Small Cap Value Report (Thur 20 Sep 2018) - BEG, NAR, INL, IGG, NTBR, FCCN

Thursday, Sep 20 2018 by

Good morning, folks.

There is lots to catch up on today. We will be hearing from Paul on French Connection (LON:FCCN).

The list turned out to be:

Begbies Traynor (LON:BEG)

  • Share price: 70p (+1%)
  • No. of shares: 110 million
  • Market cap: £77 million

AGM Statement and Trading Update

A nice easy one to start with. Q1 trading at this insolvency practitioner is in line with expectations. It's investing for growth and benefiting from recent acquisitions while the underlying number of corporate insolvencies has picked up, providing a tailwind.

The long-awaited (for BEG shareholders) spike in insolvencies looks like it might be approaching us, and as such the share price remains within touching distance of a multi-year high at 76p.

Its counter-cyclical nature is probably its most interesting feature for some of its investors, who otherwise might not be too interested in a professional services consultancy.

More growth is on the cards both organically (hiring fee earners) and through acquisitions.

Good luck to those involved with this one.

Northamber (LON:NAR)

  • Share price: 29p (unch.)
  • No. of shares: 27 million
  • Market cap: £8 million

Final Results

Below our threshold and probably the most boring share on the LSE, I should probably ignore this one. But it has a special place in my heart, as it's a "deep value" investment I fruitlessly held for years.

This share taught me several things. One of the things it taught me was that distribution activities - acting as a middleman - don't offer much of a moat (except in very specific circumstances).

Northamber has struggled to generate much of a gross margin on its tech distribution activities for years, and whatever margin it has generated has been easily gobbled up by staff costs and other overheads.

It last generated a profit in 2010.

Reported NAV per share was 103p in 2005, and has been very gradually…

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

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Begbies Traynor Group plc is a business recovery and property services consultancy. The Company's segments include insolvency and restructuring, and property. It provides services from a network of the United Kingdom locations through two operating divisions: Begbies Traynor and Eddisons. Begbies Traynor is an independent business recovery practice that handles corporate appointments, serving the mid-market and smaller companies. It provides insolvency, restructuring and consultancy services to businesses, their professional advisors and financial institutions. Eddisons is a national firm of chartered surveyors, delivering transactional and advisory services to owners and occupiers of commercial property, investors and financial institutions. It provides professional services, such as business rescue options, advisory options, forensic accounting and investigations, corporate and commercial finance, personal insolvency solutions and services to banking, legal and accounting sectors. more »

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Northamber PLC is a United Kingdom-based company engaged in supplying computer hardware, computer printers and peripheral products, computer telephony products and other electronic transmission equipment. The Company's Wholesale business provides a wholesale function for information technology (IT) products. The Company's Solutions business unit focuses on a consultative approach to IT technologies. Its Retail business unit focuses on providing consumer goods to national retailers. It offers products, such as personal computers, tablets, smart phones and monitors. It offers hard disks, memory cards and optical media. It also offers a range of cables. The Company provides a range of infrastructure solutions. It offers networking and security solutions. It offers software solutions, such as design and publishing, cloud, desktop software, security software, server software and licensing. It also offers home control solutions and conference phones. more »

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Inland Homes plc is a United Kingdom-based company, which is principally engaged in acquiring residential and mixed-use sites and seeks planning consent for development. The Company develops a number of the plots for private sale and sells consented plots to house builders. The Company's segments include Land, House Building, Contracting, Hotel, Investments, Investment property and others. The Company is a developer of urban regeneration projects around Southern England, with a particular emphasis on residentially led mixed-use schemes on brownfield sites. The Company's land portfolio consists of approximately 6,680 plots with the majority in the South and South East of England. The Company's portfolio consists of both brownfield and strategic sites. The Company's projects include Wilton Park, Beaconsfield, Meridian Waterside Southampton and Buckinghamshire. The Company's land portfolio includes Famborough, Woolwich and Bushey. more »

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43 Comments on this Article show/hide all

cw6365 20th Sep '18 24 of 43

City Pub (LON:CPC) please

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Snoo 20th Sep '18 25 of 43

I am an IG Group (LON:IGG) holder, so would like to add my request to the numerous others, G.

I am personally not sure whether the 10% drop is rather optimistic. I use IG for spread-betting and the effects of the leverage are all too apparent: previously you could have had a £1/point bet on the FTSE100 with very little in your account (don't know the exact number but under 100).

This week I tried to place a similar £1/point bet (to get the £5 share trades) and the margin has increased massively.... to make the same bet you need something like £400 in the account now.

Would these requirements be the same for PLUS? I can imagine 'recreational' trading being heavily hit if you need a couple of thousand just to open up a few positions on indices.

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Howard Marx 20th Sep '18 26 of 43

In reply to post #400429


IG Group (LON:IGG) are assuming a 34% drop in retail revenues due to the higher margin requirements you mention above.

The new ESMA limits on leverage are industry wide & so apply to all EU operators, including Plus500 (LON:PLUS) & £CMCX

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rivaldo 20th Sep '18 27 of 43

I second EC's request for coverage of PEG's interims today, which (as a holder) I found very satisfactory indeed on a £14m m/cap at 25p:

- H1 adjusted profits up 17% to £600k, so PEG's confidence in full year forecasts of around £1.2m looks well-founded
- there's a good chance forecasts of 2p-2.15p EPS will be beaten given the very strong H2 order book
- revenues are up 21%, even despite the new IFRS15 revenue recognition rules reducing Eyetrain revenues
- all 3 divisions are looking strong and growing nicely
- the new acquisition is going well and winning contracts
- recurring income is also looking good
- there's a strong hint of further retrofit Eyetrain contracts to come
- there was excellent cash generation of almost £1m from operating activities, and PEG have a £1m cash pile to play with

WH Ireland have retained their 34p valuation for PEG, and their forecasts of 2p EPS rising to 2.4p EPS next year.

I note they say that this is "For the time being", with those forecasts "well underpinned by the strong order coverage".

Which suggests that we may get upgrades if all goes well - and PEG are cheap enough on a forward P/E of 10.4 secured by their order books, let alone with any upgrades.

The outlook statement reads very well:

"The Group continues to benefit from a good balance sheet and a strong forward order book of £20 million which has been further enhanced with the recently announced awards of three contracts totalling over £6.5 million from Bombardier and Siemens.

The Board is also pleased with the performance of its more recent acquisitions, QRO and RTS, and continues to review opportunities for other acquisitions.

With the June 2018 order book containing revenues of approaching £10 million for the second half of 2018 and almost £8 million for 2019, the Board remains confident in the future prospects for the Group."

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Paul Scott 20th Sep '18 28 of 43

Good afternoon! This section written by Paul Scott

Share price: 45.5p (down 9% today, at 12:36)
No. shares: 96.4m
Market cap: £43.9m

(at the time of writing, Paul holds a long position in this share)

Interim results

French Connection Group PLC ("French Connection" or "the Group") today announces results for the six-month period ending 31 July 2018.

Thanks for the excellent reader comments. I agree that the turnaround here is going at a glacial pace. That is unavoidable though, because it's tied to lease expiries of the heavily loss-making retail division.

One point which readers seem to have overlooked, is that FCCN has a considerable H2-weighting to results. Most years, the interims are perceived as poor, and often presents a buying opportunity, because people forget about the seasonality - i.e. H1 losses are recouped in H2. Also, net cash is higher at year end, compared with interim period end.

As has been discussed here extensively in the past, FCCN is best seen as a successful wholesale & licensing business, with a disastrously performing retail division attached - with shops being closed when leases expire.

Retail division - it feels like FCCN is trying to run the wrong way up an escalator with its retail division. Despite store closures, the H1 loss actually got worse, from -£6.7m in H1 LY, to -£7.2m in H1 TY.

Like-for-like ("LFL") sales in H1 were poor, at -7.0%. That's quite a hefty number, and with operational gearing inherent in retail (fixed cost base), this had a magnified impact on the bottom line. So unfortunately, the turnaround is being held back by deteriorating profits outweighing the benefit of closing loss-making stores. 

My understanding is that FCCN has 3 sites which have horrendous trading losses. Therefore, once those sites are closed, the performance of the retail division should improve considerably. Unfortunately, I have not been able to find out when these leases expire. The Oxford Street store for example is on a crippling rent, and must lose millions of pounds each year.

2 stores were closed in  H1, and 6 more are planned for closure in H2. It's encouraging to see the pace of store closures accelerating. Therefore, losses from the retail division will definitely shrink over time, but the timing is uncertain. I should probably sit down with a commercial property expert, and find out the lease terms of all of FCCN's sites, as I'm not sure how to find that information online.

Wholesale - doing quite well. H1 profit rose from £3.7m LY, to £4.6m this year.

Licence income - flat at £2.6m

Central costs - look far too high, running at just over £10m p.a. This is excessive, given the smaller size of the business. Management really needs to take an axe to the central costs.

Balance sheet - remains excellent, and is key to the investment case here - as downside risk is protected strongly.

NAV is £40.9m, NTAV is £40.7m.

Working capital is very strong, with net current assets of £31.6m, including £12.8m net cash (there's no bank debt).

Obviously the company is using capital inefficiently, as it is not generating any meaningful return from all that capital. As stores continue to be closed, this will free up more inventories into cash.

Outlook - the Chairman/CEO/founder, Stephen Marks, is worth listening to, as I find his commentary each year is realistic & honest. Today he says;

"I am pleased that the changes we have made around the business over the last couple of years continue to move us forward.

There is no doubt that progress has not been helped by the trading conditions in which we operate in the UK, although we can take great confidence from the performance of the wholesale business and the stability of the licence income

The order books we have provide a clear outlook for the second half of the year in wholesale although retail continues to be challenging.  We remain on target to return the business to profitability this year and we will be doing everything we can to ensure that happens."

That's a fair assessment in my view. I'm encouraged by the comment that full year profitability is still expected, based on good visibility from the order book.

Onerous lease charge - I'm rather surprised this wasn't done in the past. The auditors probably insisted on it, so I wouldn't read anything in particular into this decision. The £6.4m provision will of course assist future profits, as it is released.

My opinion - candidly, I was hoping to see more progress on the turnaround in H1. However, the reason I hold this share remains unchanged - it's likely to be sold to a trade buyer in the not-too-distant future. Waiting may be frustrating, but patience is a key attribute in investing.

Mike Ashley's plans to turn House of Fraser stores into the "Harrods of the High Street" should play to FCCN's strengths, if they can negotiate a decent deal with him.

A bid approach was received last year, and due diligence undertaken. It fell through, but the key point is that this confirms the septuagenarian founder is willing to look at exit routes. The longer it takes, then the more loss-making retail sites will have closed, so time is on our side, in my opinion - although that's not particularly evident from today's numbers!

There's also the potential for divis to resume fairly soon, which is hinted at in the narrative;

We believe that the business is best served by retaining our current cash reserves to support the turnaround of the business and therefore do not recommend the payment of an interim dividend.  We do however intend to keep the shareholder distribution policy under close review during the remainder of the year as we return to profitability.

I can understand why some people might have wanted to sell up & move on today, as small shareholders tend to have very short time-frames, and the figures today overall were not great. For me, I'm looking further out, with a potential exit price on a takeover bid possibly being 150p+ in my opinion. With balance sheet strength protecting the downside risk, this looks an attractive special situation to me. As the timing of any bid is unknown, I want to be holding this share when a bid is announced. That might mean taking a bit of short term pain, but that doesn't bother me in the slightest, it's part of the whole process. Special situations are usually painful for a while, before the payday comes in.

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Phil Dunphy 20th Sep '18 29 of 43

Thank you G for your update on IG Group (LON:IGG) I think it's too early to tell what will happen longer term. As other readers are right that there is a huge difference in margin requirements when i needed to put some cash in spreads to qualify for the three trades (£1 point on FTSE quick open & close) to not get charged £25 per quarter to have the account.

Northamber (LON:NAR) is interesting one you mention, do you know the breakdown of NAV in freehold property as a %? I can't seem to find it in my quick scan of the accounts?

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paraic84 20th Sep '18 30 of 43

Re French Connection (LON:FCCN) leases this may help for context from end of FY2018 (apologies if this is already widely known):

"We are still targeting to have
reduced our store portfolio to around 30 full price French
Connection stores by the end of the new financial year.
one store already closed and another five already planned to
close later in the year, we also continue to work on a number of
other opportunities. Importantly though during the second half
of the year we opened a new store in Manchester, under our
new store concept. This is the first store we have opened in the
UK for a considerable amount of time and serves as a great
representation of the brand, in a smaller location but in a key
market. Performance to date had been encouraging. The
average lease length of the remaining UK/Europe stores is
2.9 years (2017: 3.2 years)

The same report notes there were 47 French Connection (LON:FCCN) stores so that implies in 2018/19 they were expecting to close 17. However, today's results say they only managed to close 2 in the first half and only expect another 6 to close in H2...


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cholertonandrew 20th Sep '18 31 of 43

Thanks Graham, hope you have a good weekend.


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Camtab 20th Sep '18 32 of 43

Paul, I can't give much more on leases, but can say French Connection (LON:FCCN) in Cambridge is on Market Square which is costly space and last 5 times I have been in (over 4 months - not a big shopper) it has been empty. Two floors, one female one male, be good to know if and when this one shuts.

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gbjbaanb 20th Sep '18 33 of 43

In reply to post #400414

WRT SCISYS (LON:SSY), I used to work next door to them at one of the many Capita buildings. What I noticed most was their car park was half empty, compared to Capita that had people parking all over the nearby roads and local estate.

I think this means they're doing right - few good people working is much better than lots of people spending most of the day talking to each other.

I don't think they're the kind of stock to take off though, they have fingers in pies that can easily go wrong (eg government type IT)(and through no fault of theirs) and that means the price can be a little risky. I bought in when they announced one gov IT project wasn't going as well as expected (no surprise to me!) and the price dropped.

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Snoo 20th Sep '18 34 of 43

In reply to post #400439

Thanks Howard.

I tried a small share purchase on Griffin Mining (LON:GFM) with IG only to be confronted with the message 'not suitable for European retail clients'.

On contacting them they said I could only have a CFD or spread bet.

Is this something to do with ESMA as well? Really can't see why I can't trade it - surely it is just commission for them.

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janebolacha 20th Sep '18 35 of 43

In reply to post #400449

Paul, you talk of a potential exit price of 150p+ in the event of a bid for French Connection (LON:FCCN) .

I assume you have calculated that figure on the basis of a level of profitability
you expect them to be capable of achieving in certain circumstances and in a
particular timescale plus perhaps a premium for the name value of the brand.
Or perhaps by reference to the values of other women's fashion companies.
There is so much uncertainty around retail at present and around the high street
that, even in the very rosiest of projections, I can't see this company being worth
around £150m,

May I ask how you get to that figure.

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Bonitabeach 20th Sep '18 36 of 43

In reply to post #400449

Hi Paul,

Your review of French Connection (LON:FCCN) is a very optomistic stance, in my humble opinion.

A bid approach was received last year, and due diligence undertaken. It fell through, but the key point is that this confirms the septuagenarian founder is willing to look at exit routes.

This also confirms that somebody had a look at the books, shook their head and walked away. They have possibly calculated when the cash runs out and it can be bought from the administrators.

Working capital is very strong, with net current assets of £31.6m, including £12.8m net cash (there's no bank debt).

Without the £11.7M received from the sale of Toast it would look very different and Marks can only pull that white rabbit out of the hat once. I think by September 2019 this business will be overdrawn. The provisioning for onerous leases will flatter future profits (or losses) but the rent will still have to be paid and does nothing for cash flow.

Central costs - look far too high, running at just over £10m p.a. This is excessive, given the smaller size of the business. Management really needs to take an axe to the central costs.
The lack of action or even recognition tells me all I need to know about the quality of the management.

Your hope for a trade sale is the only way out. It just might be a vain hope - but best of luck with it!


No position.

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Snoo 20th Sep '18 37 of 43

I'm not so bullish about French Connection either. I can very well understand the strategy they are pursuing because retail is losing money, but I think there is an element of blaming it more on the macro elements rather than a possibility that their brand isn't what it used to be.

Totally IMO as a male consumer who might have been their target market, in the 90s it was a premium brand with a catchy advertising campaign (fcuk), but back then stuff like Uniqlo, H&M, Zara didn't exist and others have upped their game, and tastes have changed a little, with people not so bothered about a logo. Other brands have had big name tie-ups, like Uniqlo/Djokovic, a quick Google shows that FC had Anthony Joshua, but that was in 2015 before he hit the big time... I guess they couldn't afford him today as he would be a great partner for a brand.

As well, the kind of licencing they have done has done little to position themselves away from others. Come Christmas time there is a lot of FC branded stuff that is the same price as all the others, and the worst of all, there are FC suits in any shop that wants to sell them (like M&M direct), the cheap polyester type not much better in quality than an own-name (I have owned one, sucked in by the brand). Would a genuine premium brand do this? Short-term of course it brings the cash in.

There is inherent value in the brand, but just how much is questionable. Looking at other cool brands, it isn't impossible that they could fade out. Potentially it could be good for Mike Ashley, a hybrid sports/fashion brand could be something he could sell.

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Howard Marx 20th Sep '18 38 of 43

In reply to post #400489


The ESMA rules introduced 1st August seek to provide better protection to retail clients trading leveraged products, like CFDs.

Clearly the buying of shares with cash is not a leveraged product & hence falls outside the new ESMA rules.

IG will allow you to set up a separate account for trading cash Equities that runs parallel to a CFD account or a Spread betting account. Setting up these accounts should take just a few minutes, though you'll probably need to contact the helpdesk.

Hope this helps.

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Paul Scott 21st Sep '18 39 of 43

In reply to post #400494

Jane, fair question. For me, I cannot see Marks selling it for under 100p, and I see the value going up. You may have a different view. This brand has a very high value, in my view. So 150p is not my low view, it could be a lot higher

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StudyingHard 21st Sep '18 40 of 43

In reply to post #400519

Keep in mind that the company currently has no debt. Even if your scenario were to occur, I doubt the company would have much issue covering costs for quite some time by taking a loan or two. Very likely provided their recovery process has continued and is still on track (given that leases are the primary issue I don't see why it wouldn't? Or would be within the loan period even if it goes slower than we'd like) I can't see why a bank wouldn't cover them?

Trust me when I say, I've seen companies in worse situations get survivable loans. Granted I'm no fan of gearing in shares, but we're not talking death spiral style loans here. We're talking a well established brand on a clear proven path towards profitability taking out their first loan in a very long time, to cover very predicatble expenses. Loan terms should be fairly reasonable from any creditor.

This company should not run out of cash simply because their own bank balance runs out.

For myself I have a minor position of roughly 1.000 Pounds worth, which I'll be holding. If the share price remains low over christmas I might put in another thousand pounds or two. I read Paul's initial reports and the statements he based them and his logic seems sound to me.

I also got the pleasure of buying in on the absolute peak so I'm down about 21% so far but I bought into this expecting a 1-2 year wait for profit so whether it bounces up or down a little in this period isn't much of a concern.

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Zipmanpeter 21st Sep '18 41 of 43

In reply to post #400539

RE FCCN - I can see it as perfect for Ashley as part of a "Harrods of the High St" plan, keeping it as a pure fashion brand alongside/in Flannels in the same way we has kept and moved downmarket Slazenger, Lonsdale etc. They trade off past glories enough to be worth keeping but will be dropped when they no longer pull their weight and replaced with other fading beauties. Same in ex-HOF (& Debenhams?) stores, French Connection ladies dresses on floor 1 upstairs (with other posh frocks), FCUK a standalone brand downstairs near the door and next to the entrance to Belong upstairs.

Wholesale & licencing (and international) keep on as they are and the whole thing is cost cut to the bone. Not pretty but would squeeze out a lot of value - certainly more than current price.

Key issue is probably egos and timing: Mike Ashley and Stephen Marks have to agree a valuation at a common moment.

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Clitheroekid 21st Sep '18 42 of 43

"My understanding is that FCCN has 3 sites which have horrendous trading losses. Therefore, once those sites are closed, the performance of the retail division should improve considerably. Unfortunately, I have not been able to find out when these leases expire. "

Paul, I may be able to find this information if you can identify the 3 stores concerned.

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wpfool 25th Sep '18 43 of 43

French Connection (LON:FCCN)
I have reviewed a Deed registered at the Land Registry and it is my understanding that:
The Oxford Street Store lease is to be surrendered in Jan 2019
A reduced rent has been paid since February 2017
A premium is to be paid by the Landlord to French Connection (LON:FCCN) totalling £4.5 m part of which has already been paid with the balance payable on surrender.
Impossible to determine what has been paid to date and what remains to be paid

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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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