standard rate payers. Many of the proposals have the impact of reducing future tax take but increasing it now.

Certainly the system as it stands has more potential benefits for the wealthier (eg IHT is mostly an issue for wealthy people and middle classes in London and the South East). The 25% tax free is the main incentive and helps smooth the transition from a working income to a pension, but there is no obvious reason why it could not be capped without losing that benefit for the majority of people.

My guess is that if there is a significant pensions raid then there will also be a raid on ISAs soon or at the same time to stop the better off just switching. Could reduce the annual allowance, or, more sneakily, switch the 0% tax rate to a preferential rate, that could easily be increased in future budgets.

The country does need an effective pension system, and the old company system seems permanently broken for most people. SIPPs are OK, but too complex for the average worker. NEST equivalents seem the only option we have at the moment and can apply to the self-employed as well as the employed.

I'm not sure much will happen in this budget, though I will be reducing my risks; Hammond seems to in with the City and too politically incompetent to try anything big. Nevertheless, I do intend to reduce my exposure to risks.

Hi Sharw, thanks very much for this.
Regards,
Clive

MichaelFBS

Yes I would agree with you but Cornyn would have to get his policies through parliament, which is not a given. But nothing would be off limits. Remember Cyprus taking 10% off the top of all banks accounts not so long ago.

And remember that for €250,000 investment (I think in property but I will be investigating other investments qualify) Greece will give your family Greek passports so one could move to another EU regime. Of course the most attractive (Jersey and Monaco) are not in the EU and you need a few more millions than most of us have to get residencey!!

barnetpeter

Pensions....I got my former employment pension just a few weeks ago. Very pleased to get final salary based (local government) ; that is not longer available to almost anyone and it makes a massive difference. Our kids can look forward to what? I think there will be a lot of company pension issues in the UK over the next few years as we saw with BHS. Too much blatant robbery; even the government is at it with pushing up state retirement age. I think any company with a large pension scheme is a big red flag with current politics in mind.

Accrol, which was widely discussed on here has stated that the fine for health and safety breach will be in the range of £550K to £2.9M (seems a pretty big range!) subject to a one-third deduction for their admission of liability. The lower figure seems immaterial and I cannot think that this issue had any real bearing at all on the profit warning.

Small Cap Value Report (Thu 12 Oct 2017) - EHG, NXR, RNO, RBG

Elegant Hotels (LON:EHG)

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Paul Scott

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