Small Cap Value Report (Thu 23 Sept 2021) - BEG, FNX, XLM, DFS, FCCN, VLG, EVE

23rd Sep '21 by Paul Scott

73 comments 10655 reads

Good morning, it's Paul & Roland here today. Today's report is now finished.

Agenda -

Paul's Section:

Begbies Traynor (LON:BEG) (I hold) - AGM trading update says the company is confident about delivering market expectations for FY 04/2022. Acquisitions are going well. This share looks good value to me, and should benefit from the withdrawal of Govt support measures. Hence I'll be buying any dips in the coming months, to add to my position.

Dfs Furniture (LON:DFS) - sparkling results for FY 06/2021. The balance sheet is still weak, but has improved a lot. Clear guidance given for the current year. Obviously supply chain problems are an issue for everyone, so a range of profit guidance is provided. Given the significant improvements, I'm happy to turn positive on this share.

French Connection (LON:FCCN) (I hold) - announces (without their consent) that a consortium of investors is mooting a cash bid at 30p/share. Let's hope this smokes out a more generous bid.

Venture Life (LON:VLG) - a poor market reaction to interim results, with the shares down 14%. As mentioned in my last review of this company, it's difficult to value now, because 2 material acquisitions are not yet bedded in. Let's see what the numbers look like in future. For now, I'll continue to steer clear.

Eve Sleep (LON:EVE) (I hold) - a quick look at its interim results. Outlook comments give me some hope. This is a special situation, value share, not a regular type of investment, so won't interest most readers.

Roland's Section:

Fonix Mobile (LON:FNX) - a strong set of figures from this mobile payments specialist, but I have some concerns about long-term growth and the risk that its technology could become redundant.

Xlmedia (LON:XLM) - the renewed management team is doing all the right things to turnaround this digital marketing business, in my view. But I remain concerned about the underlying durability and quality of its earnings.

Explanatory notes -

A quick reminder that we don’t recommend any stocks. We aim to cover trading updates & results of the day and offer our opinions on them as possible candidates for further research if they interest you. Our opinions will sometimes turn out to be right, and sometimes wrong, because it's anybody's guess…

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Paul Scott

23rd Sep '21

Hi mojo,

I chatted to new management at Scs (LON:SCS) (I hold) quite recently, and think they don't really know what to do with all the surplus capital on the balance sheet. As you say, capital allocation is the issue here. I got the impression the new CEO wants to focus on running the business, not doing anything too ambitious (e.g. acquisitions), but who knows what the future holds?

It looks such a blindingly obvious candidate for a private equity bid - when you compare the balance sheet structure with DFS, the opportunity is so stark. The whole cash pile could be removed, plus some debt introduced. That's what DFS did, and it runs fine with a massive negative NTAV balance.

Maybe SCS is too small for private equity?

It needs someone like Geoff Wilding of Victoria (LON:VCP) to come in, and shake things up, and use SCS as a starting point for good acquisitions. It's too sleepy as things stand.

Or failing that, a massive special dividend will do.

Regards, Paul.

nanotrader

Just a bit more on Dfs Furniture (LON:DFS) working capital model - I'm not sure the pay upfront is 100% of the value as with my "posh" sofa's from Sofiology, I paid £300 upfront and the £1.7k last week - they were delivered yesterday after I kept pushing out the delivery (I didn't want to buy new sofas till the kids were at least 5yrs old ,but the wife got her way!)

KevinS1

They came out with a profit warning in July in a TU. I think todays HY (formal update rather than a TU) numbers was just conforming what they said in July which in itself resulted in a major drop in SP.

I would've hoped this hadn't resulted in their 14% drop, but it has so now time to decide to get out on the assumption that they normally come in three's, or hold on believing the two new acquisitions will deliver.

Paul - I'd stay there if I were you. It turned quite wintry/autumnal today and I know where I'd rather be.

Enjoy, it looks fab.

Hi davidallen77,

Paul late news £mcls director share award based award nice freebees?

Thanks. I ditched all my supermarket shares (TSCO, SBRY, MCLS) when the National Insurance rise was announced by the Govt. Just seemed to me it was the last straw in terms of headwinds for the sector, on top of supply chain problems, wage inflation, HGV driver shortage, very low net margins, etc.

Thought this might amuse you! I was so desperate to get online, this was the only way I could find power, wifi, and a workstation, on arrival at our Madeira villa!

eighthwonder

Agree. I am a holder and went to visit my local Scs (LON:SCS) for some market research. I think the share price may be held back because it simply dosent have as good a product as the likes of Dfs Furniture (LON:DFS), Sofology. The other shops in the same retail park were much busier and the Scs (LON:SCS) store itself was bland and uninviting.

I am however interested in the financials which are appealing from a value perspective but think their product offering is not what would make this a great business. Maybe that’s the opportunity!

OldSchool05

That’s hilarious. Well done Paul

Best possible use of an ironing board, a technology which has now clearly been consigned to history with everyone working from home !

mark1308

24th Sep '21

Still very pleasant in London - walked the dog at 8:30 pm in tee and shorts and I was not cold / chilly at all. Friday meant to be 23 which is great for this time in Sept.

Where is the tools tab ? not showing on my laptop version of stocko !

or should that be AHA !

mikebianchi

I get to it from a company page ie one you want to compare to another, you will see tools drop it down click compare enter the company you can look at up to 5-6. But I have no idea what the weighting is to arrive at the winner, it plainly says "winner" you would think its aimed at stock selection, I just don't know hence question. Perhaps one for Stocko back room team

gus 1065

Re. the background to the Compare Function, this explanation from the Learn Section on Stocko might be helpful:-

https://www.stockopedia.com/le....

Gus.

Rusty2

I just tried this. I put in 3 with SR of 99, Royal Mail (LON:RMG), Gattaca (LON:GATC) and Firstgroup (LON:FGP), Royal Mail (LON:RMG) was the winner. However when I swapped Firstgroup (LON:FGP) with Marshall Motor Holdings (LON:MMH), Gattaca (LON:GATC) became the winner.

I expected Marshall Motor Holdings (LON:MMH) to be the winner as it had SR of 100.

How can Gattaca (LON:GATC) be the winner now? Nd why are lower ranked stocks higher than higher ranked ones?

still like mid summer here in Suffolk, where are you living?

timarr

Nd why are lower ranked stocks higher than higher ranked ones?

If it was as easy as identifying the company with the highest Stockrank it would hardly require a comparison tool ...

As far as I can see the "winner" is the one that "wins" most comparison categories - e.g. Stockrank only counts as one category, Market Cap is another, etc.

For instance if I compare Marshall Motor Holdings (LON:MMH) with Somero Enterprises Inc (LON:SOM) then MMH wins as it has most category wins. If I add Gattaca (LON:GATC) to make a three way comparison then SOM wins because GATC takes away more category wins from MMH than from SOM.

So basically the "winner" thing is useless as a stock selection tool.

timarr

Without being able to delve into the mechanics of the comparator it’s hard to be sure. I suspect it’s a function of the relative (as opposed to absolute) merits of each company when compared to your other selections as opposed to its score when ranked against the entire universe of stocks.

It’s a bit like trying to pick your favourite fruit. Say I offer you an apple, an orange, a plum and a mango (in a world of say 1,000 different fruits). Each fruit is scored against all the other fruits in the universe and given a relative ranking say based on sweetness (Q), cost (V), and popularity (M). These are then totted up to give an overall fruit score relative to all other fruits (analogous to a company Stock Rank). For sake of argument, let’s say the plum gets the top fruit score against all other fruits. If you then change the universe of fruits from 1,000 fruits to just 3, (say an apple, a plum and a mango) the relative scores of just these three fruits will change and you could well end up with a different winner. If you keep two of the three and add a different fruit, the relative rankings may well change again and the addition of a new fruit/loss of the original fruit could well affect the relative ranking of the two original fruits. (For example if you go from comparing an apple, a plum and a mango to comparing an apple a plum and an orange the substitution of a high sweet/Q scoring mango with a sour/lower Q orange might jumble the relative rankings of the second selection such that the apple now comes out on top).

I suspect the peer group comparison is especially sensitive if you are trying to compare companies with similar ranking scores (in your example it looks you’re looking at companies all with a SR of 99/100).

Then again, there may just be a bug in the algorithm ……

Thanks Tim, that explains it.

So as you say not that useful for selecting stocks.

mojomogoz

Hi Paul, if Scs (LON:SCS) return excess cash through buybacks then I'll be sad I didn't hold as I think the sustained upside to high dividend and earning growth through buyback and modest growth would be pretty considerable over 5-10 years. When I spoke to management they had a very defined model for new stores and had a list of 30 specific locations they want to open in....given that they have been slowly killing off the bad sites they opened in the mid noughties expansion rush that are a drag on performance there's a nice potential growth inflection in that too. However...

I'd worry about acquisitions as I think their model is so niche and honed that they would best maximise the return from that model...but then maybe I lack retail imagination. A misstep on capital allocation see this turn into a value trap

Norfolk'n'Good

6th Oct '21

Your dog wears tee shirt and shorts??

Small Cap Value Report (Thu 23 Sept 2021) - BEG, FNX, XLM, DFS, FCCN, VLG, EVE

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Paul Scott

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