Small Cap Value Report (Thu 26 Oct 2017) - CNCT, COS, CTH, ALU

25th Oct '17 by Paul Scott

36 comments 16214 reads

Good morning! It's Paul here.

This is initially just a placeholder article (created the night before), so readers can post your comments on the day's results & trading updates from 7 am. I will then update the article in the usual way, once I've digested some interesting news.

Good morning properly! It's a quiet day for small cap trading updates & results, but I will be reporting on 4 companies (as shown in the article header). This has to be early, due to other commitments today.

Connect (LON:CNCT)

Share price: 95.5p (up 5.2% today)
No. shares: 247.7m
Market cap: £236.6m

(at the time of writing, I hold a long position in this share)

Preliminary results - for the year ended 31 Aug 2017.

This group is;

a UK leading specialist distributor

By far the largest (in both revenues and profits) part of the business is Smiths News;

Smiths News is the UK's largest newspaper and magazine wholesaling business with an approximate 55 per cent. market share. It distributes newspapers and magazines on behalf of the major national and regional publishers, delivering to approximately 27,000 customers across England and Wales on a daily basis. The speed of turnaround and density of Smiths News' coverage is critical to one of the world's fastest physical supply chains.

This raises the obvious question whether this is a dying business? As we know, newspaper circulation is relentlessly falling, due to the popularity of smartphones, and online generally. Well, that doesn't seem to be the case just yet. The Smiths segment reports profits that are flat on last year (well, up 1%, on an adjusted basis). It's shown as the first item in the table below "News & Media - News Distribution";

"Mixed Freight" is the other significant division, which is parcel delivery firm Tuffnells. Note that £15m cost savings are planned in the next 2 years, through integrating Smiths News and Tuffnells. So that should hopefully see profits cope with further likely falls in newspaper & magazine circulation. Price rises are offsetting some of the circulation falls.

The other thing to consider, is that if you have a sophisticated & fast network for delivering to newsagents & other shops, then you can distribute other things to them at the…

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bobo

26th Oct '17

CNCT, so basically in a declining business, massive debts which are being used to fund a large dividend.... something in there says someone is going to pay!

Ben1

Re CNCT
I don't think I place as much confidence in a management statement that they 'AIM for volumes to increase', as it seems some others do. What business doesn't aim for increased sales?

But I hope they can leverage the fast delivery service, this does seem to be the future.

No position at the moment, but pondering it.

Paul Welsh

Think Paul must have pushed up the share price of Connect with his "small" purchase! Up 10.74% at the time of writing.

The Phoenix

Thanks Paul much appreciated

Gromley

I had been drip buying small amounts of Connect (LON:CNCT) since the July trading statement that basically said that things were ticking along acceptably. It was a little worrying therefore that the price had continued to flag over that period, so today's announcement was reassuring and the share price rise brings me back to about break-even :-(

My main worry though would be that the stocko computers description as a value trap may well be perfectly correct. On the metrics I'd probably be looking for a c. 50%+ upside here, but I'm just not sure what the trigger to deliver that upside will be. The 'fear' that it operates in an unattractive low margin business in a declining market can't really be dispelled in the near future, so there seems to me to be a strong chance that the benefits of the synergies between Tufnells and Smiths might not be fully rewarded in the share price.

Still the near 10% (apparently sustainable) dividend yield is a fairly decent compensation.

Incidentally, Paul, although it is not quite the magic button you were looking for, Yahoo provides a useful feature in it's share price history - "Adjusted Close" which states the historical share price effectively net of subsequent dividends. (So for example you can see that when the share price was around this level closing at 101.9 on 24-Jul-12 the "adjusted close" was 76.3p so whilst there has been virtually no capital appreciation over the last 5 years, the TSR has been about 36% (6% pa is clearly not that exciting , but you would have had the chance to cash out for over 100% return within about 18 months when the PE 'roared up to' about 11 and the yield fell to a 'paltry' 4.5% - such irrational exuberance must clearly be the hope of the value investor here ).

Anyone have any thoughts on what might trigger the breaking of the value trap here?

Ben1
Re CNCT I don't think I place as much confidence in a management statement that they 'AIM for volumes to increase', as it seems some others do. What business doesn't aim for increased sales?

In fact it is very worthwhile watching/listening to the results presentation available here (not sure for how long).

I gives much more richness to what the business is about and some of their key differentiation and the ability to drive some of the improvements outlined.

In relation though to the "aim" to grow the Pass my Parcel business, it makes it much clearer that the in year growth was very back ended so in fact much of this aimed for growth is in fact already delivered and in the run-rate. This though makes me a little disappointed that they are only targetting this business to be break-even in 2019 (rather than 2018).

I should have watched the presentation BEFORE making my initial post, because on the basis of seeing more of the detail I'm somewhat more comfortable that the "value trap" can be broken out of.

Orangetree

The difference between WH Smith and Connect Group share price is huge.

https://i.imgur.com/DaibCj5.png

ganthorpe

I believe that our village shop accepts parcels for return to internet sellers , which seems to be a great convenience and could be a big growth area as customers become aware of the service.
I'm not currently a CNCT holder but the flexibility of almost every newsagent providing the service sounds good for the near future.
I will not be buying CNCT so DYOR|.

Paul Scott

AlanJenkins said;

I must be careful only to speak in generalities,here,but if a company has a substantially negative NTAV, and its book value is not rising as it pays an above-market dividend and disposes of assets;,then the logical conclusion is that the creditors had better get their skates on double-quick and put a stop to this if they can - before nearly all of its assets wind up being paid away in dividends and they get left with very little.

I don't see what that has got to do with Connect (LON:CNCT). The key point with Connect is that it's paying divis from its own cashflow. Bank debt has been greatly reduced. See Marben's very interesting comments about how it has a negative working capital profile - i.e. it collects in cash from customers before it has to pay suppliers.

Regards, Paul.

Hot Socks,

I think interest cover at Connect (LON:CNCT) should improve considerably, as it has de-geared greatly, from the disposals which I mention in the main article. So interest cost should reduce a lot in future. Hence interest cover should improve,

Regards, Paul.

AlanJenkins2

Net debt has been creeping up despite an increase in shares.The z-score is negative.I am therefore not convinced that the market is wrong about the sustainability of the dividend.Unless of course those figures are out of date.
Marben's point about the company collecting from customers before having to pay suppliers is well made,but all it gives it is breathing space.

Paul Welsh said;

Our SCVR articles here are all about the company results & trading updates which have been issued on that day. So it's primarily that price-sensitive newsflow which is driving the share prices up or down, not our comments.

AlanJenkins2 said;

Net debt has been creeping up despite an increase in shares.The z-score is negative.I am therefore not convinced that the market is wrong about the sustainability of the dividend.Unless of course those figures are out of date.

Yes, those figures are out-of-date!!! That's the whole point of these SCVRs - we update you on the latest results, on the day they are published. As explained in the article, net debt at Connect (LON:CNCT) has reduced dramatically, due to a disposal.

Did you actually read the main article???

Paul.

I beg your pardon for my faulty memory - I had read the article.However,an asset disposal,while increasing the z-score,would only make the dividend more sustainable in the long term if the reduction in interest exceeded the return on the assets that were sold.Is that the case here ? Apologies for sounding like a boring bean-counter !

MichaelFBS

Is there not a possibility of a merger/takeover of Connect (LON:CNCT) with/by John Menzies (LON:MNZS) as I am sure that there would be quite a lot of synergies to be had? This might give support to the share price in the future?

I would have thought that at some point in the not too distant future there will be only room for one company delivering newspapers and magazines.

Lastly I do think there will a floor, which will be reached, in the decline of newspapers and that maybe we should not extrapolate sales decline in to the future on a straight line basis? I could of course be completely wrong.

Anyway my interest is piqued by this and it has been on my watch list. Also I think Paul has a point about un-sexy “value” shares being forgotten and I feel recently there has a fair amount in the press about the end of value investing etc, which is surely a lead indicate that value is back? :-) Don’t get me wrong I have made good money from Boohoo.Com (LON:BOO), Fevertree Drinks (LON:FEVR), Treatt (LON:TET), Purplebricks (LON:PURP) and still hold all but the last but think that things may be start8ng to change.

27th Oct '17

Is there not a possibility of a merger/takeover of Connect (LON:CNCT) with/by John Menzies (LON:MNZS) as I am sure that there would be quite a lot of synergies to be had? This might give support to the share price in the future?

I would have thought that at some point in the not too distant future there will be only room for one company delivering newspapers and magazines.

Clearly, there IS SUCH a possibility, but is there a realistic prospect?

RE your last paragraph - maybe true but what is the relevance? The company has long since moved on and this is not the core mode;

matylda

Just a thought Paul - There are plenty of alternative communities for pointless useless posts like this.

Hot Socks

Paul - thanks for explaining

thomasbertram001

30th Oct '17

Many thanks Paul for your thoughts on Connect. The stocko window shows net gearing at over 300% and the acid tests at around 0.87. Things to worry about?

vik2001

9th Jan '18

Seems like Connect (LON:CNCT) has passed it resistance level today, passing 118p. according to some chart work a further break out into a higher price is possible now. I like to wait till something passes it resistance level before getting in.

Connect (LON:CNCT) is paying a great div, last date to get in is 11th Jan to get the div. I been looking to get into some value shares and this is now looking good to me, especially as the momentum is picking up. I hold after getting in today, and will be looking for further value shares this year.

Small Cap Value Report (Thu 26 Oct 2017) - CNCT, COS, CTH, ALU

Connect (LON:CNCT)

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Paul Scott

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