Small Cap Value Report (Thu 9 Nov 2017) - SWL, QRT, GATC, DVO, TRCS

Thursday, Nov 09 2017 by

Hi, it's Paul here.

This is initially a placeholder article, ready for your comments from 7am onwards.

To get you started today, please note that I updated yesterday's report in the evening, with some new sections. So it now includes additional sections on;

  • Stadium - profit warning
  • Snoozebox - it's gone bust
  • Tracsis - results for y/e 31 Jul 2017

See you in the morning!

Good morning, it's Paul here.

No larger cap preamble today, as it takes up too much time, which is limited today.

Swallowfield (LON:SWL)

Share price: 390p (down 1.3% today)
No. shares: 16.9m
Market cap: £65.9m

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

AGM Statement (trading update) - this company has a June year end, so this update covers the first 4 months of its 06/2018 year. Description;

... a market leader in the development, formulation, and supply of personal care and beauty products, including its own portfolio of brands

The key sentence is reassuring;

"The Board is pleased to report that trading in the first four months of the year is in line with expectations.

Outlook for the full year is also reassuring;

While we remain conscious of the continuing macro uncertainty both in the UK and internationally, overall we expect to maintain our positive progress and are well positioned to deliver against our expectations for the full year"

The following comments might have spooked some investors (the H2 weighting), but it sounds fine to me;

Our manufacturing business is also performing steadily against strong prior year comparators. As previously indicated we are seeing volumes normalise against the significant new products launched in the first half of last year. Pleasingly, there is a fresh wave of new product launches and contract wins that will contribute to our full year performance and bode well for future momentum. This is likely to give a second half bias to the year in this segment of the business.

New product launches is a good reason for an H2 bias, and might even trigger out-performance, who knows? Christmas ranges have seen "another year of growth".

Valuation - on the face of it, the PER looks about right;


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Swallowfield plc is a United Kingdom-based company, which is engaged in the development, formulation and supply of personal care and beauty products. The Company has presence across other European Union countries and rest of the world. The Company offers its products in various product types, such as personal care aerosols, hot pour, premium liquids/tubes/roll-ons, fragrance and gifting, and color cosmetics and pencils. The Company's manufacturing, filling and aerosol packaging capabilities include traditional system in tin-plate or aluminum cans to bi-compartmental systems, such as bag on valve (BOV) and bag in can (BIC). The Company offers its products in various brands, such as TRU SHAVE and MR JAMIE STEVENS. The Company offers a range of services, such as project management, sourcing, manufacturing and logistics. The Company offers warehouse facilities for chemicals, raw materials and finished goods, as well as a global distribution network capable of bespoke delivery. more »

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The Quarto Group, Inc. is an illustrated book publishing and distribution company. The Company is engaged in creating content and publishing books from a diverse portfolio of imprints. The Company operates through segments, including Quarto International Co-Editions Group; Quarto Publishing Group USA; Quarto Publishing Group UK, and Quarto HK. The Quarto International Co-Editions Group segment creates illustrated books that are licensed and printed for third-party publishers for publication under their own imprints. The Quarto Publishing Group USA segment creates and publishes illustrated books in North America and sells co-editions of them internationally. The Quarto Publishing Group UK segment creates and publishes general non-fiction and illustrated books in the United Kingdom market. The Company’s books are sold in approximately 50 countries and in 39 languages. more »

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Gattaca plc, formerly Matchtech Group plc, is a human capital resources business dealing with contract and permanent recruitment in the private and public sectors. The Company operates through two segments: Engineering and Technology. The Engineering segment comprises Barclay Meade and Alderwood recruitment consultancy brands. The Technology segment includes the Connectus recruitment consultancy brand. The Company is a provider of specialist recruitment services to the engineering and technology industries, both in the United Kingdom and internationally. The Company offers three core solutions: Contingent Workforce Solutions, Permanent Recruitment Process Outsourcing (RPO) and Total Workforce Solutions. more »

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  Is LON:SWL fundamentally strong or weak? Find out More »

41 Comments on this Article show/hide all

simoan 9th Nov '17 22 of 41

In reply to post #238803

Having delved into their accounts further (in particular, note 19) I understand Gattaca (LON:GATC) have an invoice factoring facility at 1.1% over base and with £50m of headroom. Their overall rate is about 2% over base (in theory and practice). All good, as Paul said.

The main problem with Gattaca (LON:GATC) that is not shown in the accounts is that the management are just not very good. They keep making acquisitions that do not add any shareholder value. Contrast the performance of the company with similar listed recruiters, and the fact is, they are poor. I don't believe their excuses, it's probably just that they are being outperformed by the competition.

All the best, Si

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daveinthelakes 9th Nov '17 23 of 41

Hi Paul,
I used the Stocko compare facility for Swallowfield (LON:SWL) and Creightons (LON:CRL) and on the vast majority of metrics Creightons came out the better. Do you have a view on the respective merits of the two companies,

Thanks, Dave

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Paul Scott 9th Nov '17 24 of 41

In reply to post #238838

Hi Dave,

The trouble is that there aren't any forecasts for Creightons (LON:CRL) - so Stockopedia isn't able to compare the most important numbers - forecast earnings growth, forecast PER, etc.

On the historic figures, CRL does indeed come out best when compared with SWL, but CRL is a bit too small & illiquid for my taste. The 03/2017 figures for Creightons were excellent, I covered them positively here.

Regards, Paul.

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Damian Cannon 9th Nov '17 25 of 41

Quarto Inc (LON:QRT) is definitely an object lesson in selling on the first profit warning. I bought twice about a year ago (at 299.5p and 318.5p) as things seemed to be heading in the right direction. Sold everything in March at 257p for a 17% loss. If I sold now that would be a whopping 61% loss! Lucky escape. However it looks like my second buy was literally at the top of the market. There must be some sort of lesson there. :-)


Blog: Ambling Randomly
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Ramridge 9th Nov '17 26 of 41

Re. Quarto Inc (LON:QRT) One of Robbie Burns hard and fast rule is never to invest in a company where the ratio net debt/ profits exceeds 3.
If you look at this ratio for Quarto over the past 3 years, it has been around 4. A clear and strong red flag.

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herbie47 9th Nov '17 27 of 41

In reply to post #238873

I think its one of Lord Lee's investments.

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Damian Cannon 9th Nov '17 28 of 41

In reply to post #238873

Sounds like a fine rule. Normally I stick with companies that are net cash or nearly so. It's surprising how many companies are in this happy state...

Blog: Ambling Randomly
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herbie47 9th Nov '17 29 of 41

Quarto Inc (LON:QRT) Also is in NAPS 2017. I generally agree with that rule but prefer no debt, sometimes I make the odd exception such as Rentokil Initial (LON:RTO) last year.

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fwyburd 9th Nov '17 30 of 41

Interesting RNS from IQE (LON:IQE) about a placing. Would be great to your thoughts on this, Paul or Graham

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dgold 9th Nov '17 31 of 41

IQE (LON:IQE) are doing a placing at the market price of 140p, they want to raise £95m for investment. Sounds interesting. Presumably they are confident they can raise the funds and I would imagine this will draw more attention to the company and its potential. (I hold). The company says:

Rationale for the Placing and use of proceeds

IQE is seeking funding to enable it to scale the business to capture multiple high growth mass market opportunities.
This placing will allow IQE to expand its capital expenditure programme in its new foundry, with the purchase of up to 40-60 new MOCVD machines over the next three to five years.
The additional capacity should enable IQE to address multiple mass market opportunities, including its leading position in the production of VCSEL wafers for use in 3D sensing consumer electronic applications.
IQE is enjoying material demand for its VCSEL wafers from a leading global consumer electronics company for use in one of its mass market consumer products. In conjunction with multiple other customer engagements IQE expects this demand to increase as its technology is applied across multiple consumer applications and platforms.
This placing should also enable IQE to accelerate the development of new products and technology; whilst protecting and enhancing its current positioning in a fast-moving marketplace.
This placing will allow the company to de-gear and should enhance IQE's financial strength and ability to supply global Tier 1 OEMs; both existing and new customers.
This placing in conjunction with the "Cardiff City Deal" should allow IQE to generate incremental sales.
Current trading

On 20 October, IQE confirmed that it had enjoyed a strong Q3 with continuing growth driven largely by the ongoing strong VCSEL ramp for a mass market 3D sensing technology.

The Board remains confident that at current trading levels, the Company is on track to achieve market expectations. Given it remains early into the final quarter, there are inevitably a number of uncertainties between now and the year-end close.

However, should the VCSEL ramp continue along its current growth curve during this quarter, then there is potential for FY17 earnings to exceed current expectations. The Board will continue to monitor current trading and plans to provide a pre-close trading update no later than the end of the year.

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Gromley 9th Nov '17 32 of 41
The Board remains confident that at current trading levels, the Company is on track to achieve market expectations. Given it remains early into the final quarter, there are inevitably a number of uncertainties between now and the year-end close.

However, should the VCSEL ramp continue along its current growth curve during this quarter, then there is potential for FY17 earnings to exceed current expectations. The Board will continue to monitor current trading and plans to provide a pre-close trading update no later than the end of the year.
It's seems a curiously conservative way to make a bullish trading statement.

Four key sentences there.

1. At the current level of business (without any further growth) we'll hit the target.

2. But it's not out of the question that something could wrong.

3. But if growth continues as it has been we'll beat the target.

4. We'll let you know when we pretty much have all of the numbers together.

I wonder if their business is really that unpredictable in the short term or whether they are being overly reticent? As I understand it a certain "leading global consumer electronics company" seems to be pretty bullish about things.

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dgold 9th Nov '17 34 of 41

In reply to post #239003

I know what you mean. I would suggest though that it's not so out-of-place to be cautious - some companies are as they want to cover themselves just in case. As they say, it is also early in the quarter. They presumably do expect and are reasonably confident that the demand from the "leading global consumer electronics company" will increase, but feel it's inappropriate to guide for that outright because based on the actual rate of orders received so far they are only heading for "in line". So in my opinion they are probably being what you call "overly reticent" rather than anything to worry about.

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ricky65 9th Nov '17 35 of 41

In reply to post #238873

That and the chart being in a clear downtrend...

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ragnar danneskjold 9th Nov '17 36 of 41

With regard to Quarto QRT, it's as well to observe that it's in an industry suffering from declining sales.
Many of its peers over the past few years of this bull market have share price performances that have been disappointing.
It's seems difficult to make money here, a good example being Jon Moulton's Better Capital BCAP purchase of Reader's Digest in 2010 for £14M, the subsequent investment of £9M and its sale in 2014 for £1. IMO any business that puts ink on paper is nowadays swimming against a very strong tide.

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bestace 9th Nov '17 37 of 41

In reply to post #239003

I read it differently, as 'uncertainties' referring to upside risk. So I read it as them saying they would hit expectations as a minimum but with a decent chance of a beat. I think it's a bit disingenuous to claim it's "early into the final quarter" given that we are nearly half way through it, so I think they will have a pretty good idea of the final outturn for the year relative to market expectations. A steep ramp up in VCSEL activity isn't suddenly going to reverse itself in the remaining 7 weeks of the year.

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dgold 9th Nov '17 38 of 41

In reply to post #239058

I actually tend to agree with Gromley's interpretation. If the uncertainties refer to the potential upside beat then it wouldn't make sense that the upside potential is only referred to in the next paragraph and begins with "However". Although I still think the update is not so unreasonable as I mentioned in post #34.

I think the issue around the "steep ramp up" is not that they are so worried that present levels will reduce (although to be cautious they don't want to exclude it). Their main point is that it may continue to improve further in which case the results would be ahead, and about that prospect they are more cautious as it is just a projection of an increase from current levels based on the assumption that since it has been increasing it will probably increase further. This is inherently somewhat uncertain.

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bestace 10th Nov '17 39 of 41

In reply to post #239108

Taken literally, I agree that the word 'however' tends to support yours and Gromley's interpretation, but given the mood music from their customers and everything else we know about their markets right now, I just think it makes more sense to read 'however' as 'therefore'.

The VCSEL ramp is a broad secular trend. They wouldn't be splurging on all this capex and doing the placing at all if there was a material risk of that trend suddenly reversing.

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jonno 20th Nov '17 40 of 41

Regarding debt and as a follow up on the comments from Ramridge and Damian I note from the stock report that Devro's debt is about 5 times forecast pretax profits to end December. On this basis alone I would steer well clear.

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herbie47 20th Nov '17 41 of 41

In reply to post #242973

Devro (LON:DVO) also has a pension deficit, I agree I would stay well clear.

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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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