Small Cap Value Report (Thu 5 August 2021) - SCS, TTG, BRCK

5th Aug '21 by Paul Scott

65 comments 9395 reads

Good morning, it's just Paul here today, with the SCVR for Thursday.

Today's report is now finished.

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 what direction market sentiment will take & nobody can predict the future with certainty.

We stick to companies that have issued news on the day, with market caps up to about £700m. We avoid the smallest, and most speculative companies, and also avoid a few specialist sectors (e.g. natural resources, pharma/biotech).

A key assumption is that readers DYOR (do your own research) - don't blame us if you buy something that doesn't work out. Reader comments are welcomed - please be civil, rational, and include the company name/ticker, otherwise people won't necessarily know what company you are referring to.

Agenda -

Paul's section:

The IPO Survival Guide - in case you haven't seen it, this is a major research project, spearheaded by Keelan Cooper at Stockopedia HQ. It's fascinating stuff, and as always with Stockopedia, relies on data to arrive at important conclusions about IPOs. I won't spoil it by revealing any of the results here. You can download the eBook here. There's an introductory blog about IPOs here. Well worth checking this out. It confirms my thoughts on IPOs, which is reassuring!

Scs (LON:SCS) (I hold) - ahead of expectations trading update, for both FY 07/2021 and FY 07/2022. Tons of cash on the balance sheet. This looks far too cheap to me still.

Tt Electronics (LON:TTG) - decent interim results, I go through the numbers. Looks a good company, with a positive outlook. Valuation looks about right to me.

Brickability (LON:BRCK) - accounts for FY 03/2021 look resilient in a pandemic year. Decent margins, acceptable balance sheet, I can't see anything wrong with this. The valuation looks reasonable too.

Paul’s Section

Scs (LON:SCS)

(I hold)

290p (yesterday’s close) - mkt cap £110m

Full Year Trading Update

ScS, one of the UK's largest retailers of upholstered furniture and floorings, today issues the following…

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Paul Scott

5th Aug '21

QUIZ's cash position latest info -

As at 12 July 2021, the Group had a £2.7m net cash balance (31 March 2021: £1.5 million). In addition, the Group has £3.5m of bank facilities available which are currently scheduled to expire on 31 October 2021, which the Group intends to renew.

So net cash rose from £1.5m to £2.7m in last 4 months. The undrawn bank facilities are in reserve, but I doubt will be needed now the shops have re-opened. The family are absolutely loaded, so can probably get an unsecured overdraft for the business with ease.

IMHO this is highly risky investment - chance of close to 100% wipout if things go wrong

I think that's completely wrong. If you dig into the figures, and check out the strong balance sheet with net cash, and plenty of liquidity, and a rich family backing it (they took out something like £90m in the IPO, from memory), plus lease liabilities extinguished, then I think real world risk is quite low!

Still, it takes all sorts, and your view was the general market view until recently, which enabled me to buy dirt cheap after crunching the numbers ;-) (cheeky, but I couldn't resist, please forgive me!!)

When talking to investor friends about QUIZ, nobody was interested. Everyone thought it was a basket case, and wouldn't even look at the numbers. That's the opportunity here I think.

Best wishes, Paul.

Bouden54

I agree I am still not convinced the digital side will ever fully offset the decline in the print side, although the market clearly thinks otherwise ATM and well done to anyone still holding.

gus 1065

Just posting breaking non-smallcap news that Daily Mail And General Trust P L C (LON:DMGT) has agreed to sell its RMS business to Moody‘s (yet another US buyer) for £1.425 billion.

https://www.investegate.co.uk/....

Looks to be a pretty full price at about 37x trailing EBITDA.

Gus.

Zipmanpeter

Paul,

Wasn't me supporting Made.com ! I just quoted the first (of many) new internet-only players to came to my mind plus internet-savvy bigger companies ion the space. (I thought about including Debenhams which under BooHoo might well go for fashion-first, cheap on trend furniture but was trying avoid the new B-word on SCVR main page! )

But my view is that consumers are rapidly becoming more comfortable with online purchases or even big ticket items as long as they believe in the returns policy. This favours big budgets and specialists. I don't think SCS will disappear - just they might be priced right as they might not be able to gallop from here.

bryans1311

I also sold Fonix Mobile (LON:FNX) this morning. D’oh! Not my smartest/luckiest of moves. Not quite as bad as the time I sold Sportingbet. I sold it in the morning a couple of hours before it was the subject of a takeover bid!

sevenccc

Any chance of a lookback at Lsl Property Services (LON:LSL) results from yesterday? Happy if it gets covered tomorrow. Results are very good but difficult to compare LfLs as the property market is so different this year to last year and LSL have also been busy acquiring and divesting operating units as they align themselves behind a pivot to a greater financial services orientation.

Perhaps one for Jack following his reviews of Belvoir (LON:BLV) and Property Franchise (LON:TPFG)?

LSL as you probably know is a mix of owned and franchised Estate Agents and Surveying, Valuation and Mortgage services. Probably more like BLV than TPFG and will indeed be providing mortgage services to much of the TPFG estate under a recent agreement.

I see this as undervalued on a read across. May be down to the historically lower margins they have achieved or simply them being a little under the radar. I'm hopeful the new focus of the management team will bring them in line with PEs for BLV (14.9) and TPFG (13.7)

LSL stats currently on Stocko as SR 91; Super stock; Forward PE 11.3 and PEG 0.7.

rmillaree

QUIZ (LON:QUIZ)
PauI

I accept your points that this is not the worst balance sheet in the world but IMHO i would say it is not particualrly stong in the context of ongoing unknown lossses and large payables figure so i think we will have to agree to disagree here.

Per the last interims they had £10 mill of payables ignoring lease liabilities - so please correct me if i am wrong but are they not 100% reliant on the payables bods being happy to offer credit to the extent that its not payables that need no credit ratings?

So net cash rose from £1.5m to £2.7m in last 4 months.

Its easy to pimp cashflow and they confirmed they benefited in period from inven

Note i hold quiz and am positive on the prospects and i think from the low point the upside potential more than compensated for the downside risk. But i am not nieve enough presume this is not a risky investment with less than £6 mill headroom and presumably losses still being made.

"and a rich family backing it (they took out something like £90m in the IPO, from memory)"

Ok specific question in this regard if they are happy to chuck in £5 mill via rights issue - surely they have the option to coimpletely screw over small sharehgolders here if they and other larger institutions choose to do things on terms that suit them.

This may work out very well like Saga where the main bods have ensured shareholders have not been screwed over , but there is always the potential they coluld raise at highly diluted numbers for curent sharholders (like £RBG) - it may work ok if you have spare funds to add extra later - but not everyone plans on doubling up on the size of their initial investment to stay where they were.

In this regard they specifically advised also

During the Period, the Group benefited from the Debenhams concessions trading for a short period prior to their closure allowing for the clearance of most of the Group's stock associated with these concessions.

If you dig into the figures,

I have dug into the figures cheers - i dont generally post thoutghts without having done that - i just have a slightly different outake from what has ben presented.

Finally ref me being comepletely wrong in my thoughts/calcs.

The last word i will leave with the auditors whose comments included the following text included in the interims release - i don't know the context of this quote (please read full text to clarify) and whether this is concerns that would apply now - but untill they provide clean bill of health this is the latest i can see ref going concern - and it it is clearly uncertain at best !!

The uncertainty this created in the Group's ability to accurately forecast trading cash flows and continue to trade within their current facilities indicated that a material uncertainty existed that may cast significant doubt on the Group's ability to continue as a going concern.

ls2g08

does anyone know why broker forecasts decline 17% for 2023?

Hi rmillaree,

Fair points, well made! As you say, we can agree to disagree, but it's always helpful to hear an opposing view.

I take on board your point about the potential risk if the founding family decide to stuff outside shareholders. But to my mind, the fact that they haven't done this so far, means it's a receding risk. I'm hoping they see it as a matter of pride/honour to restore the company's fortunes. Also, it just doesn't need to raise any fresh equity.

in the context of ongoing unknown lossses and large payables figure so i think we will have to agree to disagree here...

That's the key point, that now the shops have re-opened, on cheap turnover rents, it should already be profitable. I wouldn't be interested otherwise. The historic numbers don't matter now, because that was based on old, expensive leases, then periods of lockdown when the shops were closed. I think we probably now have a business that could settle at revenues of maybe £80-100m p.a., and perhaps £5m-ish profits? If I'm right, that would be worth more than £20m market cap.

Regards, Paul.

Boon

Yup, going to a painful next few months for hospitality. Either lack of staff and therefore lower revenues, or lower margins if they pay more. But medium term, prices will have to go up as all businesses pay more for staff, so margins will bounce back and arguably absolute revenues and profits will grow from inflation.

I see that Fulham Shore (LON:FUL) have changed nomad and broker with immediate effect to Singer.

My hunch is maybe a fundraising. They have debt. But they also want to rapidly expand. Not enough existing cash flow to self fund rollout.

They did manage to fund raise last August at a 2% premium to share price though. But that was when it was 6.25p...

QUIZ (LON:QUIZ)

Paul

That's the key point, that now the shops have re-opened, on cheap turnover rents, it should already be profitable.

Lets certainly hope so - i always think that as soon as a company are back into confirmed sustainable profits from losses they are likely to let us know sooner rather than later. Not aware they have given us the good news yet - and they certainly have had issues up to about now time - so hopefully not long to wait for confirmation now that your assumptions are correecty. I expect the doomongers may then depart the scene - despite my prior posts i still see the bigger picture that they have in the past shown that when conditions are normal they do know how to run a decently profitable business.

Fulham Shore (LON:FUL)
I wander if fulham shore brand(s) would be better suited to a bigger entity with more firepower to roll out the brand?
having said that at least if they do raise funds themselves rather than put themselves up for sale the shareprice is reasonaly bouyant. £20 mil to spend on expansion would probably go a long way at present compared to 3 or 4 years ago.

Tortoise investor

I think you're right to ask those questions of the acquisition. I assume Creightons (LON:CRL) see opportunity to expand profit margins but at face value the numbers don't look great. The market might be excited by how if the company doesn't reach 125p share price within the next 12 months it will need to pay Emma Hardie owners more - perhaps indicating the company is pretty confident the share price will be above 125p. Also Simon Thompson did a write up recently which may have boosted the share price too.

I think you're being a bit harsh on the deputy MD. She seems excellent to me on the company webinars I have watched - on top of her brief and the market trends and she fills me with confidence.

I like Creightons (LON:CRL) a lot but sold out recently as I think the share price has got a bit ahead of itself given the company didn't seem to talk about profit increases for FY22 in most recent webinar and it also will lose the one-off benefit from hand hygiene sales it saw in FY21.

CamRaid

Thanks Patrick. Maybe I am being a bit harsh on her. Given the high price paid I thought the case would have been more compelling.

As I said I know Emma Hardie quite well and I was talking this through with a contact of mine. He said there was another beauty product business with a turnover of £5m that had never made a profit. That sold for £12m recently.

He said the thought process is that the risk is in the early stages of building a brand and it's awareness. It is cheaper to buy the established brand and then to try to grow sales, expand in to new markets and cut costs to drive profit. As such the valuation is based on what it is worth to Creighton rather than what it was worth under it's previous ownership.

It kind of makes sense.

ridavies

Yes Paul. Thank you so much for your early read on Scs (LON:SCS) and I was in there with you at 0700. Got in near the 0800 bell and bought some more. I agree with you that the message was not all that clear. What company would leave it till well down the report to say that they were forecasting to beat market expectations? More and more companies put that in the headline, never mind the first para!

I have read all the later comments during the day, and I have a few extra points to make which are in no particular order.

There are changes at the top in the management team. I seem to remember listening to a double act webinar where the new incumbent was talking about expanding the range into e.g. outdoor furniture, so maybe there will be expansion beyond the hugely financially successful model we see today. However, such expansions can fail as well as succeed as we have seen elsewhere many times.

I believe I have seen somewhere that SCS production is primarily in this country. That may be advantageous or not in the current situation of supply and inflationary pressures. The raw materials have to come from somewhere, so it may be that the bottleneck is further down the material supply line for SCS than other competitors. However, if international transport is in short supply and very expensive it takes less space to transport materials than finished articles like sofas etc.

The cash pile does stand out like a beacon and with so much M&A activity it must be a real threat - or opportunity, depending on where you are sitting. You Paul, have pointed out the freehold asset backing of companies like Vertu Motors (LON:VTU) and occasionally on much bigger companies like Wm Morrison Supermarkets P L C (LON:MRW) have. The share price did respond, then in come the vultures and the SP heads for the heavens. In a way it is so predictable, assuming that some organisation wants to bid for Scs (LON:SCS) and go through that process. As you say, it could be worth 400p which would be a smaller premium than some of the recent takeover bids we have seen. The one for Meggitt (LON:MGGT) for example after their results and pretty downbeat outlook was breathtaking!

That's it. Thanks again, Paul.

abtan

Scs (LON:SCS) (no position)

Hi Ridavies

Adding to your comments on international sourcing, I thought I'd add a comment I read recently from Haverty's, a US-listed/based furniture company.

They're very similar to Scs (LON:SCS) , and here's something that was mentioned in their press release last week:

"Our suppliers have recently paused their manufacturing operations in Vietnam due to COVID-19. These closures, if not resolved in August, may begin to impact our merchandise available for delivery in the fourth quarter."
https://www.havertys.com/furni...

As you say, it looks like SCS get most of their products from the UK and EU, but it's unclear if the supply chain extends to the Far East. I looked at the DFS annual report, which stated that 25% of their goods are sourced from there.

If I'm honest, I don't think this would make a difference to Scs (LON:SCS) - customers will just wait longer and accept that these are different times, though it was an interesting point that isn't really mentioned in the UK listed firms (that I'm aware of.)

Good luck all holders

Camellia (LON:CAM) has always intrigued me. Sprawling agriculture group that also did private banking and aerospace components in the past too I believe.

Always an amazing discount to NAV, which is very nicely land-backed, as well as always having a healthy net cash position. But hard to see the catalysts and the CEO and CFO having been in their roles since 2015 are in no rush to unlock value for shareholders...

Interestingly, neither CEO or CFO owns a substantial amount of shares, nor do they have a LTIP or options programme at all! In addition, they only get base pay and not even annual performance cash bonuses. One of the rare few companies where the C-Suite are not incentivised to drive shareholder value?

Rusty2

6th Aug '21

Has the Club not been stopped out of Fonix Mobile (LON:FNX) as price fell to 124p?

Fonix Mobile (LON:FNX) the SR fell below 50 at around 145p.

It would be good if there was an update, on the Investment Club when stocks are stopped out. Pity they don't have fantasy funds on the new site, then it would be so easy to track the Investment Club performance.

Small Cap Value Report (Thu 5 August 2021) - SCS, TTG, BRCK

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Scs (LON:SCS)

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