Small Cap Value Report (Thu 13 Jul 2017) - GMD, BWNG

Good afternoon, it's Paul here.

The good news is that I've now completed Tue & Weds reports, as follows;

Tuesday's report covers updates/accounts from:

• Begbies Traynor
• McBride
• Ilika
• Amino
• Bango

Wednesday's report covers:

• Fulham Shore
• CloudCall
• Eve Sleep

On to today's news.

Game Digital (LON:GMD)

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

 Sky news broke this story yesterday, and it's been confirmed in an RNS today. Mike Ashley's Sports Direct has bought a 25.75% stake in Game Digital. This is what GMD said about it today;

GAME Digital plc ("GAME" or the "Group") has been informed that Sports Direct International plc ("Sports Direct") has acquired 44 million shares, equivalent to 25.75% of the share capital of the Group. 

GAME is aware that Sports Direct has taken significant strategic equity stakes in a number of retail and brand businesses across both the UK and USA, and is a leading retailer which partners with major global brands and suppliers. 

GAME is pleased that the strategic value of the group has been recognised by Sports Direct through this acquisition of a 25.75% stake. The Group looks forward to working collaboratively with Sports Direct to explore the clear opportunities that a constructive partnership and collaboration can deliver for all stakeholders in the gaming, live events and rapidly growing esports markets in which it operates.

Windows 10 has just decided to do a major update, without warning me, and it took nearly 2 hours. Great, thanks Microsoft.

Getting back to GMD, I think this one is very interesting indeed. It's still profitable & cash generative, is priced well below its own net cash pile, has a sound balance sheet (unlike when it went bust in 2012), and has an average lease length of only just over 1 year. So this one could get interesting, especially now that Mr Ashley has got involved.

We had a very interesting discussion about the company, here on 30 Jun 2017, prompted by Graham spotting the potential special situation opportunity.

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N Brown (LON:BWNG)

Share price: 287.9p (down 5.4% today)
No. shares: 283.4m
Market cap: £815.9m

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

Historic Insurance Products - Customer Redress - here is the text in full;

N Brown Group Plc (the "Group") today announces that it has identified flaws in certain general insurance products which were provided by a third party insurance underwriter and sold by the Group to its customers between 2006 and 2014.

This follows a review prompted by a recent industry-wide request from the FCA that firms ensure that general insurance products and add-ons offer value for their customers. The vast majority of these products were sold to the Group's customers in the period leading up to, and including, 2011. Sales of the relevant products ceased in early 2014.

Following an assessment of the cost of potential customer redress, the Group expects to incur an exceptional cost in this year's income statement in the range of £35 million to £40 million. However, the Group anticipates that there may be mitigating actions to reduce the overall net cost.

The cashflow impact of this is forecast to occur from FY19 onward, and the Group anticipates funding the full cost of customer redress from existing resources.

The Group continues to demonstrate strong underlying trading performance in line with its 20 June 2017 trading statement.

Clearly that's not good news. However, it sounds like a ring-fenced problem, and the company can afford to sort it out. Note that the market cap has dropped about £40m today, to take into account this problem.

Note the reassuring little trading update added at the end.

My opinion - I'm playing it safe, and have just told my broker to sell half my long position on this one - just in case more, bigger problems subsequently emerge.

I wonder what read-across there is for other retailers? Selling worthless insurance add-ons was a big part of what lots of retailers tried to do in years gone by. Remember all those extended warranties that were pushed on to customers?

I'd be interested to hear what readers think about this - it sounds like the next mis-selling scandal, which could potentially hit a lot of retailers, I imagine. Another reason to be wary of this sector perhaps?

That's probably it for now.

Regards, Paul.