Small Cap Value Report (Thu 14 Sep 2017) - IRV, W7L, NXT, EPWN, FRAN, HYNS

Thursday, Sep 14 2017 by

Good morning! It's Paul here.

Please note that I added more sections to yesterday's report in the evening - on Eve Sleep, Ten Entertainment, and Epwin. I know it's not ideal doing that, but I find it very difficult to concentrate on writing when the market is open.

No preamble today, as there are too many company results to cover.

Last call for questions for my interview with Spreadex tomorrow. I need your questions in by midnight tonight please, to give me time to prepare. Should be an interesting audiocast. Please submit questions only using this form. Thanks!

Interserve (LON:IRV)

Share price: 83p (down 45.5% today)
No. shares: 145.7m
Market cap: £120.9m

Trading update (profit warning) - this is the biggest percentage faller of the day. Yet another profit warning, from this accident-prone international support services and construction group.

To refresh my memory, I've looked back at the archive. I wrote a piece here on 6 May 2016, on a horrible profit warning (causing the shares to drop 20% to 313p). My conclusion then was that this share was uninvestable, because management were not in control of the business. It would have been a good short at the time.

I've not followed the company since then. Today it delivers more bad news;

Trading in the UK in July and August was disappointing, particularly in support services, but also in the construction division.

As a result of this, the Board now believes that the outturn for the year will be significantly below its previous expectations.

To quantify this, Stockopedia currently has a broker consensus EPS figure for 2017 of 57.1p. What does "significantly below" mean? It could be anything really. I would take that as meaning at least 20% below expectations, possibly more.

Broker notes - I've seen two broker notes this morning. One says they're working on updated figures. The other says that they're withdrawing forecasts, as there are too many uncertainties. That sounds wise.

There's more bad news on what look like exceptional exit costs;

Further progress continues to be made on contracts within our exited Energy from Waste business. However, the anticipated timing and complexities of completion mean that the Board now considers it likely that the final costs will significantly exceed the…

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Interserve Plc is a United Kingdom-based support services and construction company that offers advice, design, construction, equipment, facilities management and frontline public services. The Company provides a range of integrated services in the outsourcing and construction markets. It operates through three segments: Support Services, Construction and Equipment Services. The Support Services segment focuses on the management and delivery of operational services to both public and private-sector clients in the United Kingdom and internationally. The Construction segment offers design, development, consultancy and construction services for building and infrastructure projects. The Equipment Services segment operates globally, designing, hiring and selling formwork and falsework solutions for use in infrastructure and building projects. It provides outsourced services in sectors, such as hospitality, leisure, education, defense, retail, and oil and gas across the Middle East region. more »

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Warpaint London PLC is a United Kingdom-based company engaged in color cosmetics business. The Company sells color cosmetics in the United Kingdom and overseas, principally under the W7 brand. The Company operates through two divisions: close-out and own-brand. The own-brand division consists primarily of the Company's flagship brand, W7. The W7 brand contains over 500 items, which are sold into high street retailers and independent beauty shops across the United Kingdom, Europe, Australia and the United States. The W7 brand focuses on the 16-30 age range. more »

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NEXT plc is a United Kingdom-based retailer offering clothing, footwear, accessories and home products. The Company's segments include NEXT Retail, a chain of over 500 stores in the United Kingdom and Eire; NEXT Directory, an online and catalogue shopping business with over four million active customers and international Websites serving approximately 70 countries; NEXT International Retail, with approximately 200 mainly franchised stores; NEXT Sourcing, which designs and sources NEXT branded products; Lipsy, which designs and sells Lipsy branded younger women's fashion products, and Property Management, which holds properties and property leases which are sub-let to other segments and external parties. Lipsy also sells directly through its own stores and Website, to wholesale customers and to franchise partners. The Company's franchise partners operate approximately 180 stores in over 30 countries. more »

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  Is LON:IRV fundamentally strong or weak? Find out More »

32 Comments on this Article show/hide all

vik2001 14th Sep '17 13 of 32

In reply to post #219033

The FTSE often falls when the pound rises, as the stronger currency cuts the value of companies overseas earnings when they are brought back to the UK.
We could see a rate increase next meeting now.

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murrb 14th Sep '17 14 of 32

In reply to post #219028

If you look at the actual form of the RNS it states she sold the shares ,,,,?

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runthejoules 14th Sep '17 15 of 32

In reply to post #219063

Frontier Developments (LON:FDEV) The announcement says buy, the form says 'sale' but every share purchase is a sale by whoever's selling them. Whoever sold them had the right idea at the time though.

@ISAallowance the ping in accesso Technology (LON:ACSO) a couple of days ago came when their customer Six Flags announced it was opening all year round. Annoyingly, I held at the bottom of the last dip but sold on micromovements, so good for you.

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ISAallowance 14th Sep '17 16 of 32

In reply to post #219078

Ah, OK, thanks for the clarification about the Six Flags announcement, I'd missed that.

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runthejoules 14th Sep '17 17 of 32

Can I just reiterate to Ed and the site staff how useful it would be (for me anyway, and if it's possible) to have a holding page automatically come up every day so we could start the discussion and put in requests early rather than pester Paul & Graham on twitter? Especially useful when Matylda is on her hols :-)

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fredericktug 14th Sep '17 18 of 32

I am just finding it easier to spot what I think are over valued companies than value situations right now. It's pure conjecture but I think that some speculative and momentum type froth is coming out of what I believe to be stretched and (to quote Paul), "euphoric" type markets right now. Personally I struggle with momentum type investing anyway - there seems to be little sense in choosing to invest in a stock mainly because it is rising, if there are not clear underlying findamental reasons for the strength. Right now I am profitably short of Frontier, Purplebricks and Hotel Chocolat but I often cash out quickly from these because I lack the conviction and risk appetite to go short for long: I'll probably close these today!  I do get seriously tempted when I see share price graphs that look like the preverbial hockey sticks and massive multiples (of sales as well as profits). It's still pretty risky stuff but I do believe we're in bubble territory in many assets, stocks (especially speculative story stocks) included.  

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bestace 14th Sep '17 19 of 32

In reply to post #219053

I agree the news seems to have been rather leaky given share price action over the last few days. However given that the news release was non-regulatory and no numbers were provided (not that they ever seem to provide numbers in these sort of announcements), I don't think the contract can be material.

I'm therefore a bit surprised by the size of the recent share price bump although with the interims being announced next week I suppose some of the increase may have happened anyway as a result of anticipation leading into those results.

edit - just read rtj's post #15 which makes more sense.

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fredericktug 14th Sep '17 20 of 32

I wondered if you had any thoughts on Corero Network Security (LON:CNS), who announced interims today. I think you've commentated on their 22p placing back in 2016 and I had a nibble at 8p recently, believing that the historic car crash numbers may be about to turn. I am now having doubts again!

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kenobi 14th Sep '17 21 of 32

In reply to post #219008

Interesting that IQE has been weak, I wonder in part if anti climax from the iphone launch ?

but in the environment where expensive stocks are falling back, interesting to see boohoo up today.

Maybe things are going well in the US?

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Aislabie 14th Sep '17 22 of 32

You note that Warpaint(W7L) does not look like a growth stock any more - if it ever was. I was tempted by what appeared to be a very promising start in a sector that can produce outsize profits. My reluctance to buy was confirmed by asking around at every shop I could find about the W7 cosmetics. As an older guy I thought that it might just be passing me by while being a hit for the younger female. Ain't so. I have yet to find any cosmetics sales assistant who has used it and barely any who have heard of it. The list of outlets on their website is minimal with only TJMaxx having any national recognition.
It's social media presence (crucial in this market) is very light and overall I am completely unconvinced.
My conclusion is that it is going no

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Brookeda 14th Sep '17 23 of 32

In reply to post #219033

Some of the FTSE fall is just an offset of GBP appreciation. Its noticeable that the companies with the biggest foreign earnings have fallen the most

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JohnEustace 14th Sep '17 24 of 32

In reply to post #219173

My extensive research on W7L (asking my daughter) says you wouldn't expect it to be sold in the department stores. They offer much cheaper "dupes" of the department store brands.
They sell a lot online - look on Amazon UK for a huge range. My daughter buys the W7 Absolute Lashes. Compare the Absolute Lashes packaging and pricing with the Benefit They're Real and you'll see what I mean.

I'm not a holder.

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Orangetree 14th Sep '17 25 of 32

The fall in Interserve’s shares has broken my expectations. It’s a race between them and Carillion for the race towards the bottomless pit of doom.

Having said that, there are some good divisions that I like. One is their Equipment Services (which I placed a £500m value) division with operating profits growth of 10%. It has an EBIT margin of 21%, along with a 16% return on assets. With £48m in operating profits, deduct 20% for taxes which leaves it with £38.4m after-tax profits.

Their International Construction saw profits increased to £8.3m in six months from £6m, a 38% increase. But Middle East tensions could disrupt operations, however, I put a value of £149.6m.

The question is: Will Interserve be able to reduce debt to a sustainable level to carry on as a going concern?

A placing is looking like a real possibility.

Here is my valuation on each Interserve Division:

Blog: Walbrock Research
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Bagash 14th Sep '17 26 of 32

Hi Paul
I understand that Dunelm Group is outside the remit of this report. But as you have such an interest in Retailers, I wondered if you would be kind enough to give your opinion on its final results yesterday.
Best wishes and thanks.

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Gromley 14th Sep '17 27 of 32

In reply to post #219013

Dunelm (LON:DNLM) reported yesterday not so good figures, e,g, underlying eps down near 15%. Yet sp goes up 8.4%.
And this morning, Next (LON:NXT) reported HY figures with underlying eps down 6.2.%. Yet sp is up 11% as I write !
Maybe people are seeing early signs of green shoots. But against evidence of squeeze on consumer spending, inflation, cost increases, etc, these sp hikes do not make sense to me.

It is clearly the better (or less bad) outlooks they both came out with (and indeed John Lewis), but like you it feels premature to me.

A particularly noted that both Dunelm & John Lewis mentioned favourable weather comparatives** (as I think did the BRC last week) which does indeed suggest a fluctuation rather than a trend change.

But then you would think that the management of Next know more about than we do and they saw fit to raise their forecasts.

I think if I was short retailers I might be inclined to close, but I'm certainly not ready to buy yet as I still think there is a decent chance of better entry points or at least a clear indication of the turn.

** As a wry aside I also recall that a few days ago Green King cited the weather as being an adverse factor for them. It really makes me wonder what kind of weather it is that forces you out of the pub and into John Lewis?? (A cold day in hell perhaps?)

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ricky65 14th Sep '17 28 of 32

Paul, thanks for covering Franchise Brands (LON:FRAN). I think it has good potential if the Metro Rod acquisition is a success (I think you meant Metro Rod instead of DynoRod).

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barnetpeter 14th Sep '17 29 of 32

Short of ftse and I think the fall will continue. The Dow is at bonkers levels imo and I note that Oracle reduced forecasts after the bell tonight. Dangerous short though unless you have a lot of margin. I expect a 1,000 fall one day but timing is tough.

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Firtashia 15th Sep '17 30 of 32

Interesting to know that EPWN are reading your reports Paul, I think that says something about the quality of them. Only my opinion of course, but the person named in your report should be added to the list of directors whose companies one should think very carefully about before investing in.

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Paul Scott 17th Sep '17 31 of 32

In reply to post #219383

Hi Firtashia,

Interesting to know that EPWN are reading your reports Paul, I think that says something about the quality of them

That's not fair actually. I often get PRs and brokers contacting me - the SCVR is widely read in the City. So it's not at all unusual for company advisers to contact me & try to persuade me to change something I've written.

My approach is to have friendly & constructive relationships with PRs and brokers. I always listen, and engage, and if something is wrong, I'll happily correct it. But I'll never be bullied into retracting anything that is factually correct. Some have tried, none have succeeded!

Overall, I feel that an intelligent discussion is much better than conflict.

Regards, Paul.

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 Are LON:IRV's fundamentals sound as an investment? Find out More »

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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