Small Cap Value Report (Thur 18 Oct 2018) - GAW, ZYT, TAM, PHO

Thursday, Oct 18 2018 by
57

Good morning! 

A couple of things which caught my eye so far:


Games Workshop (LON:GAW)

  • Share price: £30.175 (-9%)
  • No. of shares: 32 million
  • Market cap: £977 million

Trading Statement

This is almost comedic in its brevity:

Following on from the Group's update in September, trading to 7 October 2018 has continued well.  Compared to the same period in the prior year, sales are ahead and profits are at a similar level to the prior year.
However, the Board remains aware that there are some uncertainties in the trading periods ahead for the rest of the 2018/19 financial year.  A further update will be given as appropriate.

The share price has now fallen by 25% from its recent high, with a further 9% fall today.

Isn't it remarkable that nearly £100 million pounds in value can be wiped away merely at the mention of "some uncertainties"?

I suppose there's a little bit more to it than that. There is a slight cause for concern in that profit margins must have slipped, if sales are up and profits are flat.

But there's also a discrepancy (in the company's favour) between official forecasts and this update.

Official forecasts for the full-year ending in June 2019 are that sales will be a little lower and pre-tax profit will fall by c. 17% to £62 million, before the trend turns positive again in FY 2020.

But according to this note, sales so far are up and profits are flat. So if this trend could be sustained for the rest of the year (not guaranteed by any means, since there are still 7-8 months left), then we would be on course for an earnings beat by the end of the year.

Given that management have expressed some caution (over unnamed uncertainties), I'm inclined to think that we won't get an earnings beat in the end. As I've said many times, the product cycle with GAW can be a bit lumpy and we shouldn't necessarily view this on a 12-month cycle.

Anyway, let's not…

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Disclaimer:  

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

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Games Workshop Group PLC designs, manufactures and sells fantasy miniatures and related products. The Company's segments include Sales channels, Product and supply, Central costs, Service centre costs and Royalties. The Sales channels segment includes Trade, which sells to independent retailers and includes magazine newsstand business and distributor sales from its publishing business (Black Library); Retail, which includes sales through retail stores, its visitor center and global exhibitions, and Mail order, which includes sales through its Web stores and digital sales. The Product and supply segment designs and manufactures products and incorporates production facility in the United Kingdom. The Central costs segment includes its overheads, head office site costs and costs of running Games Workshop Academy. The Service centre costs segment provides support services and undertakes strategic projects. The Royalties segment includes royalty income earned from third-party licensees. more »

LSE Price
2970p
Change
-0.7%
Mkt Cap (£m)
971.3
P/E (fwd)
17.4
Yield (fwd)
4.2

Zytronic plc is involved in developing and manufacturing of touch sensor products. The Company is also engaged in the development and manufacture of customized optical filters. Its geographical segments include Americas (excluding USA), USA, EMEA (excluding UK and Hungary), Hungary, UK, APAC (excluding South Korea) and South Korea. Its products incorporate an embedded array of metallic micro-sensing electrodes. Its technologies include projected capacitive technology (PCT) and multi-touch mutual projected capacitive technology (MPCT). PCT touch sensors can be constructed from one, two or three layers of laminated, toughened glass. Its sensing products offer touchscreen solution for applications, such as leisure, digital signage, retail, surfaces, banking and industrial applications. Its touch sensors are used in video jukeboxes and slot machines. The PCT touch sensors are used in a range of workplace applications, from medical diagnostic equipment to oil field machinery controls. more »

LSE Price
389p
Change
1.7%
Mkt Cap (£m)
61.4
P/E (fwd)
15.0
Yield (fwd)
6.8

Tatton Asset Management plc is a United Kingdom-based company engaged in providing on-platform for fund management, regulatory, compliance, mortgages, protection and business consulting services. The Company operates Tatton Investment Management, Paradigm Partners and Paradigm Mortgage Services. Paradigm Partners provides compliance services to a range of firms, including financial promotions, advisor skills and knowledge assessment, FCA application, risk assessment and mitigation plans, compliance monitoring plan design and audit. Paradigm Mortgage Services is engaged in mortgage distribution business and provides access to lending panel as well as a range of mortgage and related support services, including specialist lending distributors, conveyancing partners and general insurance through Paradigm Protect. more »

LSE Price
248p
Change
1.6%
Mkt Cap (£m)
136.4
P/E (fwd)
20.9
Yield (fwd)
3.3



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


35 Comments on this Article show/hide all

sharw 18th Oct 16 of 35
1

In reply to post #409884

Zytronic (LON:ZYT) "I can't find the F/C"

PTP 5.18 (now 4.2):

https://uk.webfg.com/equity/Zy...


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Snoo 18th Oct 17 of 35

I agree with the last point there. Doesn't really seem to meet that definition because it involved a payout. Is litigation a common thing in the industry? I do know that most patents are just dormant.

I do think potentially they are in a good market. Digital interactive signs are surely going to increase in popularity, and screens could replace almost everything where physical buttons are required with a few exceptions.

Can someone explain to me, what is proprietary about their products? If a shop wants a digital touchscreen, are there not other providers?

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simoan 18th Oct 18 of 35

In reply to post #409989

Hi timarr,

Yes, you're right. It's somewhere around the 20% mark. I sold out in the summer along with anything else I thought might get got up in the general uncertainty around (which doesn't leave a lot, to be honest). It seems to be a growing trend - Renishaw (LON:RSW) also indicated a slowdown today and they've previously been a leading indicator of troubles ahead due to their limited order visibility. 

Thanks for confirming I was in the right ball park - you had me worried for a bit that I'd got my sums wrong! I noticed the Renishaw (LON:RSW) announcement too. It's a quality operator so if they are struggling I will need to revisit some of my other holdings operating in similar markets.

I don't ever try to time the market but I'm never really fully invested so I'm a bit more sanguine about things. However, I did sell and transfer as cash a large pension fund to another provider in August and that is still in cash, other than putting a chunk into the Smithson IPO.

Agreed on the patent issue: if you don't contest these you end up a target. If it really was spurious they should have made it as difficult as possible.

The trouble is, patent cases are like cockroaches... I was never quite sure how strong their IP protection was and now they have fallen at the first hurdle. Hardly spurious.

All the best, Si

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timarr 18th Oct 19 of 35
7

In reply to post #410004

On Renishaw (LON:RSW) - historically they've put out quite a lot of profit warnings and then met expectations anyway, it's the nature of their business. They're one of a bunch of higher quality engineers like Halma (LON:HLMA) and Spirax-Sarco Engineering (LON:SPX) I'd love to own if I could buy them at the right price. 

I don't generally tend to time the market either, but I went on a long holiday with no online access in the summer so decided it was wise to step out of the market and then buy back when I got back. When I came back I found I couldn't justify myself buying most of what I'd sold on the prices and outlook at the time. Funny how your perspective changes dependent on situation :)

timarr

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simoan 18th Oct 20 of 35
2

In reply to post #410014

On Renishaw (LON:RSW) - historically they've put out quite a lot of profit warnings and then met expectations anyway, it's the nature of their business. They're one of a bunch of higher quality engineers like Halma (LON:HLMA) and Spirax-Sarco Engineering (LON:SPX) I'd love to own if I could buy them at the right price.

Ahh yes, Halma... it's always looked expensive though. It certainly looked expensive when I sold it at £2 and change 10 years ago :( I suspect I will be getting exposure to some of these kind of companies through Smithson in the near future.

When I came back I found I couldn't justify myself buying most of what I'd sold on the prices and outlook at the time. Funny how your perspective changes dependent on situation :)

And of course, you'll understand the psychological reason for this. The very act of selling would have influenced your future thinking re: commitment and consistency. It's a pretty difficult thing to overcome.

All the best, Si

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dfs12 18th Oct 21 of 35
3

I've been a holder of Games Workshop (LON:GAW) and I think they have a history of being a little cheeky/cautious with their updates, which I can live with. But this one caught me out. I hadn't realised that the bad half of this update was identical to one of the updates from last year. The following text is in both updates:

"However, the Board remains aware that there are some uncertainties in the trading periods ahead for the rest of the 2018/19 financial year. A further update will be given as appropriate."

In isolation it sounds like something from a recent Patisserie Holdings (LON:CAKE) RNS. But in reality it is something that can probably be ignored.

But looking at the half that wasn't identical they had a different tone. Last years was:

"Following on from the Group's good performance in 2016/17, trading has continued strongly into 2017/18 such that sales and profits for 2017/18 to date are well above the same period in the prior year. Profits for 2017/18 are therefore likely to be above market expectations."

and this year was:

"Following on from the Group's update in September, trading to 7 October 2018 has continued well. Compared to the same period in the prior year, sales are ahead and profits are at a similar level to the prior year."

So I'd say last year's update was extremely good and this year's is OK.

I saw today's update as a preparation for a profit warning as the tone sounded ominous so sold out immediately. But now I'm not sure it isn't just another cheeky/cautious update.

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Stuart Muxlow 18th Oct 22 of 35
3

In reply to post #409964

Invested Geordie - that's the infuriating way Games Workshop work, their actual reports are top notch, very clear and articulate, yet their periodic trading updates are bizarrely vague such that they clearly spook the market with so much room for interpretation. They have released the general 'but there are many risks' statement several times before and each time the price dips. It's far too pithy for an otherwise quality company.

On the margin side, it's fairly clear the recent uplift in turnover was initially delivered with a resource pool that exceeded its capacity, so the company has had to invest in IT, warehousing and significantly in web content / social media / communications which is keeping the tills ringing (remembering back to commentary in the published accounts, it was very clear this levels of turnover was uncharted territory for the company), but is clearly nibbling at margin. They look to be trying to lock in this level of T/O rather than dipping back to lumpy sales cycles based on one big product launch. Luckily though there's a hell of a margin to work with and I remain a very long term holder for the divis!

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brucepackard 18th Oct 23 of 35
2

Hi Graham, I'd be interested in your thoughts on International Personal Finance (LON:IPF) trading update. Stock rank of 98 - bombed out valuation, but I feel like there might eventually be a decent long term story here.

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SundayTrader 18th Oct 24 of 35

Yes, Halma (LON:HLMA). I gritted my teeth and bought it at a ludicrously expensive price a long time ago, I think it was about £3. One of the less stupid investments I have made. Same for Renishaw (LON:RSW). Historically that sort of precision/specialised engineering has been the best bit of UK manufacturing, unfortunately most of it is foreign owned now so not available to UK investors - one reason for the high valuations applying to those left. A not-BREXIT may not be very favourable to them in the long run, as they mostly sell much more outside Europe than in, and competition from those with freer access to the global supply chains could get stiffer.

Both should of course have been sold at the highs earlier this year, so congratulations to those who did.

I thought the Renishaw (LON:RSW) update was short of a profit warning - they announced a first quarter profit fall, and expressed confidence in a full year profit increase - historically they are notoriously cautious and the business is subject to Q on Q swings - but they have been ramping up costs over the past couple of years, and the revenue increase in this quarter is looking light compared with the past couple of years. That in itself is indicative of where demand is heading.

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shanklin100 18th Oct 25 of 35
3

In reply to post #410024

dfs12

IMHO, the Games Workshop (LON:GAW) TS today is clearly their response to the current broker forecasts being understated by a significant extent possibly in terms of revenue and definitely in terms of profitability.

Otherwise they would not have issued it.

Only an idiot would not believe there are uncertainties ahead given the Government's complete incompetence re Brexit negotiations combined with EU intransigence. Have been happy to buy more shares in today's sale.

Cheers, Martin

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peterg 18th Oct 26 of 35
3

In reply to post #410024

But don't forget that GAW's brokers' forecasts for this year were for a significant fall in revenue and profits, after the considerable success of last year. Today's TS contradicts that view, so I'd say it looks more like preparation for an outperform on expectations later in the year than preparation for a profit warning!

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rmillaree 18th Oct 27 of 35
1

In reply to post #409999

Zytronic (LON:ZYT)

"Can someone explain to me, what is proprietary about their products? If a shop wants a digital touchscreen, are there not other providers?"

I am guessing there is none, presumably they just provide products that "work and do the job WELL" (again guessing) to enough different companies to always be one of the main options available for suppliers. Tech has come so far in the last 5-10 years and they are still going,probably as strongly as they have ever been that i don't see any reason for them to become obselete in the near future  - if it was likely to happen i am guessing it would have happened by now. Presumably their nicheness helps - although there is always the prospect someone will come along and directly try and wipe them out on price point (ala Safestyle). To me if i was a busy owner and the staff are happy with their current machines i wouldn't want to be swapping suppliers to save a bob or two or unless there was a materially proven better product - presumably they know their customers exact needs very well having been in the game so long and have enough different products that a new customer can probably be accommodated generally speaking without to much investment - albeit they seem to have had a bit of a wobble in this regard - perhaps though this investment will pay dividends.

In some respects its nice to see an honest type company where they are not hiding some extra costs as something they are not - most listed companies? would have these extras hidden (probably correctly in that they are allowed to do what they want under the rules :)) as capital items or treated as exceptional items so they can look good to mr market.

generally in the past this share has always shown good bounceback ability with peaks and troughs aplenty  which is what i quite like to see as it offers the chance to buy lower and sell high - the future as ever could be different though.

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Graham Neary 18th Oct 28 of 35

In reply to post #410024

Thanks for pointing out the similarity with previous RNS's! ATB. G

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Beginner 18th Oct 29 of 35
5

I have stayed in the Caledonian in Newcastle and the Midland in Bradford. The NAV at Peel Hotels (LON:PHO) may be a wee bit of an exaggeration!

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timarr 18th Oct 30 of 35
8

In reply to post #410044

Only an idiot would not believe there are uncertainties ahead given the Government's complete incompetence re Brexit negotiations combined with EU intransigence.

Given that there's only 6 months to Bidet and we know, roughly, that the options are Chequers or no-deal, as there's no time left to do anything else, I'd have thought the likes of Games Workshop (LON:GAW) should have assessed the risks by now and should be able to quantify them, rather than putting out vague updates. I mean - how hard can it be to warehouse a few hundred thousand Orcs, surely our new immigration policy can't be that badly defined?

Or are they saying something else? Has Donald Trump muddled up Mordor and North Korea again? Or is the EU's geek tax likely to hit profits? Or what?

It's not good enough, not for Games Workshop (LON:GAW) shareholders or anyone else.

timarr

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rhomboid1 18th Oct 31 of 35

In reply to post #410129

It’s the same boiler plate ‘future is unknown’ wording they’ve used several times before ...not least July last year...they’re just being cautious about managing expectations whilst exceeding expectations

..plus they didn’t mention Brexit

This remains my largest holding

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dscollard 18th Oct 32 of 35
1

In reply to post #410129

@timarr, substituting Uruk-Hai for Orcs simplifies the supply chain as they can be bred in subterranean pods removing the import uncertainties and the need for a currency hedge.

Clearly Games Workshop (LON:GAW) didn't do any good war gaming of Brexcrement scenarios... guess they were too busy, em, actually war gaming?

Website: runprofits.com
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JohnEustace 18th Oct 33 of 35
2

Does Games Workshop (LON:GAW) still make their miniatures at Citadel in Nottingham? If so I don't see Brexit impacting them much. It's hardly a complex supply chain is it? They just need to get in some buffer stock of raw materials - metal, paint, plastic feed stock.
If they import some miniatures then there could be issues I guess - Orcs are likely to be a lower priority than food or medicines at Customs.

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Ramridge 19th Oct 34 of 35
6

In reply to post #410129

timarr -
Given that there's only 6 months to Bidet...

Is this a typo, or auto-correction gone stupid, or B-Day short for Brexit Day, or an attempt at some kind of toilet humour that escapes me?

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ls2g08 19th Oct 35 of 35
1

In reply to post #410149

Probably referring to exporting finished products.

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About Graham Neary

Graham Neary

Full-time investor and independent analyst. Prior to this, I spent seven years in the financial markets as an analyst and institutional fund manager. I'm CFA-qualified, also holding the Investment Management Certificate and the STA Diploma in Technical Analysis.Away from finance, my main interests are recreational poker and everything to do with China, especially Mandarin Chinese. more »

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