Small Cap Value Report (Thu 15 Feb 2018) - CNCT, SDM, BOTB, SND, LID, TRI

14th Feb '18 by Paul Scott

33 comments 14341 reads

Hi, this is Paul,

Thanks for your requests - I've got enough to be going on with now.

Please try to limit requests to small caps (under c.£400m market cap, and above c.£10m), and only in sectors that I cover (so no resources, property, financials, or pharmas/biotech). Also, please limit requests to companies which are reporting trading updates or results, as that's what drives these reports. Thanks!

Yesterday's report was extended to cover 2 more companies, so here's the link for that.

On to today's news

Connect (LON:CNCT)

Share price: 66.5p (up 2% today, at 09:29)

No. shares: 247.66m
Market cap: £164.7m

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

Disposal of books division - This has been a rather strange turn of events. The buyer backed out, and it looked like a legal battle would ensue. We're informed today that the deal has now been done, at a reduced price - £6m cash received, instead of the previously agreed £10.6m plus £1m deferred. I can't shake off a feeling that we've perhaps not been told the full picture? Maybe the buyer found something during due diligence that they didn't like?

I'm not really sure if this is good, or bad news? Anyway, it's a done deal now, and not material to the market cap of £161m. The disposal is useful in reducing debt a bit, so on balance it's probably a good thing to have jettisoned a small division which might have been a distraction for management.

I've recently topped up my holding here a little, as I think the market possibly over-reacted to the recent profit warning. It wasn't a big miss, yet the share price almost halved. The forecast dividend yield is 15%, which is the market clearly telling us that the divis are likely to be cut, or passed altogether.

Maybe I made a mistake, recently averaging down on this one? I might go through the figures again over the weekend, to decide whether to ditch them, or buy more. It's not a big holding for me, as I don't usually like to put too much money into wobbly situations.

Graham sounded unimpressed when he reviewed the profit warning here on 22 Jan 2018. So this looks a polarised situation, where some…

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threeputt

15th Feb '18

Well that's irritating, I was an SDM shareholder until recently, I cashed in on a small profit when it looked like it as choking a little. I was correct at the time as it choked back to around 80 and I was thinking well if I saw value around 90 why am I not buying this back at 80 ?
Onwards......

FREng

AGM statement from Sanderson (LON:SND) today looks positive. They seem to be growing well and not expensive.

Trading update from Earthport (LON:EPO) today. They continue to invest their shareholders money in buying revenue growth, which is increasing steadily. Will they realise their ambition to become "the leading global cross border payments utility"?

tabhair

I agree with most of what you're saying, but I wouldn't regard the licensing of the brand to hotels as being a waste of time. Laura Ashley is still a reasonably strong brand, that is borne out by licensing income from the interim of £10m I think any incremental revenue, even in small amounts from licensing is very high margin and will go in large part to the bottom line. The company needs to build that part of the business up, grow their e-commerce sales while trying to dispose of useless fixed assets while exiting their bricks and mortar locations.

With that said, it's all a moot point anyway. Management here have proved their total incompetence by buying that property in Asia in 2015. That acquisition transformed a company that was doing alright into one that is in financial distress. I just calculated the Altman Z and Piotroski scores and Laura Ashley Holdings (LON:ALY) scores poorly in both regards. The nightmare scenario here is that capital will have to be raised, but it will be done so at a low market cap, while excluding minority shareholders.

Phil Dunphy

Off topic -

Can anyone help me...

I would like to know how to find out who has the largest % holding in a stock, how do I go about this?
In addition, who has the highest % of voting rights?

I can't seem for the life of me being able to find this out!

cholertonandrew

For % holdings you can usually find in the investor section on the company’s website. Sometimes under the AIM disclosure heading if it doesn’t have its own heading.

Regards
Andrew

davidjhill

Innovaderma (LON:IDP) Share price is very cheap if you believe the expectations. EPS growth of 90% and 60% respectively next two years on a fwd PE of 10 (or less if you strip out net cash) and a PEG of 0.3!!! This type of business should be rated as a growth stock and 3 times higher in my view.

so why is it not? well, in my view there are a couple of things holding it back

1) The 1st half of this year has involved a ramp up to support the new brand channels. This has made the current year 2nd half weighted and that makes people understandably nervous. Mgmt has been consistent in saying they will meet expectations and are investing for significant profit growth but I think people want to see the proof of that before giving it the benefit of the doubt.

2) It had a flurry of private investor interest and thus share spike when Skinny Tan was going through the roof and as we know this can be quite transient. As the business has taken a breather and set itself up strategically people have gotten impatient and sold up.

Products appear to be very good though and generally well received. I remember Graham saying some of the reviews on TrustPilot were poor which put him off, but that's not the experience I've seen in practice. I know a number of women who have used ST for the 1st time and absolutely loved it and have repeat bought and recommended to their friends. Roots hair products for men seem to be flying off the shelves and well received too. 15% week on week growth is phenomenal.

Skin whitening is a massive craze in the Far East and Innovaderma (LON:IDP) have a national retail contract in South Korea that is just about to take off - that could be very interesting though not factored in to any expectations from what I can make out.

I hold a small position now and am happy with it. If expectations are met in this 2nd half I will buy a much bigger holding if it is around this price as it will then be staggeringly cheap in my view.
Of course if expectations are not met............well !!!!

Zipmanpeter

Re Connect (LON:CNCT) - They are trying to do the right things - strategy to strip out cost (combine Tuffnell and Smiths depot networks) and construct margin rich niche specialities (focus on early morning delivery and irregular parcels) makes sense. Getting rid of Education and Books divisions to simplify organization and cut debt also makes sense.

Critically, even at say 4p vs LY 9.8p, divi will still a 5% return on price. Lower dividend will give another £10Mn+ pa to cut debt and fund completion the transformation over next 2 years, savings for which they have said will be slower (and I think will be smaller than promised - Tuffnells is different to Smiths)

However, key is to demonstrate they can add new services and grow them to scale successfully. With rapid internet growth, I can well image these opportunities can exist. Now must deliver (or change the CEO). Original target for Pass My Parcel was 3Mn units in 2017, got to <1Mn.

But tough to cut costs/people AND innovate at the same time as often different mindsets. So big challenge to execute successfully.

Minded to take a gamble as someone will find value in a fast, invested national distribution network as being created. Both inbound and outbound parcel delivery transforming. I think Connect (LON:CNCT) will create value and be involved in M&A activity in 2-3 years but whether being the consolidator or the consolidated I am not sure.

Not yet a buyer but close - may wait for the next trading update on PMP volumes before I act.

timarr

On Connect (LON:CNCT) Paul commented:

Maybe the buyer found something during due diligence that they didn't like?

Yes they did, janebolacha already pointed out the Aurelius response in a previous report:

http://aureliusinvest.com/en/p...

Shortly after signing of the transaction, we were informed that there was a severe under-performance of the Connect Books business for the month of December 2017, which led to a significant decrease in forecasted EBIT for the financial year 2017/2018. This was a marked deviation from the forecasts provided to us by Connect Group before signing of the transaction. As a result of this change, our banking partners confirmed that they could no longer provide financing for the proposed acquisition.

We have made several attempts to find a mutually satisfactory solution with Connect Group and the banking partners, but it now appears unlikely that the transaction will proceed

Basically the terms will always include a force majeure clause which allows the buyer to withdraw if the funding banks change their minds - and they obviously did based on the new trading figures. Connect were presumably advised that they didn't have a case and decided that £6 million was better than none.

mortimer

Paul. like you i have a small holding in connect.whats to be done.well the management must know the only attraction for this share is its divi so i think they will always try their hardest to maintain some kind of high divi. I know Graham feels it is a dying business but I am sure the management are always looking for new types of business that they can gradually switch into. Is there any point in selling the shares at the moment with a divi of 15% maybe being cut back to 10 or even halved, which is still a blinding return. If I knew for certain there was a share I could switch it into that would give me my loss back within a year then I would sell, but the way I see the Stock Market at the moment is like trying to do business in a Madhouse.

tscott

Re Connect I think the main problem is that the management were not straight when they put out the original statement. It should have stated the reason why Aurelius wanted to pull out or renegotiate rather than implying the company had been shafted by Aurelius and a legal suit would follow. Markets hate obfuscation and uncertainty and it always pays to be upfront and honest.
By the way Paul have you completed your piece on the motor retailers which is an interesting value sector at present
Ted

Weasel

"Laura Ashley (ALY) H1 LFL -0.5%. Pretax £4.3m (£7.8m). Div passed. Guides FY pre-tax below market expectations. "I remain confident that Laura Ashley will continue its progress." Progess? What progress?"

Looking at the SP chart for the last two years, I assume he means progress in utterly destroying shareholder value. It must be said, so far, he's doing a good job of it as well!

paraic84

The last broker note for Innovaderma (LON:IDP) I saw predicted 14.5p EPS for 2018 which I think might be what Stockopedia's computers are using. That looks way too high to me given gross profit has only gone up 20% in today's results compared with last year. EPS today was 0p. EPS for 2017 was 6p so I am currently pencilling in an optimistic 8-9p for 2018 which would put this on a P/E of over 20. That doesn't look so cheap and is probably about right on the current growth trajectory. I am reluctant to pay much above 20 because Skinny Tan is the sort of product that can easily go in and out of fashion and it looks like sales growth is already slowing. I am interested in the potential of Roots though which could drive a re-rating.

EPS for this year is 11.3p according to house broker with 18.8p in 2019 and 23.1p in 2020

median ratings for industry is 15* fwd earning (usually 2019 numbers) so suggest 280p is closer to fair value at present I think. (house broker 400p btw)

Management is clearly comfortable with 11.3p as they have stated this numerous times.

H2 revenues are generally twice H1 so expect £8m+ = £12.5-13.5m
Last year H1 was a loss of £150k and they made £1m for full year on £8.9m (£1.15m in H2)
So reasonable to assume £2m+ on £13m given operational gearing

Like I said I think Innovaderma (LON:IDP) is held back by H2 nervousness but if the numbers are right suspect a material re-rating will follow.
This is not a "fashion" fad though so disagree re that point.

btw Skinny Tan is now the worlds largest tanning brand on Facebook with 300,000+ followers !! and that's before the proper US launch

also note that ST sales in Superdrug has grown 100% in 2018 so far vs 2017 (4 weeks to early Feb) which supports the view that management isn't just making up its numbers....

Reacher

One thing which is confusing me about today's 1H results from Innovaderma (LON:IDP) is allocation of the £24,486 loss for the period between owners of the parent company (allocated loss of £62,336) and non-controlling interests (allocated profit of £37,851).

For the year to 30/6/17 the profit of £530,987 was split £350,173 (66%) and £180,814 (34%) between owners of the parent and non-controlling interests. Whilst in 2016 the profit of £402,341 was split £338,026 (84%) and £64,315 (16%) respectively.

Can anyone shed any light on how this allocation is derived? At the half year stage it seems particularly skewed as I would have expected the loss to be allocated between owners and non-controlling interests.

Effortless Cool

gajri,

The split relates to profits and losses at subsidiary level. All of the Innovaderma (LON:IDP) subsidiaries are owned 100%, except for the two related to Skinny Tan, which were 80% owned at 30 June 2016 and 91% owned at 30 June 2017.

Thank you! My bad! I can see the non-controlling interest in the Equity Section of the Balance Sheet.

samanddee

Any chance of a quick look at JIM results / views on upward interest rates etc?

janebolacha

21st Feb '18

In post 11, I wrote this about Laura Ashley Holdings (LON:ALY):

"There is one real unexploded bomb in the accounts, imo. This is the tremendously high inventories, equivalent to about four months cost of sales, obviously far too high for a business that is subject to changes in trends and fashion. I would expect there to be the need for very substantial write-downs of inventories in the second half-year.

Just as they disregarded the need for writing down the value of the Singapore property until they really could not get away from the blindingly obvious any longer, so it will be (imo) with the inventories."

Here they are, only a week after those results, with reportedly 40% off virtually everything, including furniture, plus free delivery.

https://www.birminghammail.co.uk/news/property/laura-ashley-launches-40-sale-14319496

This is in February, not a traditional sale period, perhaps.

Make of that what you will.

JohnEustace

Interesting that the Birmingham Mail advises their readers to pay by credit card so that they have protection if the firm goes bust before delivering the goods!

When Bunnings took over Homebase they decided they didn't want the the Laura Ashley in-store concessions any more. That looks to have been a very bad decision for both businesses. Bunnings have written off all the money they paid for Homebase plus around £120m more.

Small Cap Value Report (Thu 15 Feb 2018) - CNCT, SDM, BOTB, SND, LID, TRI

Connect (LON:CNCT)

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