Small Cap Value Report (Thu 3 Oct 2019) - IFRS 16, RBG, ZTF, TED, SDY, WIN

Wednesday, Oct 02 2019 by

Good morning, it's Paul here.

Timing - as you've probably gathered, I've settled into a routine of writing in the afternoons, which works best for me. I'm trying to persuade the boss to change the timing of the daily SCVR email to something like 5pm, so that it doesn't go out half empty or blank.

Estimated time of completion today is 6pm. So by all means check in before that, as sections are added, but the finished article will be done by 6pm, as I have no meetings or other distractions today. Update at 17:33 - today's report is now finished.


I've noticed one or two investors & commentators are getting into a panic about IFRS 16.

From the enquiries I've made so far, institutions & banks are taking as much notice of it as I am - i.e. seeing it as a nuisance, and wanting numbers to be presented to them in the old way.

I've also been assured that banking covenants, facilities, etc, will continue to be based on the old numbers. The idea that IFRS 16 adjustments will "wipe out" companies, is as daft as thinking that Brexit is going to wipe out cross channel trade!

When I met management of Revolution Bars (LON:RBG) earlier this week, of course I wanted to talk to them about IFRS 16, as the notes to the accounts showed that it's going to involve some big new entries on future accounts. The CFO ran through all the details, leaving me none the wiser, as it's all so complicated. So I thought for a moment, then asked this question;

How much cash losses do your problem leases cause you, compared with if you could theoretically just ditch them all? 

The CFO replied that it's about £1m p.a..

That's easily affordable, in the context of c. £12m p.a. EBITDA, so I was happy with that issue addressed. The problem leases are a bit of a drag on profitability, which was a known factor before IFRS 16 anyway. Most multi-site retail/hospitality operations have a tail of loss-making sites, which they exit when they can (when leases expire, or can be assigned on commercially viable terms).

A good follow-up question would be to ask what the break clauses or lease expiry dates are for each site - or an…

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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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Zotefoams plc is a United Kingdom-based cellular material technology company. The Company is engaged in the manufacture and sale of cross-linked block foams. The Company's segments include Polyolefins, High-Performance Products (HPP) and MuCell Extrusion LLC (MEL). Polyolefins foams are made from olefinic homopolymer and copolymer resin. HPP foams include ZOTEK F foams and T-Tubes insulation, made from polyvinylidene fluoride (PVDF) fluoropolymer. Other products include foams made from polyamide (nylon) and PEBA. MEL licenses microcellular foam technology and sells related machinery. The Company offers a range of categories of products, such as AZOTE, including PLASTAZOTE, EVAZOTE and SUPAZOTE; ZOTEK, including ZOTEK F, ZOTEK N and ZOTEK PEBA, and T-FIT. Its products are used in a range of markets, including sports and leisure, packaging, transport, medical, Industrial, building and medical other construction, and other. more »

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Ted Baker Plc is a United Kingdom-based global lifestyle company. The Company offers a range of collections, including menswear, womenswear, global, phormal, endurance, accessories, audio, bedding, childrenswear, crockery, eyewear, footwear, fragrance and skinwear, gifting and stationery, jewelry, lingerie and sleepwear, luggage, neckwear, rugs, suiting, technical accessories, tiles and watches. The Company operates through three segments: retail, wholesale and licensing. It operates stores and concessions across the United Kingdom, Europe, North America and Asia and an e-commerce business based in the United Kingdom, primarily serving the United Kingdom and Europe, with separate the United States and Canadian sites dedicated to North America, and a separate site serving Australia. The Company's wholesale business in the United Kingdom serves countries across the world, particularly in the United Kingdom and Europe. The Company operates both territorial and product licenses. more »

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38 Comments on this Article show/hide all

rmillaree 3rd Oct 19 of 38

Zotefoams (LON:ZTF)

warning my calcs may not compute correctly!


It was definitely priced as a quality company with no room for error but a 37% hammering on the back of recent falls seems harsh.
From the limited info it looks to me as if revenues could be flat y-o-y and profits slightly lower due to costs being up this year.

This may be an overreaction but i think the numbers are worse than you fear unless booboo i have made (as yoda might say if he knew booboo)  I can't even get the numbers to add up !! which is a bit worrying unless i have my numbers in a  knot which i am hoping is the case.

H1 was £42 mill and today they advised

resulting in Group sales for the second half of 2019 approximately £2m below the first half of the year.

that would be £40 million for H2

Total £82 mill and i have stocky expecting £90 mill that's an £8 million downgrade when they only quantified £6 million specific reduction with everything else running ok. 

Hopefully i have my numbers in a knot but it does not compute to me.

If they had simply said profits will now be £4 million down this year and we have reduced forecasts for next year by only £2 million that would have been job done and figures quantified. My estimates  used here actual figures may be worse!. 

What they have effectively done morning is light the blue touchpaper and walked away - what are shareholder meant to do without quantified numbers?

If only all companies used the sensible approach of ALWAYS using range specific guidance for this year and next (profits estimates most important) whenever they update then messes like this would probably be mostly avoided unless the updated change in numbers justify that.

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doug2500 3rd Oct 20 of 38

In reply to post #518666

Zotefoams (LON:ZTF)
I was assuming £82 M too which is approx the same as last year.

I agree on all your other points entirely, quite a disappointing TU in more ways than one.

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sherpa 3rd Oct 21 of 38

In reply to post #518666

I have also been a fan of £ZTF in the past and like the long-term story. However, I don't see today's fall as an overreaction at all. The rating on the stock was sky high and priced in blue sky all the way. EPS forecasts are likely to fall to 16p or less for the year to Dec 2019 or a p/e of 21x and yield still under 2% at the current 340p. The warning also comes in the middle of a heavy expansion cappex phase that is pushing debt up towards £30m. Buyers beware! 

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john652 3rd Oct 22 of 38

Hi Paul,

Any comment on Ted Baker, currently off 35%!! and down 75% ish for the year. Is this oversold, my it has to be a bargain voice is speaking to me but I avoid all retail, as it's just not for me but I like Ted Baker clothes, the brand, the model of shops online and only discounting in their own shops. Oversold?

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Camtab 3rd Oct 23 of 38

ITM looking interesting.  I am a holder.  Still a minnow but revenue up 40% to 4.6m (3.3m). This is important because much of their funding is and has been grants (12.9m v 10.8m). Grants should grow given increasing pressure on global warming front, but clearly corporates responding with interest rising and good sales pipeline. Linde Eng are taking a 20% stake by investing 38m. Additional 20m being raised in placing and open offer. Got 5m cash on balance sheet. 15 hydrogen stations now exist or under construction. 33 hydrogen fuel contracts in place. Valuation tricky 140m mkt cap v above revenue and loss from ops 9.3m (6.5m). Stocko gives it 22 rating (momentum trap). But isn't this always the case with unproven business models, new ideas. Not for everyone but I like it and will be taking up the offer.

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Paul Haworth 3rd Oct 24 of 38

Great to see IFRS16 raised, Paul.  As a CFO I think it's nuts - confusing the vast majority of people and moving the P&L even further away from cashflows.  Ultimately it's important to remember that nothing commercially changes.  I've been surprised at how unprepared some banks and finance providers have been for it; the shape of a lot of balance sheets is changing markedly, which has scared a lot of people, even though cashflows and commitments are completely unchanged.

Something for people to watch: you don't have to restate your prior year numbers when you implement IFRS16 (though you can choose to), so profit numbers will not be on a like-for-like basis.  This matters most where a company reports EBITDA as their headline number.  For most, IFRS16 improves EBITDA because rental costs are "swapped" for depreciation and finance costs.  I fear people will try to be a bit sneaky with this, showing artificially stronger EBITDA growth.

At my business, we've tried to adjust our profit measures to simulate the pre-IFRS16 position because we believe it gives a more objective cash-based profit/loss number.  But I don't see many others doing this so I don't know if that's now impeding comparisons with peers.

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shipoffrogs 3rd Oct 25 of 38

In reply to post #518691

Ted Baker (LON:TED) - oversold?
Their very high inventory figure suggests there could be more bad news to come.

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rmillaree 3rd Oct 26 of 38

Zotefoams (LON:ZTF)
Your points are spot on their operational gearing means it is a bit of a disaster if they spend to increase sales massively then don't - that's basically not an option if the business wants to deliver for shareholders.

I would say its probably wasn't exactly "blue sky all the way " previously in that their expansion seemed to have a ready and waiting market available to expand into in which case on the balance of probabilities the projections seemed more likely ro have basis in fact rather than picking numbers out of the air.

I did have one background worry with regard to the Nike deal - i am not sure how meaningful those numbers are now and are expected to be in the future - but being at the beck and call of a large company like Nike does mean you are reliant in factors way outside of your control.

Hopefully the dust will settle soon and some expectations for 2020 will be made know - in hindsight i have had a lucky escape with this share in that they could have had the same issues this time last year when i did hold. I guess its all swings and roundabouts though i recently added to B.P. Marsh & Partners (LON:BPM) only for them to have profit type warning 2 days later - there are more banana skins on the stockmarket than mario kart i think and mario kart isn't exactly short of them.

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Trident 3rd Oct 27 of 38

There are so many pluses and minuses regarding the discussion of leasing/owning. Even if you own property you face either amortisation questions or revaluation questions that can impact your profit line on a non cash basis.

From a practical perspective leases that provide security of tenure can be a good thing or an anvil around your neck, depending on whether there is an upward moving rental market or not.

For companies that have to be move on a short term lease, means refurb/fit out costs for new premises (as well as the ability to get out of onerous leases). For businesses that require uprooting IT structures IT, phone connections, all become material costs. So chopping and changing is not always a good thing.

For retail the considerations are slightly different, so sector relevance is applicable to a 'standard' IFRS approach, and therefore maybe comparatives should be the order of the day- though this requires apples being compared to apples.

I am always wary of companies that shift their accounting reference date, for the confusion this causes with benchmarking, and it seems to me this IFRS concern should be amplified in the notes to accounts rather than on the face of them - though some will say this is a way of burying an issue.

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pj8 3rd Oct 28 of 38

In reply to post #518606

The people controlling IFRS are not academics but, as you advocate, leading people in business. The IFRS are set by the IASB - most, if not all, of the 14 people on the International Accounting Standard Board are working, or have worked, as accountants or finance directors in various commercial organisations.

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doublelutz 3rd Oct 29 of 38

In reply to post #518701

Paul - you are obviously with a substantial company but although I am not up to date on accounting standards I think this will apply to smaller companies in a couple of years time. I am glad I no longer have to explain this to directors as they will not understand it and your description of "nuts" will be mild to their reaction. It will also be the reaction of smaller firms of accountants when they have to deal with it. I think it adds confusion and has been developed by academic minds to whom the cost of implementation is not an issue.

I am not surprised that banks are unprepared as from my considerable experience of dealing with them they will have few people who understand it.

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doublelutz 3rd Oct 30 of 38

In reply to post #518726

The list of board members can be seen by searching for IASB board membership. This is a group of people from all over the world who have experience ranging from regulating financial markets down to the former chief accounting officer for Xerox. The outcome of their deliberations may be very relevant for multi-national companies but we are talking here about small cap companies. I would suggest there are few persons involved in the decision making that have had much involvement with the type of company that Paul was initially writing about. It also leads at times to total frustration and disconnect between the views of smaller firms of accountants and those of their governing body.

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Paul Haworth 3rd Oct 31 of 38

In reply to post #518731

Sorry, I should have been clear - my comments were in the context of main market and AIM companies, almost all of which have to use IFRS.  It doesn't matter whether you're big or small, under IFRS you now have to adopt IFRS16 for accounting years beginning on or after 1 Jan 2019.

I dread to think how small, under-equipped firms of accountants will deal with it!

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jonesj 3rd Oct 32 of 38

Thanks for the article Paul.

Only yesterday, I was having almost exactly the same thoughts about IFRS 16. However, I'm an Engineer, with almost no accountancy training & very capable of getting it wrong.
Therefore it's quite reassuring to see some analysis from an accounting pro.

Perhaps this is confirmation bias on my part.
For profitable sites, I just cannot see the sense in putting a lease liability which could be spread over 10 years on the balance sheet.

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clarea 3rd Oct 33 of 38

In reply to post #518526

Hi Paul

I know your probably stacked out most of the time but would there be any chance you could do a video using Stocko platform to show the more novice investors oh here how to do some basic balance sheet checks maybe 30 mins or so.

I've picked up from you things like being wary of low current ratio and obviously its easy to work out net debt on Stocko but another few quick wins on balance sheet training would be awesome.

No drama if its a ball ache.



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doublelutz 3rd Oct 34 of 38

Ted Baker (LON:TED) - I mentioned to my wife that Ted Baker had bad results. She said that she used to like them and bought for both of us but they have gone right off particularly on the women's side as well as being expensive. She says other brands have also gone off in her opinion including Whistles, Coast and Karen Millen. She buys mostly continental makes on the internet. It sounds as if Ted will have difficulty clearing his huge stock at a profit.

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Gromley 3rd Oct 35 of 38

In reply to post #518666

Quite a shocker this morning from Zotefoams (LON:ZTF)

Also a shocker of execution by me.  I looked at this a while ago and decided that I was nervous about the downward share-price trend since the start of the year. So what did I do? I reduced my position, in retrospect there was an element of FOMO and perhaps emotional attachment in that decision.

A new sign needed for my office wall I think - "DON'T BE A RABBIT".

I have sold out completely now, but like Paul I still like the business in the long term so will be back.

I believe gross margins in Polyolefins are in mid 30s % so a £6m miss probably means a £2m reduction in Pre Tax profit which would I think be consistent with the top end of the 15-18p that Paul suggests above.

However, I am puzzled by their statement

Anticipated profit for this period is impacted by our limited ability to change the operational gearing in the business in this timeframe.
I would have thought it goes without saying that Opex cannot be dialled down that quickly, so are they telling us something more? Perhaps there is some unrecoverable Cost of Sale also?

Equally if the revenue miss is actually bigger as rmillaree  suggests then obviously my £2m would be an underestimate. So Paul's 15-18p does seem reasonable to me.

In and of itself that would not be a total disaster, but of course we are left wondering what about next year?

One to avoid I think until we see some clear signs of their markets recovering.

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Paul Scott 3rd Oct 36 of 38

In reply to post #518826

Hi Gromley,

Re your post on Zotefoams (LON:ZTF) operational gearing, you said;

I would have thought it goes without saying that Opex cannot be dialled down that quickly, so are they telling us something more? Perhaps there is some unrecoverable Cost of Sale also?

That was my thought too, hence why I estimated a bigger reduction in profit than would have been caused by just removing the gross profit on the lost sales.

In other words, I think we could be looking at a double whammy from lower than expected sales, and a lower gross margin too.

Regards, Paul.

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xcity 3rd Oct 37 of 38

In reply to post #518811

Sounds as if she might have an interesting perspective on Coast and Karen Millen when they restart trading under Boohoo (LON:BOO) management.

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john652 6th Oct 38 of 38

Thanks Paul for your excellent write up on Ted Baker (LON:TED), not a bargain at all.

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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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