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

Thursday, Nov 01 2018 by

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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All my own views. I am not regulated by the FSA. No advice.

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Patisserie Holdings PLC is a United Kingdom-based cafe and casual dining company. The Company offers cakes, pastries, snacks, meals, and hot and cold drinks across the United Kingdom. The Company's segments include Druckers, Flour Power and Philpotts. It offers products, such as coffee, dairy, fruit, packaging, cocoa and wheat items. It offers cakes in various categories, including celebration cakes, gluten free cakes and wedding cakes. The Company operates under various brands, including Druckers-Vienna Patisserie, Philpotts and Flour Power City Bakery. The Company offers a range of cakes, such as Gluten Free Flapjack, Gluten Free Chocolate Chip Muffin, Cortina, Chocolate Box, Carrot Cake, Cheesecake, Blackforest, Exotic Fruit Tart, Pecan Tart, Citron Tart, Choc Mousse, Mixed Berry Mousse, Raspberry Tart, Madame Valerie Slice, Mille-Feuille, Gluten Free Chocolate Brownie and Gluten Free Marble Cake. more »

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Victoria PLC is a designer, manufacturer and distributor of flooring products. The Company's principal activities are the manufacture, distribution and sale of floorcoverings. Its segments include UK and Australia. It manufactures wool and synthetic broadloom carpets, carpet tiles, underlay and flooring accessories. In addition, it markets and distributes a range of luxury vinyl tile (LVT) and hardwood flooring products produced by third-party manufacturers. Its product offering in the United Kingdom ranges from both crafted, woven Wilton carpets to Tufted carpets in a myriad of fashion colors and styles. Its stock range offerings cover saxonies, tonals, velvets, twists and natural loop pile styles for residential use. The Company supplies its products to the mid to high end residential market and contract sector both in the United Kingdom and overseas. Its subsidiary, Munster Carpets Limited, is engaged in the manufacture and distribution of floorcoverings for the contract market. 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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  Is LON:CAKE fundamentally strong or weak? Find out More »

40 Comments on this Article show/hide all

Gromley 1st Nov '18 21 of 40

In reply to post #414184

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.)

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sharmvr 1st Nov '18 22 of 40

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

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Collector 1st Nov '18 24 of 40

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.

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Gromley 1st Nov '18 25 of 40

In reply to post #414419

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).

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davidjhill 1st Nov '18 26 of 40


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.

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Gromley 1st Nov '18 27 of 40

In reply to post #414459

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.

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mojomogoz 1st Nov '18 28 of 40

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 :)

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fanmail 1st Nov '18 29 of 40

In reply to post #414464

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.

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MarkOR 1st Nov '18 30 of 40

In reply to post #414324

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.

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Orangetree 1st Nov '18 31 of 40

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.

Blog: Walbrock Research
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Trident 1st Nov '18 32 of 40

In reply to post #414534

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.

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nicobos 1st Nov '18 33 of 40

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."

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InvestorJohn 1st Nov '18 34 of 40

In reply to post #414234

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!!

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Zipmanpeter 1st Nov '18 35 of 40

In reply to post #414544


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".

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 !!)

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jonesj 1st Nov '18 36 of 40

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.

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shanklin100 2nd Nov '18 37 of 40

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

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

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Bonitabeach 2nd Nov '18 38 of 40

  Patisserie Holdings (LON:CAKE)

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.

In case you missed it earlier:

there's the small matter of a charge that Patisserie Holdings had for around £5.6M, created July 2007, in favour of Risk Capital Partners (Johnson and Scalzo as Noteholders) and which was satisfied on 11th Oct 2018...

A further £10M of the placing money raised will be paid to Luke Johnson to redeem a short term loan he advanced to Patisserie Holdings. At least the £15.6M placing proceeds will have been properly accounted for and not disappeared into a black hole.

All in all, Luke Johnson has 15.6 million reasons to be satisfied for "job well done": and amongst all the outrage did anybody even notice.


No position.

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Ramridge 2nd Nov '18 39 of 40

In reply to post #414629

Re. Patisserie Holdings (LON:CAKE) Having read The Times account of the shareholders meeting, I am staggered by LJ's behaviour.
Far from showing at least a smidgen of contrition, he appeared to have been arrogant and bad tempered.
I was a regular reader of his Sunday Times column. Not any more. IMO, the Times proprietors should show him the door.

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jonesj 2nd Nov '18 40 of 40

In reply to post #414689

So Mr Johnson is not exactly demonstrating much confidence then, if I am reading this correctly:

1 Not participating in the placing.
2 He prefers to get his £10 million back AND to be diluted by the placing, rather than extend the loan for a while longer and avoid dilution.
3 You're saying they made sure this charge was satisfied just before this all blew up ?

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About Graham Neary

Graham Neary

Full-time investor and independent analyst. Editor at Cube.Investments, small-cap writer at Stockopedia. Previously a fixed income analyst in the City and institutional fund manager. I'm a CFA charterholder and have the Investment Management Certificate and STA Diploma in Technical Analysis for good measure. When I'm not talking about finance, I enjoy recreational poker, chess and Mandarin Chinese. more »


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