Small Cap Value Report (Thur 27 Sep 2018) - VLE, BON, MOGP, ZOO, FISH, IGG

Thursday, Sep 27 2018 by

Good morning!

A huge pile of news today. The impact on my own portfolio has been a small net positive: Volvere (LON:VLE) shares are up, while IG Group (LON:IGG) shares are down after the CEO stepped down.

Final list:

Volvere (LON:VLE)

  • Share price: 960p (+8%)
  • No. of shares: 3.7 million
  • Market cap: £36 million

Half-year Report

(Please note that I currently hold VLE shares.)

This is the largest position in my portfolio again.

As a refresher, this is the investment vehicle that finds companies in need of some restructuring. Typically, their bank debt has become too large. Volvere comes in and replaces the bank with a majority equity stake.

It has compounded NAV at a double digit percentage rate for many years. I'm a relative newcomer, only owning it since May 2016 (you can find my original write-up here).

Today's interim results are about as good as I could have reasonably hoped for. The company's key subsidiaries, of which there are only two, have both improved compared to last year.

These are consultants to the automotive industry - clue in the name!

I wouldn't normally want to own shares in a company like this, as revenues are quite lumpy and contract-driven. However, I don't mind owning it within Volvere's portfolio, as Volvere was able to buy it at a very favourable price. It's also just a small part of the overall NAV.

Impetus revenues are up 21% to £14.8 million and PBT up 31% to £1.9 million (before intra-group charges), after picking up new business.

The statement is cautious about making further growth in the short-term, on the basis of uncertainty in the sector at the moment (including Brexit-related uncertainty).

That's ok - Impetus doesn't owe us anything. Performance has been superb! If it merely carries on at the current rate of profitability, it will be a fine result.

  • Shire…

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

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Volvere plc is a holding company. The Company identifies and invests in undervalued and distressed businesses and securities, as well as businesses that are complementary to existing group companies. Its segments include Security Solutions, Investing and Management Services, and Food Manufacturing. Its food manufacturing segment consists of the Company's subsidiary, Shire Foods Limited (Shire), which is engaged in manufacturing frozen pies, pasties and other pastry products for retailers and food service customers. Its security solutions segment consists of the Company's subsidiary, Sira Defence & Security Limited, which is engaged in digital closed-circuit television (CCTV) viewing software business. more »

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Bonmarche Holdings plc is a multi-channel retailer of womenswear and accessories. The Company offers clothing and accessories in a range of sizes for women through its own store portfolio, Website, mail order catalogues and through the Ideal World TV shopping channel. The Company's subsidiaries include Bluebird UK Topco, Bluebird UK Holdco and Bonmarch Limited. The Company has approximately 310 stores across the United Kingdom. more »

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Mountfield Group Plc is engaged in the supply of fit-out services (and in particular the supply and installation of flooring systems) to data centers, office, retail and other commercial premises and of specialist construction services, including those related to property fabric repair and refurbishment. The Company's segments are Construction and Fit-out. The Construction segment includes direct contracting and trade contracting services to both main contractors and corporate end users. The Fit-out segment provides raised flooring systems to main contractors and corporate end users. It provides construction support and property services to private and public sectors. It provides construction and internal fit out of data centers for the information technology (IT) industry. Its activities include design and installation of environmentally controlled data centers; fitting out and refurbishment of commercial office buildings, hospitals and education facilities, and principal contracting. more »

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

43 Comments on this Article show/hide all

Damian Cannon 27th Sep '18 24 of 43

In reply to post #402519

I agree that their statement this morning is very positive. It looks as though recent acquisitions are working well and they're confident for the coming year. Not expensive compared to growth forecasts either.

Blog: Ambling Randomly
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ISAallowance 27th Sep '18 25 of 43

In reply to post #402484

Bear in mind that IG Group (LON:IGG) went ex-div today by 33p, so the fall is not quite as bad as it first seems.

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Phil Dunphy 27th Sep '18 26 of 43

Another vote for IG Group (LON:IGG) if you have time. It's my largest holding and kicking myself on not taking profits, if only I had a magic ball.

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RustySpanner 27th Sep '18 27 of 43

In reply to post #402534

My question too. I'm very much a novice here, and while all the indicators show it as a good bet the share price performance does not!

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Wimbledonsprinter 27th Sep '18 28 of 43

I have sold out of my position in BON today - agreeing with many of the negative points raised above. In addition, I did not like the repeated emphasis in the statement about the positive trend on online sales. While important, it is still a few years away before his is big enough to really move the needle. It is the decline in physical stores which needs addressing. Helen Connolly seems to be doing a good job but maybe she has run out of low hanging fruit to pick up from correcting previous mistakes.

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gary3980 27th Sep '18 29 of 43

In reply to post #402509

af20001 - I've always wondered that as well. My wife usually tells me I need to go holiday clothes shopping around May "before they run out" :)

If they all do it there must be a reason for it, fashion changing so fast and not wanting to be left with stuff they can't flog.

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Graham Neary 27th Sep '18 30 of 43

In reply to post #402384

Thanks for the requests, never looked at Mountfield (LON:MOGP) but will check it out. G

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LeoInvestorUK 27th Sep '18 31 of 43

In reply to post #402464

I presume this is why the SP is only down about 20% on a major profit warning.

As I noted, it was 116p at the beginning of the month, so one interpretation is that it is actually down circa 30% on the reduced expectations. Still, that's not as much as the profits miss and not enough to get me adding.

As to the argument that "If it didn't exist, we wouldn't have to invent it", there are two answers. Firstly, it does exist and has significant cash, tangible assets, few liabilities and significant goodwill not shown on the balance sheet. It does have a positive value, it is just a matter of what.

The second argument is that, if the store I braved is any indication, it absolutely does have a niche. The in-store environment I saw was far far superior to a supermarket. It was also superior to the local M&S, Debenhams and Primark plus also had a differentiated smaller "boutique" type feel. I'd be interested in reports from other stores, maybe the Coventry one is atypical?

I would certainly agree that there is little scope for structural growth in store numbers or revenues.

Blog: LeoInvestorUK
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rivaldo 27th Sep '18 32 of 43

Thanks for the review of Volvere (LON:VLE) Graham. If I may pick up a couple of points.....

Firstly as regards Impetus, I hope you noticed that VLE announced today that "We have been notably successful in winning new business in providing training services and recently won a second contract with another large automotive manufacturer. " So, in their usual prudent fashion, I suspect what VLE are saying is that although Impetus' growth may not be quite as spectacular as to date, it's still likely to continue in pretty decent style.

Secondly as regards Shire Foods, it's incorrect to say that it "has been unprofitable for a few years now". Last year Shire made £0.6m PBT and the previous year £1.2m PBT before intra-group charges.

You may be unaware that H1 is much seasonally weaker for Shire, and that H2 is always much stronger given the cold weather (and demand for pies etc!), which explains the losses which always occur in H1.

Finally, it's worth noting that Shire owns £2.55m of freehold property and £millions more of plant and equipment. Any sale of Shire would take these into account (to whatever extent) in calculating an acquisition price, and of course in the meantime it also acts as a tangible asset base to add to VLE's £20m+ cash pile against the £34m m/cap.

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JohnEustace 27th Sep '18 33 of 43

In reply to post #402574

The seasonality issue is another advantage for online because the are not space constrained in what they can display.

I made one of my very few visits to a physical clothes shop to Uniqlo on Oxford Street at the end of August looking for a polo shirt. The assistant told me they had none as it was now winter season. They had dozens of them on their website, some at sale prices. So another purchase goes online.

The thing that occurred to me was that it may not be the season anymore in England, but it is somewhere in the world and it's a very international, travelling set of customers on Oxford Street so being parochial in what they stock makes even less sense there.

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barney100 27th Sep '18 34 of 43

Volvere sounds interesting, sounds like just my cup of tea. I'm currently researching

One quick observation, the Shire Foods website could sure do with some work

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Graham Neary 27th Sep '18 35 of 43

In reply to post #402614

re: Volvere (LON:VLE)

Hi rivaldo. You are correct. Shire has been generally deteriorating since around 2015 and has been unprofitable or around breakeven in H1 since 2016. Yes, it does have a better H2.

Yes, I'm aware of the freehold property, and thank you for mentioning it. One of the reasons I doubt that Shire is worthless is due to the asset base. Hopefully the Lander brothers will find success with this £1 million capex investment and it will prove to be worth quite a lot!

It feels like ages since they had a deal, doesn't it?

Appreciate your contributions on the boards.


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Howard Marx 27th Sep '18 36 of 43

In reply to post #402534

Re Bonmarche Holdings (LON:BON), the Quality Score is based on multiple components, some of which reflect five-year averages:

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Graham Neary 27th Sep '18 37 of 43

In reply to post #402634

PS, I edited the wording of the article so it's more accurate. Thanks. G

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herbie47 27th Sep '18 38 of 43

In reply to post #402629

Volvere (LON:VLE) is pretty illiquid and the spread is around 6%, if things do go wrong then I would expect the spread to widen. I bought in after the good results but it has been a steady drift down. I'm hoping this report will lift the shares back to £10 and then I can get out.

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rivaldo 27th Sep '18 39 of 43

In reply to post #402654

Herbie47, you need to have a longer time frame and a little patience. This is not a share for traders or short-termers.

Over time VLE's share price has gone from 100p to 930p. At some stage VLE will sell either Shire or Impetus, at which point the share price will likely be catapulted upwards as it has been on all prior disposals.

Either that, or Simon Thompson will once again at some point soon note the huge discount to core NAV which exists, and once again the world will wake up to VLE.

The spread sometimes closes to only 10p-20p and is sometimes larger, as it is today. But already today around £180,000 of shares have been traded. Unless you have a very large holding, trading say £5k-£15k shouldn't now be a problem.

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andrea34l 27th Sep '18 40 of 43

In reply to post #402654

I am put off Volvere (LON:VLE) by the fact that they only have three investments made, one of which is minute too. I guess it's great they have that cash sitting there... but is it going to enable them to substantially increase their divestment? I am not convinced. I prefer the likes of Draper Esprit (LON:GROW) and £3IN which have a much bigger spread of investments.

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herbie47 27th Sep '18 41 of 43

In reply to post #402714

The spread is quite wide even considering the volume traded today. Liquidity is ok today but on a bad day things will be different. Yes it maybe too long time scale for me, I don't want to be in many illiquid stocks over the next 2 years.

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Gromley 27th Sep '18 42 of 43

I was out all day today at a training course, so missed the excitement of several of my "holdings" getting a bit frisky.

Like Graham I was up on the day despite one disappointment.

I my case the disappointment was Bonmarche Holdings (LON:BON)

Yes yes , I did say very recently that I could not see the need to hold ANY discretionary retail stocks this side of Christmas! That'll teach me not to allow myself to break the rules in search of contrarian value. Erm, except that it won't as I've decided to compound the error by holding after a profits warning.

I certainly agree that the phraseology of the profits warning is odd.

My interpretation (call it a guess if you wish as they have really done a poor job in communicating this)  is that if store sales had not collapsed they could have covered the "forex headwind". So I think the comment that "excluding the impact of the FX headwind, this year's underlying PBT expectation would be in line with the £8.0m achieved in FY18." is meant to convey the message that although our forecasts are much lower than two months ago, it is not a disaster.

They also tell us that "Due to a required change to the established interpretation of IAS36" they have to take a (purely procedural)  £1m hit by way of a "provision for impairment of store fixed assets".

(I wanted to have a long rant here about the term "provision for impairment", but instead I'll leave readers to form their own opinions of what that means.)

Either way the reduction in profit forecast is huge based on only 2 months passing, especially given that we/they still have little visibility of the all important Christmas trading period.

By holding here I am essentially taking a bit of a punt (based on some of the supporting commentary) that in this forecast revision they have 'kitchen-sinked' a poor Christmas in advance.

Crazy speculation aside, there were a couple of valid questions raised that maybe I can give some insight into :

Someone asked why they didn't hedge the FX risk. My thought would be that whilst Forex hedges reduce volatility, they cost significant amounts of money - if you have a sound (and liquid) balance sheet as they appear to have, then perhaps the rational position (in the long term) is to let the forex waves wash over you.

Also Graham questioned why the number of stores is forecast to stay broadly flat.

Reading through the strategy ( as outlined in the last FY results) they do regard the stores as an important part of their overall proposition, but they retain flexibility on this point  :

"our average store lease had only 3.5 years remaining. This affords flexibility in the event that changing shopping patterns dictate a significant shift in the nature of the store portfolio. It also helps ensure that the rents are at market levels."

In fact : "Overall LFL store rent deflation was 0.3%"

I am tending these days to do less of this in depth digging into individual companies as selectively following  "the factors" seems much more fertile ground. But I am convincing myself here that there are hidden positives  and that this is a valid contrarian play.

As always though - No advice intended. I offer this up more than anything to hear other views from the collective Stocko mind pool.

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sharmvr 28th Sep '18 43 of 43

In reply to post #402789

Similar performance for me with Bonmarche Holdings (LON:BON) hurting.

I don't intend to sell on this warning - considered adding after today but will see how price plays and the Divi gets reinvested. I would consider adding at better value. At full year 4m they would be 9x ex cash - which I find expensive given the operating trends.
However at the moment some 10% of sales are online, growing 20-30%, about 20m per 2018. We could say that could be 25m this year. Assuming the valuation of other online retailers, say 4x sales (lower Roce), we could end up at 100m valuation. The cost of entirely exiting the store estate as I understand is around 50m (15m / year).

The profit forecast miss was big no doubt. Re the hedging, they do hedge. They also guided in their full year results that they screwed up their hedging strategy and expected higher costs as those unwound.
The return on capital is still healthy although going in the wrong direction. Their reviews on trustpilot are very strong (one which said this should cover everyone from 40-90). And while store numbers are flat overall, they're opening and closing and as noted by Gromley and leo, the stores are used to help the online offering.

Value for me comes from:
Valuation and covered dividend
A growing demographic
Online growing and becoming meaningful to sales
FX impact ought to be a one off
Think Helen Connolly is strong - like that she does not massage - would expect most CEOs would have struck FX as non-underlying

The reasons I would need better valuation:
Declining retail could mean that this doesn't have time to play out but the balance sheet gives them time
Declining store lfls suggest store refurb / store location strategy is not paying off and costing cash - which could be spent on marketing / investment in online / shareholders!

I'm deluded and waiting for a cheaper price might reveal said delusional tendency!

Thanks for reading - I really can't sleep!

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 Are LON:VLE's fundamentals sound as an investment? Find out More »

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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