Small Cap Value Report (Thur 1 Nov 2018) - CAKE, VCP, ZTF, EKT, PCF

1st Nov '18 by Graham Neary

40 comments 9070 reads

Good morning!

Today I will cover Patisserie Holdings (LON:CAKE), Victoria (LON:VCP), Zotefoams (LON:ZTF), Elektron Technology (LON:EKT) and PCF (LON:PCF).

Patisserie Holdings (LON:CAKE)

I thought I'd add a quick preamble on Patisserie Holdings, as news flow is expected later today. The shares remain suspended.

Timeline of recent RNS announcements:

12 October (1/3): Finance Director arrested by police and released on bail.

12 October (2/3): Immediate cash injection of £20 million is required to prevent administration. Historical financial statements likely to have been affected by fraudulent activity and mis-statements. Rough estimate/guess is that revenue and EBITDA before exceptional costs for the year ending September 2019 could be £120 million and £12 million, respectively. But this is highly uncertain.

12 October (3/3): 31.4 million new shares placed at 50p.

16 October: General Meeting called for 1 November (i.e. for today) to vote through the fundraising.

24 October (1/2): Disclosure that the grant of options to the CEO and FD in 2015 and 2016 was not appropriately disclosed and accounted for in CAKE's financial statements.

24 October (2/2): HMRC's winding up petition against CAKE's principal trading subsidiary is dismissed.

26 October: The FD resigns with immediate effect. CAKE reserves its position in respect of any potential claims it may have against him.

31 October: In response to an article by The Sunday Times, restaurateur David Scott says he has no intention and no interest in acquiring any shares in Patisserie Valerie.

1 November: That brings us to today. Watch out for an RNS or two!

Today's update

Sadly, the company is not in a position to provide us with any useful information today. See the RNS. It doesn't want to prejudice the investigations from "multiple regulators and authorities".

The comment thread below always contains useful contributions. Thank you to the reader who shared this link to a Reddit thread.

On that thread, an anonymous user has asked the following question:

It could be a fake story, who knows? But if it's true, I think…

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Gromley

1st Nov '18

A bit of a mixed update from Zotefoams (LON:ZTF) actually I thought.

Revenue and Profit slightly above expectations is clearly good news.

Revenue growth for the higher margin HPP product line of 97% for the 9 months (was 82% for the first 6) is also very good.

MuCell however remains the fly in the ointment from my perspective - it only represents 2% of Group revenues, but reduces group profit by c. 20%!

o Year-to-date sales fell by 21%, excluding the one-off equipment sale in 2017;
o Q3 sales were impacted as a result of our internal restructuring, described in our interim results statement, which absorbed resource;
o MuCell Extrusion is being re-focused to develop the full potential of its technology;

I can't quite make sense of the number underlying revenue was up 20% in the first six months, so this suggests to me that they have sold virtually nothing in Q3 for MuCell. Hopefully this at least indicates that the MuCell review is extensive - I remain of the view that they need to fix it or ditch it, if they are to unlock the value in their business.

Nevertheless overall profit is expected to be slightly above expectations (17.7p eps as per stocko - incidentally I think the comparable 2017 figure was 16p eps so that is "only" c. 10% growth, but after the headwind of an 8.8% increase in the sharecount to fund capacity expansions.)

So all in all, I'm still a happy holder, but hoping for some positive news on the MuCell restructure at the Full Year results. If so I would expect an upgrade on the 2019 earnings forecast (currently forecast to be +20% vs 2019, but that I believe comes solely from the two product lines and not from any MuCell improvements.)

sharmvr

Hi Graham,
Just wondering - would you consider VCP debt investable.

Great link for sovereign BB- , personally I think I would prefer something like an ISHRS JP MORGAN EM BOND USD DIST ETF (LON:SEMB) over Victoria (LON:VCP).
Hold £Semb

millen

Brief report on the (LON:CAKE) meeting here http://www.cityam.com/267973/chairman-luke-johnson-reveals-patisserie-valerie-three

Collector

Would be a little wary of chasing ZTF much higher with oil sanctions about to kick in,
this is a large input cost for them.
Would not put it past the Iranians to really kick off in the straits of hormuz.
So am similarly wary of airline related stock too.

Graham's mention that Zotefoams (LON:ZTF) might be worthy of further research, reminded me of what hard work that is because there doesn't seem to be much written about the company.

As a minor attempt to remedy that I wrote my summary of the company here back in June I think it still broadly holds true, although I may update it to cover more recent developments. (It also contextualises my gripes about MuCell.)

As ever, if anyone has any other insights to add to that, they would be most gratefully received (You'll have to form an orderly queue however).

davidjhill

WANdisco (LON:WAND)

A little off topic in terms of todays news, though I noticed directors bought a day or so ago so and I meant to post then, so not that off topic :) However, given this communities penchant for more than the odd gem of top analysis I thought I'd ask anyway.

I owned these from 600p to 1200p and sold right at the top. Lucky, rather than good I might add !!
I felt they were overvalued there and frothy so took some good profits. They have since dropped to sub 400p on what I consider lukewarm results. The company claims the move to subscription revenues versus the historic lumpy contracts is actually good news and will ultimately lead to strong growing stable revenues. woohoo!! But really that's a must, since half year revenues actually dropped slightly despite contract win announcements.

They have signed distribution partnership deals with Microsoft and IBM though, and given their respective growing cloud presence and ambitions this could add considerable weight to forward sales. Not only that but at £190m market cap both must be at least considering swallowing the whole company. Peanuts for them to get hands on such a high quality proprietary data IPR one would have thought.

You can guess I am considering buying here as I think they could be due a strong bounce, but I am feeling somewhat reticent following, what I consider, their last set of tepid trading updates. Directors are buying down here and they already own quite a lot so they obviously consider there to be value. I don't give a lot of credence to relatively small director purchases mind.

I am also mindful that I may view this stock with heavily rose tinted glasses having made good profits recently. Just the fact they fell from 1200p to 400p does not make them a buy. They still lose money and burn cash but the technology appears to be highly regarded in the industry and well utilised. For me it is more a question of whether they can adequately monetise this tech and my previous confidence in that aspect has been shaken a bit.

Does anyone follow £WAND? I am sure one of you will have some eminently sensible analysis, which I would appreciate.

Would be a little wary of chasing ZTF much higher with oil sanctions about to kick in,
this is a large input cost for them.

Interesting thought and certainly one worth bearing in mind.

The key input material is LDPE which only broadly correlates to the price of oil at any time.

They don't reference either the price of Oil or PE anywhere in their risk management (except to note that in the event of an economic slowdown, input cost would tend to come down offsetting in part lower demand for their products.)

I would imagine therefore that they don't see this a particularly major risk and probably have sufficient pricing power to largely compensate.

One of the key selling points in fact in MuCell (and I think some of the other product applications) vs alternatives is that it allows the use of less plastic, so there is even to a degree a positive to them from higher plastic prices.

mojomogoz

Any views on Indivior (LON:INDV) ? I decided to buy into it today at 180p. A lot going on but at this price (approx 5.5 current p/e) it can absorb more disappointing news with positive developments across a number of fronts not viewed likely (implicitly in the share price).

Certainly a way to take idiosyncratic rather than market risk :)

fanmail

I have looked at ZTF on a number of occasions over the last ten years but it always comes up against the issue that its cash flow return on capital is below its cost of capital. Tends to be a showstopper for me.

MarkOR

I also am aware of some very generous consumer deals for Barclays Premier customers with Patisserie Holdings (LON:CAKE) whereby with the show of a special screen of your app, one received a free cup of coffee worth £2-3. I used this myself, and I once went into a PV shop some months ago and the whole queue of people were using this freebie to get a free coffee. (I think the business idea was for PV to make money off the cake they might sell you alongside the cup of tea/coffee). This is pure speculation, but this type of deal is very tricky for an accountant with his P&L. You can find yourself making lots of paper money, but short of cash. It depends on who is supposed to be paying for the freebie. If that's Barclays Bank then all sorts of nonsense could be going on wrt to the various liquidity / banking lines / loans currently being provided. Pure speculation but if it was, for instance, a British Airways app and not a Barclays App I wouldn't have brought it up.

Orangetree

Patisserie Holdings should have done a Rights issue to involve existing shareholders at around 30 pence per share for another £25m or more. It would give existing shareholders the opportunity to participate in the company's recovery and its a way of saying sorry. That would initially shock the market at first, but if operations were to recover in two to three years' time, they should start steady buying back shares over a number of years.
I guess the competitive advantage of Patisserie isn't as strong and it appears the company will likely close down stores and streamline their operations. Existing shareholders will probably need to wait a long time before the shares recover back to their highs.

Trident

I always wondered what the economics of these types of deals was for the retailer. Vodafone did a Monday's meal deal promotion for Upper Crust and WH Smith outlets I believe.

From the promoters perspective, they are seeking to create loyalty to the Brand. I can see the retailer might give a volume discount to the promoter, to create greater footfall. But would they provide an element of the deal free?

Be interested to know from any marketeers out there what the arrangements generally are.

nicobos

Victoria (LON:VCP)

For those interested: "Victoria has released Initial Price Talks of 5.50–5.75% for its debut €450 million, five-year (non-call two) secured bond offering via joint global coordinators Barclays and HSBC (B&D), and bookrunner Natwest Markets. Timing is likely to be next week’s business, according to sources."

InvestorJohn

Re: 4imprint (LON:FOUR) Done my research on this about 3 years ago and decided not to buy... it has haunted me ever since with its rapidly increasing share price!!

Zipmanpeter

Trident,

I'm an ex FMCG Marketeer with P&G and there is no way of knowing whether the coffee offer was for free or who paid what . In reality, the 'price' paid for the coffees would depend on the negotiating skills of the 2 partners and could could vary from Barclays paying all the costs to none depending on who approached who and how. (That's what the Business Development or Sales guys overhead line was for or so they told me!)

For my own interest, I put together some sums as a thought experiment - see below. Obviously all numbers and assumptions are made up but 2 thoughts:
1. this was not obviously a silly deal for for Patisserie Holdings (LON:CAKE) (or Barclays)
2. not on a scale to create a £40Mn black hole even if repeated several times

Let's say 100,000 "free" coffees were given away.

For a product like coffee in an established coffee shop washing & re-using its cups, gross profit margin must be very high indeed - direct cost of say 20p /cup vs say ave £2.00 'price' but let's say 40p to include marginal labour etc. The 'waste' to PV from offering the deal to existing users would be very low. I doubt a very high percentage of Barclays Premier customers (say 20%) will have used Patisserie Valerie before, yet these would be excellent cakeshop prospects being typically middle aged, above average in disposable income. Also, only those able to visit a PV store would be able to take up the deal plus the app could limit the number of times the customer was able to take advantage.

I would therefore guess the deal would be profitable quickly for PV even if they gave the coffee away, just on repeat coffee sale grounds (geddit!), let alone from adding the margin from cakes or 2nd order benefits from new customers bringing along friends or colleagues .

Equally, a 'free' coffee worth £2.00 in a nice store brand is good news and a cheap offer for Barclays to "giveaway".

Costs
Direct Costs (100,000*0.20) = £20,000
Other largely fixed costs (eg app development + publicity costs £100,000

Additional gross margin
Assume 20% wastage to existing PV coffee drinkers & 53% take free free coffee & never buy again
But also Assume 20% of triallists buy from PV again once, 5% buy multiple times (x5/yr), 2% become regulars (x50/yr)
Assume ave price is £2.00 and full price %GM is 80% ie £1.60 GM per cup

Incremental GM is thus (20,000*1 + 4,000*5 + 1600*50) * 1.60 = 120,000 * 1.60 = £192,000
Incremental costs are (100,000*0.2 + 100,000) = £120,000

Net economic gain available to be split = £72,000 (but could be shared -£30,000 Barclays, £102,000 to PV !!)

jonesj

Costa always seem to be doing more much business than Patisserie Valerie when I walk past the stores. The prices are only a few percent higher at Patisserie Valerie, so I imagine the turnover must be lower, unless the customers are buying the more expensive items.
All these observations are through the window, since I've never been tempted to try the product or stray away from the usual coffee chains.

shanklin100

2nd Nov '18

Re Patisserie Holdings (LON:CAKE), the "Sketch" section of this Times article captures, I presume accurately, the mood of yesterday's meeting

https://www.thetimes.co.uk/article/patisserie-escapes-bankruptcy-by-raising-15-7m-with-cheap-shares-7mm58h0m9?shareToken=fc458ed33ee6056f75a931e4a76b6887

It presents LJ in a very bad light. The least he could have done was to sound a little contrite.

Bonitabeach

I write as a distant observer on the bun fight going on around this disastrous confection.

Amid the puns Luke Johnson appears to have avoided all the attempts to land a cake in his face and I suspect he finishes the week with a smug sense of satisfaction.

The share placing to raise £15.6M from shareholders (excluding Luke Johnson and hordes of incandescent private investors) has been voted through.

Small Cap Value Report (Thur 1 Nov 2018) - CAKE, VCP, ZTF, EKT, PCF

Patisserie Holdings (LON:CAKE)

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Graham Neary

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