Small Cap Value Report (Thu 19 Apr 2018) - DEB, MTC, GATC, XSG, SPRP, FCCN

Thursday, Apr 19 2018 by
88

Good morning, it's Paul here.

Please see the header for stocks I am looking at today.



Debenhams (LON:DEB)

Share price: 23.15p (down 0.7% today, at 11:09)
No. shares: 1,227.8m
Market cap: £284.2m

Interim results

Debenhams plc, the international department store destination, today announces interim results for the 26 weeks to 3 March 2018.


I don't think DEB is investable in its current form. The figures are poor;


5ad86c17f3571DEB_table.PNG


I don't accept the "underlying" figures. My reason being that the group is in a permanent state of re-organisation. Hence re-organisation costs are normal, not unusual. So the figure I'm focusing on is the near-breakeven profit of only £13.5m for the half year (which includes busy Christmas trade, so should be much higher).

Dividends - the interim divi has been slashed by just over half, to 0.5p. Given the precarious finances, they should not be paying divis at all. I suspect this 0.5p might be the last divi that DEB shareholders receive.

Like-for-like (LFL) sales - fell by 2.2% (constant currency was worse, at -2.8%). This is not good enough, because LFL increases are necessary to offset widely publicised higher costs, for all retailers. In mitigation, severe weather caused the closure of many shops in the last week of February. This is estimated to have reduced LFL sales by c.1.0%. So adjusting for that, which is an extreme event, LFL would have been down -1.2% - not good, but not a disaster either - plenty of retailers did worse than that, over a period when consumer real incomes were under pressure.

Trends - the problem DEB has, is that the trend is very much not their friend. It seems only a matter of time until the company becomes loss-making. That could lead to a withdrawal of borrowing facilities. So balance sheet strength is the key issue. For that reason, I'm not really interested in all the narrative explaining what they're trying to do to improve performance. They're trying to push water up-hill, in my view.

Balance sheet - this is worryingly weak, and has never recovered from the scourge of private equity - which hollowed out & geared up its balance sheet some time ago.

NAV of £890.4m is a mirage, as it's flattered by…

Unlock this article instantly by logging into your account

Don’t have an account? Register for free and we’ll get out your way

Disclaimer:  

As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested. ?>


Do you like this Post?
Yes
No
88 thumbs up
0 thumbs down
Share this post with friends



Debenhams plc is a United Kingdom-based company, which is engaged in multi-channel business. The Company’s brand trades through approximately 240 stores in 27 countries. The Company's segments are UK and International. The UK segment consists of stores in the United Kingdom and online sales to the United Kingdom addresses. The International segment consists of international franchise stores, the Company-owned stores in Denmark and the Republic of Ireland, and online sales to addresses outside the United Kingdom. The Company's stores trade under the name of Debenhams other than the Danish stores, which operate under the Magasin du Nord banner. Its stores offer customers a range of services, including restaurants and cafes, personal shopping assistance, hairdressing and beauty treatments, nail bars and wedding or celebration gift services. Its Debenhams Direct (www.debenhams.com) offers a range of products and services for online customers. more »

LSE Price
10.21p
Change
-1.0%
Mkt Cap (£m)
126.6
P/E (fwd)
4.1
Yield (fwd)
4.6

Mothercare plc is a retailer for parents and young children. The principal activity of the Company is to operate as a specialist omni-channel retailer, franchisor and wholesaler of products for mothers-to-be, babies and children under the Mothercare and Early Learning Centre brands. The Company's operating segments include the UK business and the International business. The UK business segment includes the United Kingdom store and wholesale operations, catalogue and Web sales. The International business segment includes the Company's franchise and wholesale revenues outside the United Kingdom. Its clothing and footwear product includes ranges for babies, children and maternity wear; home and travel includes pushchairs, car seats, furniture, bedding, feeding and bathing equipment, and toys are mainly for babies. It operates in the United Kingdom through its stores and direct business, and across the world in over 60 countries through its international network. more »

LSE Price
19.03p
Change
0.3%
Mkt Cap (£m)
64.8
P/E (fwd)
n/a
Yield (fwd)
n/a

Gattaca plc, formerly Matchtech Group plc, is a human capital resources business dealing with contract and permanent recruitment in the private and public sectors. The Company operates through two segments: Engineering and Technology. The Engineering segment comprises Barclay Meade and Alderwood recruitment consultancy brands. The Technology segment includes the Connectus recruitment consultancy brand. The Company is a provider of specialist recruitment services to the engineering and technology industries, both in the United Kingdom and internationally. The Company offers three core solutions: Contingent Workforce Solutions, Permanent Recruitment Process Outsourcing (RPO) and Total Workforce Solutions. more »

LSE Price
131.49p
Change
-2.6%
Mkt Cap (£m)
43.5
P/E (fwd)
5.3
Yield (fwd)
8.1



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


33 Comments on this Article show/hide all

dahokolomoki 19th Apr 14 of 33
7

In reply to post #355123

Another play on defined pensions & longevity rates is Legal & General (LON:LGEN).

In the last few years they've bought the defined pension liabilities from many companies and will make great profits if longevity rates go into reverse.

Article: https://www.theguardian.com/business/2018/mar/07/worsening-life-expectancy-drives-legal-general-profit-rise

| Link | Share
dscollard 19th Apr 15 of 33
3

In reply to post #355008

RE: RhythmOne (LON:RTHM) Erratum

The above quote is Whitman-Howard and not Singer: below is from SInger

 FWIW, neither is the house broker (Numis)

RTHM has confirmed it has delivered its first material profit for several years and inline with the markets $14m estimate (net cash was also better at $26m vs N1Se $20m). This reflects the substantial product, platform and quality changes made which are driving the business. Further work is being done to eliminate unattractive revenue lines and further integration benefits from the acquisition of YUME are lifting the savings from $10-12m guidance to $15m (N1Se $10m assumption).

 After a good Q3 the last quarter was softer but is indicated to be healthier heading into FY19 fiscal Q1. The net of these changes is that they we expect out EBITDA estimate of c$56m to hold and our net cash estimate in the high 50s.

 The stock trades on just 2.4x EV/EBITDA for FY19 and a P/E of 4x.

 While there has been healthy caution around delivery of the leap in profits in FY18 given the extended difficult period the company had experienced, it has now delivered and with the benefits of the acquisitions of YUME and RadiumOne set to flow the shares look set to perform.
We also flag that RTHM is a strong independent alternative supplier to the Google/FB dominated online media market and we expect advertisers to diversify away given the problems at FB. 

We reiterate our Buy rating and flag our TP equates to less than 10x FY20 EV/EBITDA (when the full savings benefit will be felt).

Website: runprofits.com
| Link | Share
fredericktug 19th Apr 16 of 33
1

Just to say thank you Paul and I'm looking forward to your take on Sprue Aegis (LON:SPRP) (I hold). And hearing you at Mello Derby!

I've been a firm Sprue Aegis (LON:SPRP) follower/holder for years but patience now running thin. My question (everyone, feel free...) - why announce draw down £3m of a £7m facility? I thought the company had at least £10m of net cash (it did at the time of the interims). Is this an indication of more trouble? Or is cash being eaten up by increased investment/R & D? Is the dividend really safe? Could this spat with BRK turn nasty, and if so, what might the implications be?

There seems to be no reason to buy whilst there is such uncertainty. But there's a compelling yield. I'm just concerned that it may no longer be safe.

Luckily for me, my entry price on Sprue Aegis (LON:SPRP) was 20p (back in the OFEX days) but it's still no fun seeing these mis-steps and the huge falls that accompany them!

| Link | Share
dscollard 19th Apr 17 of 33

In reply to post #355073

from Sharepad link here SharePad

Website: runprofits.com
| Link | Share
moolahcoast 19th Apr 18 of 33
8

What a great analysis of Debenhams- thank-you. I learned a lot.

| Link | Share
dscollard 19th Apr 19 of 33

Re: Mothercare (LON:MTC)

heard Philip Bier, a Danish retail entrepreneur interviewed on R4's business segment this am: he is opening the French franchise ID Kids in London next door to a Mothercare: worth listing to him on experience-based retail and why he is comfortable taking on the dying Toys R Us and Mothercare (LON:MTC) positioning in physical stores. Loved his point that there is nothing new in the decline of high street retail in the UK, quoting Woollies demise in 2008

i am a huge Amazon customer and buy pretty much everything online these days not just because of convenience or cost, but the dreadful experience of UK retail outside of premium stores. This is not just technological disruption, it is experiential : it will probably take new entrants to bring pleasure back into retail with differentiation through experience and exceeding customer's expectations.. which in UK high street retail is pretty damn low. The drive to cut costs  destroyed what was left of that experience.

 There should also be some pretty cheap leases on offer too

Website: runprofits.com
| Link | Share
HornBlower 19th Apr 20 of 33
4

Hi Paul, a few thoughts to add to your excellent commentary on DEBS.

LFL was -3.0% in UK which is where the problems are.

The lease incentive of £350m based on 18 year leases is about £20m a year cash outflow compared to profit. material with PBT guided to £50m and restructuring of £25m.

The out of the money FX hedge is another significant headwind. UK revenue £1.8bn, 30% stock USD sourced, at say gross margin of 60% suggests FX margin headwind of about £20m, at current rates.

Sports Direct has 29.7% stake so would be required to bid for the whole lot if they did more than pro rata in an equity raising. Who knows but I don't think that is the plan.

On the call CFO indicated covenants are a problem at a level of £30m adjusted PBT. Not there yet but was doing over £100m 2 years ago. Also peak working capital sees debt at about £400m v £300m average. As an aside although DEBS financial disclosure is fairly poor, I think the CFO was pretty good so a loss.

I am short as I think more chance of a bad turn of events than good.

See you in the Westminster Arms on Saturday. I will pay as this column had made/saved me a lot of money in the past.

| Link | Share
mrosbiston 19th Apr 21 of 33
2

I read through the Debenhams (LON:DEB) base prospectus for their 5.25% £225m Senior Notes (ok i used CTRL+F), seems to me there are no profitability related covenants - so this probably would see the Bonds as unlikely to breach any of the indebtedness covenants.

Credit Facility Covenants

In addition, the Credit Agreement requires the Company to comply with two financial covenants: (i) a minimum fixed charge cover ratio (calculated as consolidated EBITDAR divided by the sum of consolidated net rent and consolidated net interest payable); and (ii) a maximum leverage ratio (calculated as consolidated total net debt divided by consolidated EBITDA). These financial covenants are tested every quarter on a last twelve months rolling basis.

Maturity

The Senior Credit Facility will cease to be available from one month prior to 29 October 2018, or if the final maturity date is extended, one month prior to 29 October 2019.

Bond Covenants

- cannot issue debt, preferred stock or discharged stock if Fixed Charge coverage ratio is less than 2.5:1
- debt to not exceed 450m in aggregate principal

When the bonds were issued in 2015, the fixed charge cover ratio was around 2.05. As per the 2017 accounts, the ratio is 1.72x

(EBITDAR = 400 , Net Rent + Net Interest = 232.4)

Its not disclosed what the minimum ratio is for the credit facility is, however the slide in EBIT is having the largest impact. Interestingly a CVA would really help, if rents could be reduced to 150m from 220m that would see the ratio back above 2.


| Link | Share
Julian Rowe 19th Apr 22 of 33

Wholeheartedly agree with your take on LON:GATC (shares down over 20% today) on underlying PBT fall from £8.3m in H1 2017, to £6.9m in H1 2018, down 17%. Interim dividend halved - 6p to 3p.

I sold most of my holding before the previous price crash....but have kept small holding to wait for the recovery. A fantastic opportunity for a new dynamic Recruitment specialist CEO to do wonders. Co. and stock currently in limbo.

| Link | Share
VegPatch 19th Apr 23 of 33
2

Great review of Debs Paul
I closed my short, it has been fantastic
The leases are what worry me and also only 20% of sales are online, so trying to migrate sales to the .com channel is one side of the equation but they cant get rid of leases fast enough on the other side.

NXT is my only holding in retail, although Young & Co's Brewery (LON:YNGN) is very much a consumer play as well

I am still short Koovs though. Thats a real can of worms.

many thanks for the detailed input.

| Link | Share
shine66 19th Apr 24 of 33
4

One of Paul's best, in my opinion. Although they are companies I'd never consider investing in the analysis makes for great reading.

| Link | Share
Graham Ford 19th Apr 25 of 33
2

In terms of clothing and fashion retailers worth looking at I think it is not just Next (LON:NXT) that seem to be weathering the headwinds well, JD Sports Fashion (LON:JD.) are also doing pretty well (I hold).

| Link | Share | 1 reply
Paul Scott 20th Apr 26 of 33
1

In reply to post #355308

Hi Graham,

Indeed. I was having a quick look through recent results from JD Sports Fashion (LON:JD.) and was struck by how good the figures were. Got side-tracked on to something else, as usual, but it does indeed seem to be a company that's bucking the trend, so worth a closer look maybe?

Regards, Paul.  (no position)

| Link | Share
shanklin100 20th Apr 27 of 33

Hi Paul

A very minor point but FYI the SPRP FD resigned in March 2018.

Excellent report today as always. They must each take hours of hard work.

Thank you & Best wishes, Martin

| Link | Share
JOHNKING99 20th Apr 28 of 33
23

WOW!!!
THANKFULLY I LIVE IN A BUNGALOW AS AFTER READING THIS REPORT I WOULD BE JUMPING OUT FROM A TOP FLOOR WINDOW!! THERE MUST BE SOME COMPANIES THAT ARE PROFITABLE, PAYING INCREASED DIVIDENDS, HAVE A PROMISING FUTURE SO CAN YOU FEATURE AT LEAST ONE SUCH COMPANY AMONGST ALL THIS DEPRESSING NEWS?
SINCERELY,
JOHN KING

| Link | Share | 4 replies
Howard Marx 20th Apr 29 of 33
4

In reply to post #355503

You have to play the hand youre dealt JOHNK

Hoping for a different hand (or a different game) can lead to delusional behavior

| Link | Share
Paul Scott 21st Apr 30 of 33
15

In reply to post #355503

HI JOHN!

THANKS FOR YOUR COMMENT.

THESE REPORTS ARE DRIVEN BY THE DAY'S RNS - SO WE REPORT INDEPENDENTLY & HONESTLY ON TRADING UPDATES AND RESULTS STATEMENTS WHICH ARE PUBLISHED ON THE DAY. WE DON'T CONTROL WHETHER THOSE FIGURES ARE GOOD OR BAD.

THERE'S LOADS OF BLAND & BIASED COMMENTARY OUT THERE, DESIGNED TO TRICK YOU INTO PAYING TOO MUCH FOR RUBBISH SHARES. YOU WON'T FIND THAT HERE.

REGARDS, PAUL.

| Link | Share
Bonitabeach 21st Apr 31 of 33
1

In reply to post #355503

Hello John,

Paul doesn't make the news he just reports it and analyses it as he sees it.

I find a lot to be positive about in his report: I don't own any shares in:

Debenhams (LON:DEB), Mothercare (LON:MTC), Gattaca (LON:GATC), Xeros Technology (LON:XSG) or Sprue Aegis (LON:SPRP). Isn't that a good start to the day?

Secondly there is some good transferable stuff about FD's resigning, blue sky jam tomorrow technology, and high street names way past their sell by dates: all included in your subscription fee!

Have a nice weekend and happy investing!

Bonitabeach


| Link | Share
tomg23 21st Apr 32 of 33

In reply to post #355503

Been drinking again John?

| Link | Share
Nuke 21st Apr 33 of 33
3

Personally I enjoy the deep dive into the struggling companies more than the good just for the learns Paul passes on as to what to be wary of.

| Link | Share

What's your view on this article? Log In to Comment Now

You can track all @StockoChat comments via Twitter

 Are LON:DEB'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 Stockopedia.com on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »

Follow



Stock Picking Tutorial Centre



Let’s get you setup so you get the most out of our service
Done, Let's add some stocks
Brilliant - You've created a folio! Now let's add some stocks to it.

  • Apple (AAPL)

  • Shell (RDSA)

  • Twitter (TWTR)

  • Volkswagon AG (VOK)

  • McDonalds (MCD)

  • Vodafone (VOD)

  • Barratt Homes (BDEV)

  • Microsoft (MSFT)

  • Tesco (TSCO)
Save and show me my analysis