Small Cap Value Report (Thu 23 Nov 2017) - MTC, NET, TCM, WINE, MNZS

Wednesday, Nov 22 2017 by

Good morning, it's Paul here.

I updated yesterday's article in the evening with new sections. Here is the link.

There is very limited time available today, but I'll do what I can.

Mothercare (LON:MTC)

Share price: 70p (down 16.2% today)
No. shares: 170.9m
Market cap: £119.6m

Half year results - for the 28 weeks to 7 Oct 2017.

The company calls itself;

the leading global retailer for parents and young children

I don't like the PR spin at the start of the announcement, which trumpets;

Continued transformation of the brand, converting into positive UK like-for-likes set against a challenging consumer backdrop

That's just meaningless, as it tries to sound positive, when the figures are actually poor. I'd rather not have a heading, if it's just an attempt to gloss over poor results. People aren't fooled anyway, as you can see from the 16% drop in share price, so what's the point?

UK LFL sales are indeed positive, at +2.5%, but that doesn't seem to have been enough to absorb cost pressures. The adjusted UK loss was -£9.6m, a deterioration from -£8.8m in H1 of last year.

International (the only decent part of the business, in terms of profitability), saw a sharp fall in LFL sales, of -7.7% in local currency. That's not good at all. Adjusted profit fell from £20.8m in H1 last year, to £14.9m in H1 this year.

Overall, the group couldn't even reach breakeven on an adjusted (i.e. favourable method of calculation) basis, with an adjusted loss of -£0.7m. There were £16.1m of adjustments (i.e. ignored costs) in reaching that figure. The list of things they have classified as adjustments look very aggressive to me - many are just normal costs of running a business, in my opinion (e.g. restructuring warehouses & retail sites, refinancing costs, etc). So in reality, the business is loss-making.

Recent trading - the UK market is softening, which to be fair,  lots of retailers are saying at the moment, and this is also confirmed by poor recent economic statistics;

"Towards the end of the reporting period, and in subsequent weeks, we have seen a softening in the UK market with lower footfall and spend which is consistent with recent industry reports. Not-withstanding this uncertain consumer backdrop, the Mothercare brand, whilst not immune, is in…

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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 »

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Netcall PLC is a United Kingdom-based company, which designs, develops and markets communication, workforce management and business process management (BPM) software and services to the healthcare, public and private sectors. The Company provides corporate solutions, health solutions and public solutions. The Company's corporate solutions include multichannel contact center, workforce optimization, customer self-service and proactive outbound applications. The Company's health solutions include patient self-service, appointment management cycle, and resource management and work optimization. The Company's public solutions include case, record and document management, and customer service. The Company offers platforms, such as corporate liberty platform, public liberty platform and health liberty platform. The Company also provides deployment services, including on premise, cloud and hybrid; professional services, including training, and support services, including SolutionCare. more »

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Telit Communications PLC (Telit) is a United Kingdom-based enabler of machine-to-machine (M2M) communications providing cellular, short range and positioning modules via its brand Telit Wireless Solutions. The Company develops and markets cellular, global navigation satellite system (GNSS), short-to-long range wireless modules plus mobile connectivity services and application enablement platform to onboard edge devices to the Internet of Things (IoT). The Company is organized into three geographical segments: EMEA, APAC and Americas. Through its business unit m2mAIR, Telit provides platform as a service (PaaS), including M2M managed and value added services, application enablement and connectivity, including mobile network side and cloud backend services. Its modules are integrated in a range of applications, including asset tracking, remote industrial monitoring, automated utility meter reading, insurance telematics, consumer electronics and mobile health devices. more »

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

35 Comments on this Article show/hide all

hollingrove 23rd Nov '17 16 of 35

Hi Paul,
Many thanks.

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JamesrWilson1989 23rd Nov '17 17 of 35

In reply to post #244453

"The 29.0 pence per share distribution follows the gaming firm's sale of its Football Pools business for GBP83.0 million in June."

It's ex-dividend day for this large cashoff to Investors.

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Camtab 23rd Nov '17 18 of 35

In reply to post #244478

Thanks James totally missed that.

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andrea34l 23rd Nov '17 19 of 35

In reply to post #244388

I made about 20% on SMDS a year or two ago... and they have risen a lot since then (drat). Personally I feel the price is well up with events - strip out the effects of currency-assistance and turnover, profit, and eps are all up only 6-7%; ROACE and return on sales are also down.

You may indeed be correct that the price will get an uplift from inclusion in the FTSE, and they also have a good record overall, but I prefer to buy on fundamentals that I am happy with, including good organic growth that is not excessively currency-flattered.

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HHR 23rd Nov '17 20 of 35

Hello Dangersimpson, BlueFrew, Paul,

I bought TCM in April 16 and I still hold now.

I hear what you say about the accounting red flags and trustworthyness of the directors but I think there is another side to tcm that doesn't get mentioned much on Stockopedia.

I would make the following points :-
1) Most people agree that iot will be a vast market over the next 20 years

2) Most people acknowledge that TCM is a world leader in IOT. They have partnered with SAP, Cisco and countless others much larger than them. When these partnerships were announced it wasn't just tcm that trumpetted them, these massive global companies put up spokesmen to endorse tcm's products and technology. tcm also has world leading clients e.g. John Deere, Tesla

3) Contrary to what has been said here before, this world leading business has been skillfully assembled over a number of years with very few diluting share issues. Debt has also been at manageable levels until this year. Although tcm breached covenants the banks renegotiated willingly and tcm met it's covenants at 30th September. Frankly, I don't really care what tcm's ebitda or profit is, as long as revenue grows and debt stays stable

4) If I look around me it is apparent to me that iot is slow to take off so it's not surprising that tcms growth has glitched (with requisite increase in inventory, working capital etc). But few doubt that long term iot will be a massive market. According to tcm it's iot software platform is fairly unique and world leading. This should strengthen margins in years to come and could conceivably develop a quasi-monopoly position

5) Regarding the trustworthiness of the directors I do think that is a serious problem and a reason to sell. However I also think some of what has been written is slightly sanctimonious and irrelevant. On the face of it Oozi Cats's issues seem trivial to me and nothing whatsoever to do with tcm (don't get me wrong, I would never do the things of which he is accused but I know people that have done similar things and I conjecture most of us who were around in the early 90s property boom do). Yosi Fait's share sale is concerning, however Richard Kilsby seems to have a lot of experience and has unequivocally backed him today. Tcm has had ample opportunity to dump Yosi Fait at any point in the last 3 months but it hasn't, so I think it's unlikely that any further skeletons will emerge in the accounts or Fait's probity. Both Fait and Cats seem talented, credible and trustworthy in the presentations I have listened to. There are plenty of companies whose CEOs I wouldn't trust but that does not make them bad investments!

6) It will be interesting to see if the bid rumours come to anything. Part of me wants that to happen because it will vindicate my analysis above, but part of me doesn't because if tcm can regain it's poise, the long term opportunity should be huge. I think the possibility of a bid is one reason the SP won't stay down

As Paul has said it really is a fascinating and polarising share but that's how I see it - weak hold. Once this has all blown over (hopefully by the finals in March?), we are going to be left with a fast growing world leading business.

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bwakem 23rd Nov '17 21 of 35

I had my Telit Communications (LON:TCM) short called-in last week unfortunately. I assume the owner wanted to sell them.

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bobo 23rd Nov '17 22 of 35

Mothercare should be avoided, no moat, no real focus on maximising customer loyalty from its core customer base.
How did it miss the opportunity for developing a mumsnet?

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bobo 23rd Nov '17 23 of 35

Majestic; good to see that inventory has gone up in value and intangibles (while large) have gone down roughly 10%.
The strategic decision to invest in the USA should make people nervous. How many British CEOs have left their sensitive parts hanging on American fences?

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dscollard 23rd Nov '17 24 of 35

Was previously long Telit Communications (LON:TCM) but sold before the major tumble. While the technology is compelling, this company is far too accident prone to be credible irrespective of technical capability.  The IoT space is enormous and many faceted, like everything in the hype cycle it  has a maturity roadmap, Garter still positions much of it  at the peak of inflated expectations.  When I think we talked  about the internet of things back  in 2001 as part  of the  RFID "revolution"  then I tend to agree on maturity timecycles.

I too was surprised by the relatively small drop today : Telit Communications (LON:TCM) is ninth  most shorted share in the UK atm (over 10% net short)  and has been Top 10 for a while...not an enviable position.  Looks like net shorts are increasing not decreasing so the most probable direction would seem downward for now.  The price action is screaming sell too .  100p seems more likely than 200p  in the next while unless some major good news appears 


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PeterW 23rd Nov '17 25 of 35

Hi Paul,
You highly recommended a book on investment on your blog in the last three months or so. Please could you remind me what the title was. I'm sorry I've looked but can't find it, it might have been in the comment section.

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fwyburd 23rd Nov '17 26 of 35

In reply to post #244538

Peter, the book is by Mark Minervini and is called "Trade like a stock market wizard".

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PeterW 23rd Nov '17 27 of 35

In reply to post #244553

Thanks Francis

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herbie47 23rd Nov '17 28 of 35

In reply to post #244558

He has a new book out now as well called "Think & Trade Like a Champion: The Secrets, Rules & Blunt Truths of a Stock Market Wizard"

Difficult to buy in UK, seems to be only available on kindle.

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HHR 23rd Nov '17 29 of 35

In reply to post #244533

I know what you mean about the Gartner hype cycle and I agree that IOT is in the hype cycle.

But Gartner also say that when an idea comes out of the hype cycle it can either fade away to nothing or re-gather momentum and at least partially live up to the original hype. For example online shopping is still gaining momentum years after the hype cycle and years after it became obvious that it would grow to a global industry.

At 150p tcm is on a PSR of less than 1 so if there really are bidders out there it shouldn't go much lower...... famous last words.......

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tomps3 23rd Nov '17 30 of 35

Just posted a Creightons (LON:CRL) overview, with Pippa Clark Pippa Clark, Global Marketing Director and Paul Foster, Group Finance & Commercial Director talking about H1, and what they're up to.

c. 7 mins

H1 highlights, Pippa Clark - 00:21
Financial performance, Paul Foster – 01:13
Managing growth, Paul Foster – 02:33
Future development, Pippa Clark – 04:10
Export growth – 05:38

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Richard Goodwin 23rd Nov '17 31 of 35

In reply to post #244388

I'm no expert but I think most trackers track broader indices than the ftse 100 so the bounce from that source may not be so great.

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ricky65 23rd Nov '17 32 of 35

In reply to post #244563

"Think & Trade Like a Champion: The Secrets, Rules & Blunt Truths of a Stock Market Wizard" is now available in the UK on a site beginning with A and ending with Z.

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herbie47 23rd Nov '17 33 of 35

In reply to post #244638

Thanks but as I said only as a kindle version. I don't have kindle even if I did I would prefer a book. Suppose I will have to order from the US, not sure about postage.Why this book is not available outside the US, several others have raise this on twitter without a response.

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biloseli 23rd Nov '17 34 of 35

No opinion on Netcall (LON:NET) but MatsSoft, the company they're buying, has a history of Companies House filings that would worry me if I were buying them. Start here: https://beta.companieshouse.go...

Multiple changes of accounting period. Having to re-file 5 years of Annual Returns - presumably due to errors. On Aug 4th 2017 notifying they'd allotted shares 18 years earlier. In 2013 being threatened with compulsory striking off, presumably for failing to file an annual return. It does not look like it has been run well. Most of the directors changed in August. Hopefully they will sort MatsSoft out.

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tomg23 23rd Nov '17 35 of 35

In reply to post #244643

Hi Herbie

I ordered from the US only took about 5 days and cost about £28 inc postage. I sold hardcover on ebay and purchased kindle version when it was released as i prefer e books. Highly recommended though

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 Are LON:MTC'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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