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.
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.
Disclaimer
This is not financial advice. Our content is intended to be used and must be used for information and education purposes only. Please read our disclaimer and terms and conditions to understand our obligations.
31 comments
The interesting things with N Brown are;
On the downside, I don't like the expensive/extended credit business model. Maybe that could be the next thing that regulators attack?? Who knows?
The irritating J D Williams advert with Lorraine Kelly and others jumping around is enough to put me off N Brown (LON:BWNG) !
"Windows 10 has just decided to do a major update, without warning me, and it took nearly 2 hours. Great, thanks Microsoft."
I remember a couple of years ago someone was recommending to a government select committe that open source was the way to go. But then said expert got an offer of extremely well-paid employment from Microsoft and the proposal faded away.
https://www.linuxmint.com/about.php
I agree, Linux Mint is a great upgrade. A worthwhile performance boost and very much less hassle. Even my elderly mother-in-law likes it better.
One of the reasons why I have refused to upgrade from Windows 7 is the enforced upgrades on the newer software. Since I should decide when MY PC is available for use, it follows I should have control of when the upgrades are applied.
I've found Linux to be OK on netbooks, so if Microsoft do not mend their ways by the time I need to replace Windows 7, it will be Linux for my main PC.
Then there is the bigger issue, where it seems Android & Apple keep "upgrading" their software so that a phone that was very fast when brand new works at a snails pace 2 years later, so encouraging people to buy a new one. The authorities need to look into that.
At least with Microsoft, I can get my reliable windows 7 disks out and do a reinstall every couple of years. With Android, of course it can be rooted, but try finding a completely reliable source for the replacement OS.
@jonesj
You can control when upgrades are applied in Win10
http://uk.pcmag.com/operating-systems-and-platforms/87518/news/how-to-control-updates-in-windows-10
I did a reinstall of Win7, went ok but since then can't get an updates, tried various things but nothing seems to work, apparently it is a known problem.
Hmmm. N Brown. Tripped up again, and we are still waiting for the outcome of the dispute with the HMRC (could result in a charge of £43m or refund of £54m).
Net debt is rising, and more cost headwinds if Sterling devalues. Closing stores that were opened only a few years ago. USA still not profitable. And there is the additional risk that a consumer credit crunch may result in an increase in bad debt.
Profitability may return when CAPEX slows, but will sit this one out for now.
I agree. I looked at N Brown (LON:BWNG) at the weekend. I thought any re-rating of shares depended largely on better evidence of international growth which I note was down 2% on constant currency in the most recent update. Some of its brands also look a bit tired to me. One to keep an eye on though as I see they have a new international director from Boohoo.Com (LON:BOO) who could help.
I've been in gambling mode today and bought a tiny holding in GMD when the mid price dropped below 25p; what interests me as well as the cash is the growth potential in the new E-business.
While larking around I recalled FJET's recent update and I just thought I would check out their website and the customer experience in booking a flight on it. Oh deary me, what a disaster!!! Once I selected the route and pressed 'Go' it then came up with this robot-checking thing not once but twice where I had to not only click a button but also select pictures in a grid, some of which weren't that clear! Then when it came to the schedule for the applicable dates once I clicked on a flight a website error came up and took me back to the homepage. What a disaster!!!
I'm guessing DTG might be a favourite on here. I sold up on opening today, expecting that the market would punish them for the results. So it's proved. Any views as to the proportionality of the reaction?
The problem I have always has had with DTG is the Distribution & Logistics arm which has been a perpetual drag on the rest of the company. This year the main Leisure Travel business is also not doing so well, with load factor down (whereas Easyjet, Wizz, and Ryanair are up) a bit and there is a whopping forex charge! They say current trading is "in line with market expectations" which I suppose is good, though as usual it is not stated what these actually are...
I wonder if at some point OTB may announce similar mediocre trading...?
I suspect the problem with N Brown N Brown (LON:BWNG) is down to past mis-selling of insurance. FCA had a recent case with Express Gifts earlier in the year where this firm offered protection for damage to the goods being purchased which made them a lot of money and offered little value to the customer.
N Brown also used to sell PPI and so there could be a link to this also.
While it is good that the cost impact has been called out until we hear more from the company or the FCA we are left guessing as to what this is all about.
just made a quick filter, there are 75 LSE shares where closing cash balance is currently higher than market cap. Although obviously in itself this is not sufficient to guarantee upside!
Paul, I must say your piece on FUL yesterday was brilliant, I used to subscribe to shares mag, and your analysis and coverage on FUL exceeded any article I have seen them produce. Thanks for your contributions, I, like many others, wait eagerly to read these each day!
"there are 75 LSE shares where closing cash balance is currently higher than market cap"
I'm guessing one of these is Johnston Press (LON:JPR) ?
Cash £16m, Market cap £14m.
It also has £143m of long term debt.
I hope the other 74 companies on your list are not as financially distressed?!
Howard, I'm *not* making the point that they are potential investments, I am saying its an approach to begin looking for anomalies.
Is JPR on the list? no idea, I ran a quick 2 minute filter out of curiosity.
Crikey, Mike Ashley really has become the King Canute of the retail world, holding back the tide of online almost single-handedly by taking stakes in Debenhams (LON:DEB) French Connection (LON:FCCN) £JD and now Game Digital (LON:GMD) What's next, Bonmarche Holdings (LON:BON) ?
I wonder what this ongoing empire building is for... it's not like he is doing a splendid job at the helm of Sports Direct, where the performance IMHO is pretty mediocre compared to JD Sports - perhaps that's why SPD is suffering, because Mr Ashley is too busy shopping with SPD funds...
I wonder what anyone thinks to the acquisition/update announcement from ACSO? ACSO seem to be paying quite a lot for TE2 which has mushrooming turnover but is loss-making - it was also only formed in 2013 so I'm sure their directors are rubbing their hands with glee. The trading update from both sides seems pretty positive though... but maybe this is already baked into the price.
andrea,
" but maybe this is already baked into the price"
Is that not what was said about Microsoft in the 80's? Agreed, it seems like they are paying a bit less than £1m each for 69 employees. It is a small pond, they they are buying some pretty big fish, and Mr market values the employees of ACSO at just over £500k an employee.
Regards,
Seadoc
The market doesn't seem impressed... there are mostly only sales going through for ACSO since the announcement...
Andrea,
"The market doesn't seem impressed... there are mostly only sales going through for ACSO since the announcement..."
Agreed. I have the cash in the ISA and shares outwith so next reversal is a chance to move shares into the ISA. I have put some lines on my "charts" (I use Sharescope so just a two click job) and 1650 was that point but it may now be 1580? But essentially I would like to do the transfer at a low spot to avoid CGT (and even at 1580 might have to do just some and the rest next year. I do believe that in the long term accesso Technology (LON:ACSO) has to be a winner.
Regards,
Seadoc
a good call Paul, nice trade and potential (speculative) investment.
a striking example of DYOR, be greedy when others are fearful and whole host of other aphorisms that are much used but rarely so well illustrated. Chapeau.
a fellow cyclist i see.
indeed, and the TdF has forced me to invoke the n+1 rule: another Colnago added to the portfolio last week.
Game Digital (LON:GMD) is a very interesting situation - The Market Cap is £34 million and the cash in the bank is £69 million. So for each £1 invested you are gaining around £2 cash. Is this correct or am I being over-simplistic?
I thought this recent headline was a classic:
Sports Direct boss Mike Ashley 'vomited into a fireplace after drinking 12 pints plus chasers at a meeting'
If true I hope Mike Ashley will attend the next Game Digital (LON:GMD) general meeting - It could be very interesting!
bsharman
The net cash of £69m end Jan-17 was post the Xmas trading period & not representative of average annual net cash
End-July 16 Current Assets were £146m compared with £102m Total Liabilities
i.e. Net Current Assets of £44m
This is a conservative Ben Graham style Asset Value & reveals there is still a margin of safety, especially given that there appears to be a profitable business hidden behind those assets.
What are the trading asset worth in the event of a firesale? I.e. a lot of computer games and consoles. Probably less than the balance sheet value.
That's a fair point ratioinvestor, the Net Current Assets calculation assumes that inventory is worth it's Balance Sheet value.
On the other hand, the Net Current Assets is conservative as it ignores all Fixed Assets - the GMD Balance Sheet suggests total Fixed Assets of £83million.
Am I right in thinking that owning 25%+ of a company means you can have a seat on the board?
A shareholder has no automatic right to be a Director unless the company's Articles of Association include such a provision.
A 25% shareholding does facilitate the ability to block a Special Resolution, though.