Small Cap Value Report (Thu 26 Apr 2018) - SNX, BWNG

Thursday, Apr 26 2018 by

Good  morning!! It's Paul here, reporting from the Derby Conference Centre, at the Mello 2018 investor show!

Graham and I have been cajoled into doing a SCVR Live, on stage here at 9am, today and tomorrow. However, I thought we need to look after everyone else that isn't at Derby too. So here are some comments on this morning's RNS.

It's now 7:07, and guess what? The RNS feed is broken again. Great, just great! In that case, I'll nip downstairs and have a Full English, and hopefully the news feed will be working again soon.

Very nice that was too. OK, the news feed is working now. Some quick comments before I go on stage;

Synectics (LON:SNX)

Share price: 200p (up 5.3% at 08:24)
No. shares: 17.8m
Market cap: £35.6m

Trading update

Synectics plc (AIM: SNX), a leader in the design, integration, control and management of advanced surveillance technology and networked security systems, is holding its Annual General Meeting at 11.00am today, at which the Chairman, David Coghlan, will make the following statement.

The company has a 30 November financial year end.

The first paragraph sounds ominous - note the word I have bolded;

"In the first four months of this financial year, the trends we see in the various end market sectors Synectics serves have remained largely as set out in last year's Annual Report ...

This sounds like the company is warming us up for a profit warning.

More detail is given, of different sectors, some up, some down. The suspense is lifted with a reassuring final sentence;

"Based on Synectics' current order book and pipeline of anticipated new business, the Board expects that the Company will announce full year results in line with market expectations."

Stockopedia is showing consensus forecast of 14.6p EPS, so at the current share price of 200p, I make that a PER of 13.7, which sounds about right for this type of business. The business model here suffers from tending to have lumpy contracts, so it should really be on a below-average PER rating.

My opinion - this share doesn't interest me, as it's difficult to see much upside, unless the order book substantially increases. That could happen, as historically the company did well from the oil & gas sector, which is now showing signs of life…

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Synectics plc is a United Kingdom-based company that designs, delivers and manages integrated security and surveillance systems for security environments. The Company operates through two divisions: Systems, and Integration and Managed Services (IMS). The Systems division provides specialist electronic surveillance systems based on its technology to customers in oil and gas operations, gaming, infrastructure protection, high security and public spaces. The IMS division supplies products and technology from its Systems division. The IMS focuses on delivering end-to-end, security and surveillance solutions, specialist mobile systems for transport operators, as well as service-led solutions for the management of facilities and security services. The Company primarily works across oil and gas, gaming, transport and infrastructure, and high security and public space sectors. It offers Synergy 3, which a command and control software platform for security. more »

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N Brown Group plc is a digital specialist fit fashion retailer. The Company offers customers a range of products in clothing, footwear and home wares. The Company is a multichannel retailer. It operates through the Home Shopping segment. Its power brands include JD Williams, Simply Be and Jacamo. JD Williams is a department store concept offering style for 50-plus customers and their families. Simply Be is a women's clothing retailer, which offers a fashion collection regardless of the size. Jacamo offers in-house ranges, such as Label J and Black Label, alongside international brands. Its brands also include Ambrose Wilson, Julipa, Premier Man, House of Bath, Marisota, Fashion World, High and Mighty, and Figleaves. It offers financial services that focus on credit customer base and cash customers. It offers womenswear from sizes ranging from 10 to 32 and menswear from sizes ranging from small to 5XL. It operates a store estate in the United Kingdom that focuses on key shopping areas. more »

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26 Comments on this Article show/hide all

Laughton 26th Apr '18 7 of 26

"Graham and I have been cajoled into doing a SCVR Live, on stage here at 9am, today and tomorrow. "

Surely a missed opportunity for Stockopedia to have live streemed this to all of us logging on for our daily fix.

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LeoInvestorUK 26th Apr '18 8 of 26

Sorry to ask this here, but I have just booked for Mello but can only make Friday during the day. I'm not planning on staying at the venue, but will be in the area tonight. Is it worthwhile me turning up at the bar in the venue tonight, and will they let me in? :)

Blog: LeoInvestorUK
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Zipmanpeter 26th Apr '18 9 of 26

N Brown (LON:BWNG) results OK but uninspiring. However, there should be a cracking business story here given
i) it is strategically focused on growing areas (in non-PC terms the older & fatter amongst us!) and has been for years
ii) now generates 73% of revenue online
iii) has some strong (ish) brands operating at (some) scale (JDWilliams £164Mn, SimplyBe £132Mn, Jacamo £69Mn)
iv) it is now (almost it seems) at the end of big programme to be an agile digital/online focused organization
v) now (almost) ready to really drive the US expansion opportunity that has been talked for years
vi) now backed by a highly profitable, high quality credit business - whose revenues are 29% of total income but which still requires the fashion stuff to be soldat the front end to create its user base)

Overall results show y-on-y product value growth slowing quarter on quarter to 0.0% in Q4 - although it claims this reflects PY comparisons being tougher and results in market share growth in a value declining market. Power brands continuing to edge up (especially Simply Be) as a % of total and brand consolidation now effectively complete. Good growth in profitable debt services supporting new financial support package.

However, needs to take some decisive action to cause a re-rating towards the online pureplay specialists (eg BOO, ASOS). Its current PER is around 8.5-9 even after this week's rise to 204p (today at 10am). Should be able to get to a PER of 15 at least which would take it (back to) over 340p (204/9*15 = .340p)

Would like to see it bite the bullet and shrink to grow
i) drop its remaining stores (£20Mn T/0, 20 dual Simply Be/ Jacamo, 8 High & Mighty) - unlike NEXT no scale for returns/advertising etc so just a distraction and off strategy. Should never have got into them
ii) drop all non-furnishing and fashion items like electricals and random furniture / gift 'stuff' from its JDWilliams/House of Bath etc website - how can it compete with Amazon? must just complicate its warehouse operations and purchasing
iii) Sell House of Bath - soon this will get harder as it was announced will be shutting its standalone Bath offices. This could be an attractive standalone business but is lost with the Group

With a big and I think sustainable dividend of 14p giving a yield of 6.8% I am happy to hold for the long term for income. But I do think that with a sharper strategy and better presentation of the same to the city this stock should really soar. The comparison in the energy level and focus in BOO's presentation yesterday (from 1 to 3 sizeable brands, rapid and ambitious internationalisation, clear target market) is not flattering. BWNG is now cheap but with reasons.

If I were the MD after 4+years, I would be nervous and thinking (I fear, hoping!) that 2018 had better beat expectations. As an investor, I am grading it "could do better".

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xcity 26th Apr '18 10 of 26

In reply to post #357713

U and I (LON:UAI) Unlikely ever to be popular. Seen as a rather shadowy entity grubbing around the edges of the higher status property development companies. Profits rise and fall in an apparently unpredictable way and their asset value may be illusory, being largely sunk cost rather than gleaming properties.
That said, they do a (presumably) useful job and do return money to shareholders when they have it.
Just don't expect it to be highly rated.

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Carcosa 26th Apr '18 11 of 26

In reply to post #357838

U and I (LON:UAI) Oh I think I have to totally disagree with your opinion xcity. Moving forward there is excellent visibility of revenues. Take a look at today's video presentation for confirmation. In fact Liberum issued a 40 page detailed note on the company today.

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IGotPoesJacket 26th Apr '18 12 of 26

In reply to post #357833

I like your analysis. Thanks for sharing.
Wonder if an activist investor would be tempted here to shake up what could/should be a fantastic opportunity here.
I’ll be looking at this again through a different prism.

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xcity 26th Apr '18 13 of 26

In reply to post #357843

U and I (LON:UAI) The visibility depends on accepting the company's assumptions.
Liberum wrote the positive research note immediately after being appointed joint corporate broker.

I'm not saying it is a bad investment, simply that there are reasons for it not being rated highly. Might well go up after the profits and dividend announcement, and the company clearly thinks it has an opportunity to drive the share price up.

PS Standard Life Aberdeen seem to be selling down, so that might keep a cap on the price until they have finished.

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IGotPoesJacket 26th Apr '18 14 of 26

Reading N Brown (LON:BWNG) - we just don’t know what’s happening with those insurance payouts. They tell us why and how much, but make no mention of whether it’s done and dusted or if there are future provisions likely.
There’s also the worry the taxman is going to sting them from what I can tell.
Anyone who reads my posts regularly will know I am idiot, so would appreciate smarter people’s comments on these factors.

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hayashi22 26th Apr '18 15 of 26

Nice post on N Brown (LON:BWNG) Zip. Agree with most of what you have written there. High ongoing exceptionals also need to end. But their demographic is not getting smaller (haha) and the online at plus 70% seems to be overlooked by the market. Would be good to see a steady move towards 300p -for starters.

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dahokolomoki 26th Apr '18 16 of 26

In reply to post #357743

On Park (LON:PKG) I used to be a holder, but sold a few months ago.

I like the company but struggle to see where growth is going to come from. Gift vouchers / corporate prepaid cards are a little old school and ripe for digital disruption. There doesn't seem to be much innovation internally to drive growth this year and next.

The interesting thing though is that they are a play on rising interest rates. They sit on a huge restricted cash pile earning pitifully low interest rates at the moment. This interest income will fall directly to PBT.

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Gromley 26th Apr '18 17 of 26

In reply to post #357883

N Brown (LON:BWNG) originally announced the insurance issue in July last year.

Following an assessment of the cost of potential customer redress, the Group expects to incur an exceptional cost in this year's income statement in the range of £35 million to £40 million. However, the Group anticipates that there may be mitigating actions to reduce the overall net cost.  The cashflow impact of this is forecast to occur from FY19 onward, and the Group anticipates funding the full cost of customer redress from existing resources.

So they are firmly guiding towards £40m being the maximum amount and you'd think given the high profile PPI has had they have been very careful to the embarrassment of coming back with a higher figure later. They've provided for the full £40m but hadn't paid any by the year end.

They've also provided for £3.1m for the tax issue, but again not paid out.

I would not expect any further dramas on this personally.

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IGotPoesJacket 26th Apr '18 18 of 26

Thanks Gromley, explains why the shares are on such a low PE, memories of PPI loom large.
Tempted by N Brown (LON:BWNG) at these prices though.

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rmillaree 26th Apr '18 19 of 26

Ref N Brown (LON:BWNG)

Given continued cost of living pressures and in order to give our customers greater choice of flexibility in managing their finances, we made the decision to reduce our minimum payment rate from 5% to 4% during the period. The change had a positive impact on the number of customers who were in arrears, down 6%. In addition, it also meant that those customers who didn't change their monthly payment paid above the minimum amount, which will result in these customers paying off their balances faster.

Perhaps its just me being thick again but how does  an unchanged payment result in a customer paying of their balance faster ????????  

it also seems pretty obvious if you ask for less money back that arrears will go down - is it really a "positive thing" moving the goalposts as you are now comparing apples with pears to a certain extent -  they owe the same higher balance calling it less bad debt/ positive than it was before sounds like spin . Lets only ask for £1 per month from everyone and bad debt will be down 80% yay. Perhaps it should be concerning that 6% of customers couldn't previously find that extra 1% they should have paid. 

Apologies if i have got the wrong end of the stick here.

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doublelutz 26th Apr '18 20 of 26

U and I have done great since i first bought in at around 160p less than 12 months ago. It has been in an uptrend ever since. They are getting more institutional support. I don't know how anyone can read the RNS's and not be impressed. Of course, if you are looking for something to triple in value then you will not be looking at a property company.

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Zipmanpeter 26th Apr '18 21 of 26


I think the reason N Brown (LON:BWNG) shares have tanked in the last 6 months was that the market was spooked the fact that they (along with all clothes retailers) have had to give up so much margin to keep revenue growing even slowly.  H2 was only rescued by the strong financial services result.  

Press release today says

"Product gross margin was 52.2%, down 250bps yoy, in line with our most recent guidance.
The gross margin movement was primarily a result of FX pressures which has resulted in
a 280bp headwind either directly due to changes in US dollar exchange rates or indirectly
due to our cost pressures on our sterling denominated suppliers who buy their materials in
foreign currency. In addition, promotional activity to drive revenue and market share gains
against a challenging sector backdrop in the second half resulted in a 50bpdecrease."

However, this begs the questions:  i) is margin going to stay down and ii) how good /or bad is that level of %GM vs competition.  The good news is that the FX effect is likely to disappear/reverse this year.  Further, this is the same GM as BOO (which announced 52.8% GM yesterday, itself down 180bps).  Again, a good story that needs to be told better.  

(Note: I do expect ever increasing margin pressures on ALL clothing as online retail takes over but fashion does protect margins better than many sectors. )

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alterego 26th Apr '18 22 of 26

Paul said. "I've had a good chat with the effervescent CEO of SRT Marine Systems (LON:SRT) here at Mello. I see his share price has risen nicely today, so he must be striking the right tone with people here in Derby."

I doubt it has much to do with Simon's presence in Derby. This extract from SRT's 11th April trading update suggests news in due course.
"in particularly our systems business which saw some significant milestone deliverables completed for an Asian project which we will provide more detail on in due course."

This morning there were press reports that the Philippine National Economic Development Authority board had just approved, amongst other things , The Department of Agriculture-Bureau of Fisheries and Aquatic Resources’ P1.7-billion Proposed Change in Scope and Cost for Integrated Marine Environment Monitoring System Phase 2 Project.

SRT watchers believe that this may be the precursor to the Asian Project news Simon Tucker alluded to.
Disclosure, I hold SRT

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mojomogoz 26th Apr '18 23 of 26

In reply to post #357898

Hello Gromley and other N Brown (LON:BWNG) commentators...

I looked at this stock about 5 yrs ago and passed as thought it was subprime finance company disguised as a retailer. Credit to D&Es for low value retail is the most subprime of subprime. Note, pre FCA regulation of payday lending all the fly-by-night operators would use this sort of retail/catalogue credit data or credit for mobiles as the data set to price risks of lending to very high default customers.

However, I think the long story is they stumbled on financial side but have moved on a lot - right?

Anyhooo....why has their margin been coming down over the years and why the stockopedia return on capital numbers looking so poor? (NB I assume the low 2.3% forecast margin is provisions so after that they go back up to 7% but still meaningfully down from few years before)

It seems interesting so will get round to looking and doing my own work...just asking to see what more knowledgeables think.

My hunch from reading Paul and comment section is that this is a stock that still has a negative surprise to work through. My guess is that management have been struggling to fit it all under one roof and mentally overstretched by business breadth. Low end credit is a real headache and anxiety (I have started business in that area and gone through the FCA reg pains and FCA rules will be really squeezing how much they can make money out of customers financially and taking a lot of time). I say this as the retail feels like they never can quite get round to exactly what they want to do...and the commentator that said they should bite the bullet and shrink is perhaps on to something.


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Gromley 26th Apr '18 24 of 26

In reply to post #357938

Yes subprime finance is a significant part of the picture at N Brown (LON:BWNG)
Its a bit like Great Universal Stores but using the internet. It does have some niches and fairly decent branding though imho.

On the sub-prime side I agree entirely with rmillaree, I thought those comments were odd to.

Paul correctly says that the company debt is pretty much covered by its retail recievables (in fact the bulk of the debt is secured against the consumer credit).

It does pay though to be sure of the quality of the book.

The recievables are made up of :

Amount receivable for the sale of goods and services 647.6
Allowance for doubtful debts (48.8) (7.5%)
Other debtors and prepayments 53.9
Total 652.7

But I see in the year they wrote off £114.7m of the debt. With the short turnaround on a lot of this that may not be inconsistent with the level of remaining allowance, but is something that would make me want a greater margin of safety in the share-price.

There's an interesting (if  you are that way inclined) section in the report on the impact of IFRS9 from this year, they estimate that as a result their provisions will have to increase from the current 7.5% to between 17% & 27% - so we can expect a big exceptional in the coming year's results (but actually the level of provisions is far less relevant than how much you actually  collect and that won't change.)

They indicate that under IFRS9 they will have to take some level of provision against all accounts not just those that are overdue (that seems prudent and it's certainly what we did when I worked in consumer credit), but there also seems to be a suggestion that they need to take a provision not just against the money they have lent to customers, but also against money they might lend to them in future! That bonkers if true isn't it?

I'm not sure though that I see another mishap coming and think they look decent value, I haven't bought though. My general bearishness on retailers is waning, to the extent that  I actually bought one the other day, I'm not sure I'm ready for another one!

Oh and just as an aside, back to the historic tax issue raised earlier by IGPJ, I spotted there is more detail provided. They have provided for a potential £4.6m payment to HMRC, but believe the range of outcomes is between £10.2m (to HMRC) and a refund of£19.8m.

"the Group remains confident of a positive outcome," - The would wouldn't they?

" the potential impact remains unknown pending final resolution." - So not that confident then!


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jules2k6 26th Apr '18 25 of 26

Lucky break on the breakfast today Paul. it may not be such a benign outcome tomorrow. Enjoy it while you can:) ( And dont enjoy the evening too much). Keep up the good work.

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Zipmanpeter 18th Sep '18 26 of 26

In reply to post #357833

If I were the MD after 4+years, I would be nervous and thinking (I fear, hoping!) that 2018 had better beat expectations. As an investor, I am grading it "could do better".

So CEO of £BWN Angela Spindler has "left the business" with a quick exit date.  Suggests that there will be more bad news in the interim report.  

However, after that there a chance for a new broom to re-shape the business and excite the city (would are still setting a target price of x2 todays 134p value.  Personally, I still think the shares can go back to 300p if the new CEO executes well and outlines a clear strategy.  Here's hoping!

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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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