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

19th Apr '18 by Paul Scott

33 comments 15627 reads

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

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;

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…

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MrContrarian

19th Apr '18

My morning smallcap tweet:

Gattaca (LON:GATC), Trifast (LON:TRI), Idox (LON:IDOX), Hvivo (LON:HVO), Angle (LON:AGL), Science (LON:SAG), Debenhams (LON:DEB)

Gattaca (GATC) H1. Guides FY U/L pretax 15% below its previous expectations due to "changes being implemented in the Technology division in the coming months, alongside the economic challenges"
Trifast (TRI) guides FY U/L pretax slightly ahead of mgmt expectations.
IDOX (IDOX) AGM stmt H1 will be "well below the same period last year, reflecting the impact of the first quarter disruption, changes in revenue recognition as announced at the final results in March, and a seasonal skew to the second half as in most prior years. The completion of our reorganisation, which is expected to deliver annualised savings of c. £7m, and the benefit of the strong sales performance...Board remains confident that the Group will deliver an improved performance in the current year in line with market expectations."
hVIVO (HVO) FY and CEO resigns ('stepping down') immediate effect. Boilerplate thanks. FY looks OK with a quick skim.
Angle (AGL) US cancer center uses Parsortix system. "Unique capabilities of ANGLE's Parsortix system address a key aim of precision medicine to test drugs outside the patient to determine which drugs will benefit the patient. Work highlights another major opportunity for the use of ANGLE's Parsortix system in breast cancer post FDA clearance."
Science Group (SAG) AGM stmt: guides FY adjusted operating profit ahead of market expectations. Panmure Gordon replaces Numis as nomad.
Debenhams (DEB) H1. Guides FY at lower end of market expectations. I'm short.

mercury61

RhythmOne (LON:RTHM) Just throwing this out there in case there are folk interested in commenting. Is this now a turnaround? RhythmOne PLC a Speculative, Small Cap, Style Neutral – Trading Update – Financial Year 2018 this morning.Unaudited. Financial and operating performance for the full year and second half-year is estimated to be at least: Revenue $255.0 up from $149.0
an increase of 71%. Adjusted EBITDA $14.0 up from $1.4 an amazing 900% increase!

dscollard

Agreed, RhythmOne (LON:RTHM) much maligned partially with a big hoo-ha a few years back by the now largely discredited (self-anointed) Sheriff of the Internet, Ben Edeleman. Click harvesting and dodgy metrics were rife on most platforms and the industry has been cleaned up hugely since then
Been in and out of it a few times and have a position currently given its recent massive discount. Singer have a target of 770p which might be optimistic given it closed yesterday around 163p. They have a gushing note out this am on Research Tree. reckon it is good for a 320p target in the interim, still has cash post their recent acquisitions and appear to be beating synergies and headcount reduction. I reckon this is a good trading opportunity .. massively undervalued on most sensible metrics though their adjusted EBITA does cause a holding of noses. Cash is cash though and they still have $26m on the books post their buying spree which is probably done for now. Singer speculates on either buy-backs or a divi, either way its SP positive ( see below)

Not sure about turnaround as the fall from grace was enormous . 20% on the day is nice though

Cash will be key, and cash performance was better than expected with year end cash at $26m vs our $22m, as working capital build unwound. As the benefits of the recent enhancing acquisitions flow through particularly in cash flow terms, we believe the management will focus on buy backs and dividends, and we expect some form of dividend or buy back in H2. As a sensitivity analysis, a $40m buy back at the current price would be more than c25% enhancing. A $60m buy back would be c40% enhancing.

AlanJenkins2

A dividend within the next year would be premature,IMHO.

I'd expect buy-backs, Toscafund will probably influence that.

dealtn

Playing catch up today and noted some interesting comments in the Dignity (LON:DTY) release yesterday. Whilst some no doubt follow this share on its own merits its interest to me lies in the nature of its business. As a funerals business (the largest listed?) it is a useful source for practical data on mortality, as opposed to the theoretical mortality assumptions used by actuaries etc. In essence whilst any single piece of data may not be statistically significant in itself, the timeliness of it is advantageous over the long lagged adjustments made to mortality tables by the pensions industry. All of which makes it useful for those invested in companies with pension schemes with large (relative) liabilities whose size will be unknown and hence only estimated.

Here is what we got from the company yesterday.

"Additionally, the absolute number of deaths in the first seven weeks of 2018 were approximately seven per cent higher than the prior year. The Office of National Statistics expects a decline of 0.2 per cent for the year as a whole.

The trend highlighted in that results announcement has continued throughout Q1 and overall deaths are up approximately eight percent to 181,000 from 167,000 in the comparative period last year."

I doubt the broader market takes much notice of such announcements, from what is after all a relatively small company, but with interest rates on their way upwards (gradually), and possible mortality tables overestimating longevity, and inflation coming out below market expectations at 2.5, not 2.7% this week, that's an alignment of 3 factors that may mean pension liabilities, and hence pension deficits at listed companies, being less than currently priced in by "Mr Market".

Make of it what you will but over the longer term certain companies could be expected to outperform relatively as a result (cetiris paribus).

mojomogoz

Hi dscollard, this is a nice presentation of info. I get this info from other sources but what is your source? Thank you

Effortless Cool

dealtn,

I entirely agree with your summary and have been actively increasing exposure to (good) businesses with large pension deficits accordingly.

A good example is Macfarlane (LON:MACF). This had a pension deficit of £11.8m at year-end 2017, and my forecast is for this to be entirely extinguished by this year-end, largely due to the factors that you mention.

Others to consider: Norcros (LON:NXR), T Clarke (LON:CTO).

Caulkhead

I'm not sure you are quite right there. My understanding is that as interest rates rise, pension fund deficits, other things being equal, will fall and vice versa. If you take a liability and discount it at 10% (say) it will be less than if you discount it at 2% for example.

Caulkhead - That's what he said!

As dealtn sets out, all three main drivers of pension funding levels are now moving in favour of the employer, after years of adverse experience.
- long bond yields are rising (higher discount rates)
- inflation is falling (lower increases to pensions)
- mortality is improving more slowly than expected (shorter pension payment periods).

Assuming these new trends are not reversed, businesses that have been making excess contributions to close pension deficits will soon find themselves awash with cash.

So it was!

mammyoko

Please could you give your opinion on whether Martyn Ratcliffe will be able to eliminate the gap that he thinks exists between the market's perception of the value of Science (LON:SAG) and his? They gave an ahead for Q1, in-line for the year update at today's AGM and initiated a (modest) share buy-back to try and persuade the market to increase the value of the company. The market has yawned at the news and pushed them slightly higher. The house broker, Numis, is guiding that Mr Ratcliffe thinks that the shares are worth 260p and, given that 80% of the share are held by 9 shareholders, it shouldn't be too difficult to push them closer to that objective with a fair trading wind. Very little else to catalyse the share price and it does feel a little like some private game but happy to be along for the ride

ridavies

Thoughts on Angle (LON:AGL) please. I realise that shares like these with some time to go before they get well into market development are likely to be more volatile than most. However, this one seems to rise with the good news, and then falls back again immediately to the low level of the time before. Is this inevitable or is this simply brokers or others trading the shares? Whatever, there seems to be no progress in the SP to reflect the growing 'true value' (my definition, and hope!) for the company. Comments gratefully received.

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

Debenhams (LON:DEB)

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Paul Scott

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