Small Cap Value Report (Thu 23 Mar 2017) - NXT, RBG, SPE, TRCS, SIS, WYG, SFE

Thursday, Mar 23 2017 by

Good morning!

I did another big session of writing last night. So yesterday's report was greatly expanded, and now covers results/TUs from: Xaar, James Cropper, Eckoh, SoftCat, Quixant, Cello, CloudBuy, and Van Elle. Please click here to see the full report.

Today I intend reporting on the following results & trading updates:

Sopheon, Tracsis, Science In Sport, Safestyle, The Mission Marketing.

Firstly though, a quick mention of results out from Next (LON:NXT) . As retailing is my sector specialism, I always read Next's figures with great interest, as there's so much information that has wider significance. A couple of things struck me.

As always, its results just reinforced what a fantastic business Next really is. It generates such a high operating profit margin, that most retailers can only dream of. Also, even in a bad year, it throws off huge amounts of cashflow.

Most retailers have a tail of loss-making shops. Next doesn't. 97% of its store turnover is generating at least a 10% profit margin! 74% of its store turnover is generating over 20% profit margin. Truly remarkable figures, this is such a great business.

Selling price inflation - seems to be around 4-5%, driven mainly by the depreciation of sterling. That doesn't seem too bad to me.

Living wage & other cost pressures - look like they're going to be largely absorbed through efficiency & cost-cutting elsewhere. That includes reducing staff incentives - so clawing back by reducing bonuses, etc, presumably.

Guidance on EPS - quite a wide range. The low end is -12.4% drop in EPS this year versus last year. The upper end is a rise of 0.5%. So a fairly gloomy outlook, although isn't it always with Next? They seem to like starting the year with depressing guidance, then usually perform better.

Rents - this is the most interesting bit, a section called "retail space expansion". Next is still opening new stores, and crucially is now being offered excellent deals by landlords. A table is provided showing that rent/sales in existing stores is 6.6% (that is extremely low!). However, on new sites opening in 2017/18, rent/sales drops to only 5%.

The broader point is that any retailers or leisure operators that are currently expanding, are obtaining superb deals for new sites. This counteracts other problems, such as living wage, apprenticeship levy, business rates rises, etc.

The same factor is happening with

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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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Revolution Bars Group plc is a United Kingdom-based operator of bars. The Company has a trading portfolio of approximately 60 bars located predominantly in town or city high streets, which operate under the Revolution and Revolucion de Cuba brands. The Company's bars focus on a drinks and food-led offering, and typically trade from late morning, during the day and into late evening. Revolucion de Cuba bars are characterized by their 1940s Cuban-inspired style, with dark woods, traditional bar counters, antique tiles, vintage furniture, Havana-style ceiling fans, and original Cuban artwork and photographs. Its bars are located in various places, such as Cambridge, Ipswich and Norwich in South East; Bath, Plymouth and Southampton in South West; Birmingham, Derby, Leicester, Loughborough and Milton Keynes in Midlands; Cardiff and Swansea in Wales; Blackpool, Chester and Huddersfield in North West; Sheffield, Sunderland and York in North East, and Edinburgh and Glasgow in Scotland. more »

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Sopheon plc is a United Kingdom-based company, which is engaged in the provision of software and services in the product lifecycle management (PLM) market. The Company operates in two segments: North America and Europe. Its Accolade solution provides integrated support for innovation planning, roadmapping, idea and concept development, process, project, portfolio, resource and in-market management. Its offerings include alignment of long-term innovation plans with market requirements, industry regulations, and supply chain capabilities; generation and development of ideas and concepts to fill gaps relevant to achieving strategic initiatives; process and project management that tracks and enables decision making, focused on evaluating projects associated with innovation initiatives, and data management, analytics and integrity tools. Its subsidiaries include Sopheon Corporation, Alignent Software, Inc., Sopheon NV, Sopheon UK Ltd and Sopheon GmbH. more »

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

63 Comments on this Article show/hide all

jg8512 24th Mar '17 44 of 63

In reply to post #177468

You have invested £800k and, after tax, you have earned £80k per annum for 10 years. But you have not increased your wealth (value) - you've got back (£800k, ie £80k * 10 yrs) what you invested (£800k). So, as you correctly conclude, you haven't really made any money at all.!

The results of your analysis would be much different if:
1. you could sell your investment (the £800k fit-out) at the end of the lease, rather than it being worth nothing;
2. the lease could be renewed upon expiry - and you could still get some use out of your original investment in fit-out without having to make another investment in fit-out. Then, you'd get to have more annual profits with no further investment;
3. the annual profit of your business was higher. Eg, a 20% return p.a., rather than 10% p.a..

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Dennis Ayling 24th Mar '17 45 of 63


I'd just like to say how much I have enjoyed reading the in-depth analysis on RBG accounting, so thank you to all contributors. I'd like to add something rather than just lurking here but this level of accounting dissection is sooo far over my head.
Although learning all the time, for me this level of analysis remains a minefield & I am grateful for those with more experience who are prepared to share their knowledge & views.


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davidjhill 24th Mar '17 46 of 63

In reply to post #177468


There is no capital tied up in the lease, which is kind of the point. The only capital tied up is a sunk cost of fitting out a brand new site. In this case it is around £1.3m.

Then the only factors to worry about imo are

1) Rent : you have a lease that gives you both an obligation and a right to occupy the premises for a set window of time. That is a cost per annum and comes out of the operating cashflow of the bar.

2) Length of time before bar needs re-fitting : unless you plan on shutting a bar once it is dilapidated then you should assume a re-fit cost, annualise it and accrue it

3) Operating costs : staff, ingredients etc

4) Revenue : amount a bar takes each year

For me you take revenue - operating costs - accrual for re-fit - rent - tax and this gives you your annualised profit. Then you work out how much you make over the life of the lease and compare that to the capital cost of opening the store.

If this amount throws off more than £1.3m of free cash then they can afford to open 1 new bar per annum without going into debt. At £2.6m it is 2 bars and so on.

After a few years they get to an optimal size and no longer invest those £1.3m amounts on new openings. Suddenly you have bucketfuls of cash to give back to investors. (note dilapidation is irrelevant as you have already accrued each year for the re-fit costs of existing bars in each store).

People get hung up on the "liability" aspect of the lease obligation : i.e. if I have to pay rent for 15 years at £80k p/a then I have a £1.2m liability. If my bar makes no profit I still have this liability thus it is part of the capital. Whilst this is nominally true most leases can be sub-let and assuming RBG opens bars in high footfall areas they could get out of a lease if a bar underperforms.

So I would worry about this if rents were high and my margins were low, especially in the event of an economic downturn. BUT (and I think this is one of the major points that makes Paul bullish) when rents are low and margins are high you have a lot of room for error.

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purpleski 24th Mar '17 47 of 63

In reply to post #177480

Thanks for the input. Please my reply to @davidjhil 46 below.


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Trident 24th Mar '17 48 of 63


Looked at the Tracsis accounts briefly for HY 17 and could only see 5.06p basic eps and 4.9p diluted eps, rather than the figures your refer to, which compatavely shows a circa 21% growth on last year (4.19p & 4.04p). Have I missed something?

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Ramridge 24th Mar '17 49 of 63

In reply to post #177504

Hi Trident - re. Tracsis (LON:TRCS)
Yes, you need to go deep into the report for this, Section 5. Earnings per Share.
The very last line of this section gives you the adjusted & diluted data I referred to.

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Penguin8 24th Mar '17 50 of 63

Hi Paul,

Two questions for John McArthur - Tracsis

1) As far back as second half 2014 FY there was mention of "seeding the Tracsis footprint" in North America. One pilot has been successfully delivered and there was some talk of other pilots being planned. Yet now there seems to be less emphasis on North America....has the technology not been as successful there as planned and what hope for the longer term as the earlier impression was that this was a potentially major new growth area?

2) Is the strategy now based more around profitable acquisitions (eg: Ontrac) rather than purely "organic growth"?



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TraderTim 24th Mar '17 51 of 63

I like Science in Sport (LON:SIS), but true it does require a bit a leap of faith and is a little speculative, but potentially a promising growth story lingering behind the scenes. .

A lot of their revenue comes from online sales, which I believe to be a good oman given the state of high street retailers and the general consumer trend. Also, they've focused a lot on delivering more sales through their direct online site in the last 12-18 months, rather than being so dependant on retailers. Decent international growth numbers as the business begins to expand.

The products are very well received from my experience. I use them for running. They are well reviewed on Amazon and many of their products feature in the best sellers in the nutritional gels category. The products have good exposure as well, SIS have partnerships with Team Sky, USA Cycling and Liverpool FC as well as numerous other well-known ambassadors.

Blog: Trader Tim
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rhomboid1 24th Mar '17 52 of 63

In reply to post #177495

Good post , where is the accrual for refits inRevolution Bars (LON:RBG) accounts? As far as I can see they have one undefined line for accruals, totalling £889k when they had 62 sites trading so £14k per site if that is the sole purpose of the accrual line. Anybody know? My concern is when they reach the 5 yr anniversary per site they have a double whammy, rent goes up and a refit starts to look imminent. To me those 2 issues define whether this is an investable proposition or not

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ed_miller 24th Mar '17 53 of 63

Question for Tracsis (LON:TRCS) interview:

Qu: The Stockopedia report shows a worrying trend in both operating profit margin and ROCE over the last few years. What can be done to restore the previous more attractive metrics for profitability and returns?


Ed Miller

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jg8512 24th Mar '17 54 of 63

In reply to post #177624

Hi Rhomboid
You're looking at the non-current accrual of £889k, there's also the current accrual of £5160k (note 16). The timing of those (ie, £5160k in next 12 months ("current") and £889k after 12 months (non-current"), suggests they are for something else - I suspect costs of the bar roll-out fit-out. If it were for future bar re-fits - you'd expect to see a lot more money in the non-current category.

My understanding is that an accountant wouldn't accrue for a future re-fit of a bar until the company had committed to do the re-fit. Instead, the accountants take the cost of each historic fit-out, and spread that over time (via depreciation) for the expected life of the fit-out. See note 12.

I think it is for each analyst to ask whether the current profits would justify making further re-fit investment in each bar, and whether that will generate sufficient incremental revenue and profit to justify re-fitting the bar. If it doesn't you can either keep and trade on in an increasingly aged and weary look premise, or close and try to sub-lease the premises to someone else.

On that thought, I find it a little disconcerting that the time of the IPO, 25 bars produced 86% of RBG's EBITDA. I'm not clear whether that is because some of the remainder are long-standing poor performers (a big problem if you have a 25 yr lease!) or they are newer bars that are still growing their clientele and profitability. The weak-ish LFLs and weak margin growth Oakley highlights in recent years are a pause for thought.


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rhomboid1 24th Mar '17 55 of 63

In reply to post #177675

Thanks for the explanation, I missed that in my haste.

that makes sense, so they still have the issue of paying for refit out of cashflow as and when they're required ..which won't be an issue if they're trading well and generating substantial FCF

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bestace 24th Mar '17 56 of 63

In reply to post #177624

I don't know for sure as there is absolutely zero disclosure in the accounts (as far as I can see) to explain what those long term accruals are, but I would guess they might relate to dilapidation provisions for works required to make good a property at the end of the lease before it is handed back to the landlord. These have to be accrued because they are a contractual commitment in the lease.

I think jg8512 has it right: for mid-lease refurbishments after say 5 years, those are done at the discretion of the company. I don't think they would be allowed to accrue these costs because there is no commitment to incur them, contractual or otherwise.

If that is right, then after year 5 yes there will be a bill to refurbish each site - I think the Project Evolution as described in the IPO document points to the quantum of what those bills might be, i.e. far less than the £1.3m (or whatever) initial fit out cost; those mid-lease refurbishment costs will then be depreciated over the period until the next refurbishment.

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bestace 24th Mar '17 57 of 63

A couple more points on Phil Oakley's Revolution Bars (LON:RBG) article...

Firstly, Phil makes the point that operational gearing effects are not apparent by pointing out that the FY17 interims showed adjusted EPS rising by only 7.1% when adjusted EBITDA rose by 13.6% and sales rose by 12.7%.

This is indeed correct, but it may point to a particular quirk with the figures for this period rather than an inherent lack of operational gearing in the business model.

Wind back 12 months and the company included a slide in the presentation accompanying last year's interims (slide 8), which highlighted the operational gearing effect. This showed that when comparing 2016 to 2015, site EBITDA increased by 2%, total EBITDA increased by 8% and PBT increased by 14%. So increasing percentages as you go from top line to bottom line, which is the definition of an operational gearing effect.

Now it's possible that last year's interims was also a quirk and the company was simply taking advantage of that fact to highlight a metric which showed the business in a good light. One could ask why did they not replicate that slide in this year's interims presentation? If one was being uncharitable one might think the reason is that the metric wasn't in their favour this time round, so the slide was quietly shelved.

They did however mention operational gearing in the narrative accompanying the interims for both this year and last year: "the Board believes that ... we are well-placed to continue to benefit from operational gearing as we grow the estate."

So which is it? Do we have operational gearing or not?

It's only been two years since IPO so we don't have a huge amount of data, but focusing on an individual 6-month period probably isn't going to provide an answer. In the chart below I've put together some numbers showing the percentage changes in FY15 compared to FY14 and FY16 compared to FY15:


So working from left to right in the chart is analogous to working from the top to the bottom of the profit and loss account (or statement of comprehensive income, if you prefer the modern lingo). In both years, it looks to me (with the proviso that this is only 2 years of data) like there is an operational gearing effect visible, i.e. smaller increases in the top line (revenue) lead to disproportionately larger increases as you work towards the bottom line (profit).

Secondly, on the issue of treating opening costs as an adjusting item. I get Phil's point that this is "a normal cost of business when you are opening new pubs", but the roll out won't last forever, and while it is ongoing the opening costs are creating a distorting effect on profits. As the company describes it, there is a 'lag' effect, i.e. a short term reduction in profit. If we are interested in 'like for like' metrics based on the top line (sales), should we not also be interested in 'like for like' on the bottom line?

The opening costs include rent, rates and relevant staff costs for the period between acquiring a site and the site opening. As the table below shows (albeit on limited data), there is some variability in these costs which will be due to the vagaries of each site. Due to the variability and the one-off impact in the year of opening, it seems reasonable to me to exclude them from underlying profits.

£'000Opening costsNumber of sites openingOpening costs per site
H1 2016298399
H2 20163822191
H1 20178434211
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jg8512 25th Mar '17 58 of 63

In reply to post #177693

Hi Bestace

Good post. You ask if RBG has operating leverage? I offer a graph using 4 years of financials, picking up the 2013-2014 years from the prospectus. I've left out 2012 - it was a very good year - a bit hard to quite understand it (it had 53 weeks, but must be other factors too), but it took until 2016 for RBG to get back to 2012 levels. I add back the company's exceptional costs to EBIT, to give adjusted EBIT.

I've indexed everything to 2012, so you can see the percentage change in each category. Gross margin and revenues show very similar growth to each other.  Most operating cost lines (staff, D&A, other operating costs) grow at the same rate or faster than revenues.  The exception is rent costs - these decline despite a growing estate.  Presumably, this is the effect of rent inducements on new leases since most existing leases do not allow rents to fall at the periodic rent reviews.  

Yes, EBIT is growing faster than revenue, but a big factor in that is stable/declining rent costs.  As the company notes changes in market rents are outside management's control, so this does not seem to be an enduring or high quality source of operating leverage.

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Trident 25th Mar '17 59 of 63


The difference appears to be-for reasons I cannot understand- that the analysis in section is arrived at on a different basis than the eps shown in the profit and loss account of basic eps. Section 5 seems to show a greater number of add back items to operating profit for the prior year(share based charges, amortisation and exceptional charges), and the dividor of the weighted shares is greater by circa 1m for 2017.

As a supposed illustration of basic and diluted eps in the profit and loss account, it makes no sense at all, as it does not reconcile back to the figures used in the p&l. In the p&l the eps is basically the operating profit divided by the weighted shares.
Section 5 probably satisfies some accounting/auditing nostrum but it just leaves non accounting bods bemused.

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Trident 25th Mar '17 60 of 63


I would ask Tracsis why Revenues in FY 2016 increased by 28% but admin costs increased by 36%+. (& gross the margin % fell).

This does not signal operational efficiency. Are the recent costs savings referred to in the interims related to this, disparity, and what areas are being trimmed?

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Ramridge 25th Mar '17 61 of 63

In reply to post #177750

Trident -
I think you are over complicating things, it is much simpler.
- Diluted eps in the p/l is 4.90p
- Adj & dil eps in Section 5 is 9.52p
- Difference is 4.62p which is due to adjustments
- The adjustments are shown in Section 5 to be £1321K to profits; . which works out as 1321K divided by 28591K shares = 4.62p per share. So it agrees with the eps data shown.

I am not a holder so good luck with your further analysis.

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bestace 26th Mar '17 62 of 63

In reply to post #177696

Not sure if it's just me, but your image doesn't appear to be showing.

Yes lease incentives will be depressing the rent costs in the short to medium term, but there may also be another reason, which I think is the one Paul was alluding to above, namely that a large scale rotation is happening right now on the high street away from traditional retailers and towards leisure and hospitality outlets.

Next perhaps doesn't quite fit that narrative as they are a traditional retailer, but for anyone looking to expand their high street presence right now, the sectoral rotation means low rents and not just due to lease incentives. That means the rent to sales ratios could stay lower for longer for expanding companies.

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riosurfer 27th Oct '17 63 of 63

In reply to post #177621

I like SIS as well. Top 6 products in "Recovery and Hydration" drinks on Amazon. They sponsored The Cycling Podcast this year to drive brand penetration around the world so they are certianly investing in the brand. Describe themselves as "leaders in endurance sports nutrition". Mark Cavendish came on board as a shareholder a few years ago.

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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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