Small Cap Value Report (Thur 29 Aug 2019) - CHH, GYM, WTG, Brickability, DUKE, MCLS

Thursday, Aug 29 2019 by

Good morning,

We have a few new updates worth discussing today, and I'm also interested to look at yesterday's backlog if there's a chance.

As a reminder, the backlog from yesterday includes Loungers (LON:LGRS), Headlam (LON:HEAD), Wey Education (LON:WEY) and Proactis Holdings (LON:PHD).

Churchill China (LON:CHH)

  • Share price: 1610p (+1.6%)
  • No. of shares: 11 million
  • Market cap: £177 million

Interim Results

Churchill China plc (AIM: CHH), the manufacturer of innovative performance ceramic products serving hospitality markets worldwide, is pleased to announce its interim results for the six months ended 30 June 2019.

I have read through this entire thing and can't find anything particularly controversial in it.

This reflects well on a company which has grown over the years and hasn't really put a foot wrong. It's the good companies which also tend to be the most "boring", on a superficial level, because they just keep on pumping out solid results!

Note the strong like-for-like growth rate of 25% in operating profit, before taking into account the effects of a small acquisition.

The increased stake in Furlong Mills bumps up Churchill's growth rate to 30%.

Note also the very clean accounting: H1 PBT before exceptional items is £4.2 million, while H1 PBT after exceptional items is £4.3 million! The company made an exceptional gain of £0.1 million during its acquisition.

Last year, there were no exceptional items in H1 at all.

Strategically, the company says it has exited activities where it did not have a competitive advantage over the past five years. Despite this, revenues have grown every year. The latest H1 period continues the trend with 10% growth on an underlying basis (my own calculations, excluding the acquisition).

One thing I would bring your attention to is the higher level of cash that left the business in H1, as Churchill expanded manufacturing capacity and bought the Dudson brand. The good news…

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

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Churchill China plc is a United Kingdom-based manufacturer and distributor of tabletop products to the hospitality and retail sectors across the world. The Company's customers include pub, restaurant and hotel chains, sports and conference venues, health and education establishments, and contract caterers. The Company's segments include Hospitality and Retail. The Company primarily offers ceramic tableware. The Company also manufactures and sources product sold through Retail customers for consumer use in the home, in various markets across the world. The Company offers Churchill branded manufactured products. The Company offers various types of products, such as accessories, beverage pots, bowls and dishes, cake stands, cookware, cups, mugs, cutlery, dip pots and sauce dishes, glassware, jugs, melamine items, plate towers, plates, saucers and wooden items. Its collections include Alchemy Fine China, Churchill Super Vitrified, Art de Cuisine, Sola Cutlery and Lucaris Glassware. more »

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The Gym Group plc is a United Kingdom-based holding company. The Company provides health and fitness facilities. The Company operates approximately 90 gyms across the United Kingdom that are open around the clock. The Company offers gym memberships. Its subsidiaries include The Gym Group Midco1 Limited, The Gym Group Midco2 Limited, The Gym Group Operations Limited and The Gym Limited. more »

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Watchstone Group plc offers technology solutions to the insurance, automotive and healthcare industries. Its segments include Hubio, Healthcare (pt Health and InnoCare), and ingenie. Hubio provides integrated solutions to help organizations in the insurance and automotive sectors to build customer engagement and enable usage-based personalization. Healthcare includes ptHealth, a national healthcare company that owns and operates physical rehabilitation clinics across Canada, and InnoCare, a clinic management software platform and call center and customer service operation based in Canada. Its ingenie is an insurance broker. Using telematics technology, ingenie gives its community feedback, advice and discounts to help young drivers improve their driving skills. more »

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

27 Comments on this Article show/hide all

Zipmanpeter 29th Aug 8 of 27

Re £GYM - Personally, I think it will  be surprisingly resilient in any downturn.  Ave rev is only £15/month .  Those going to gyms care about their health/looks and this is a long term thing they will want to protect.  

Relatively, it is also a CHEAP trip out the home: even if you only visit 1 time/wk this is still only £4/activity - compare that cost to a meal out (£15/hd)  cinema (£5-7/hd), coffee +bun ( £4).

A recession WILL really hurt/shake out weaker mid-price independents and smaller chains (plus maybe  publically funded ones), especially those requiring a full year's fee paid upfront vs a monthly subscription model.  You easily can drop the pool & sauna if cash is tight and trade down.  Low cost cost gyms will thus gain market share, offsetting any loss in market size.

GYM has a leading brand, scale is benefitting from LT trends in society on both the demand side (investment in wellbeing, older people doing gyms) and supply side (fall in cost of leases, low borrowing costs at time of rapid expansion).  

I hold and will buy more on any Brexit induced spike down with a 3-5 year horizon.

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FREng 29th Aug 9 of 27

The market cap of a FTSE company (expressed in any non-sterling currency) changes with the exchange rate of that currency against sterling - but the real worth of the company is only affected slowly by exchange rate movements. That's one reason why UK companies look cheap to overseas buyers today.

I have just done a rough calculation to see the performance of the FTSE in Euro terms over the past few years.

At the end of April 2015, the FTSE stood at 6946 and the pound was at 1 .388 Euros. Today the FTSE is at 7185 and the pound  in 1.1 Euros.

7185 * 1.1 / 1.388 = 5696, which might be a usefully different way to think about the "bull market" and the relative performance of UK and EU equities.


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JakNife 29th Aug 10 of 27

McColls strikes me as being in structural decline and with an unsupportable level of debt. Any strong views out there?

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Snoo 29th Aug 11 of 27

Big fan of the GYM (LON:GYM), although I am hoping a better price comes. Will be interested to see how their smaller format performs. 5000 sqft sounds pretty small for a gym. I don't know if this area is the whole unit or just the area set aside for the gym, as I'd imagine changing rooms and communal areas might make up 2000sqft of that.

But I do suppose an advantage with this type of gym is that staffing costs could be real low, perhaps only one or two members of staff on duty and a cleaner. With monitoring centralised this is a big advantage over small independent gyms.

One thing I wanted to query is the capitalisation of IT costs which are fairly material to profit: £3.5-4.0m this year. As the segment matures I think the driver of innovation is going to be technology-based. For instance, the means exist for a member to know how many users are currently in a gym at this moment (because of the keypad entry).
I would expect large spends most years as new features become available.

Nevertheless this kind of figure sounds quite high to me and it builds up the intangibles balance. I do think that if we do get maturity in this segment then a third-party may offer a better solution for the back-end.

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Carcosa 29th Aug 12 of 27

Duke Royalty (LON:DUKE)

In today's RNS I noted that there had been small increases in the investments of Temarca and Trimite without an associated RNS. Having contacted the company and obtained a speedy reply it was explained that because Duke investors were never told about the original deals regarding the Capital Step portfolio companies they issued today's RNS even though it was a small investment increase. (Capital Step was bought out by Duke a few months ago)

For deals prior to the Capital Step portfolio there was full disclosure at the time of investment, and no requirement to issue RNS's for small additional investments in those companies (i.e. Temarca and Trimite)

Looking at Companies House information for Pearl and Dean the last financials ( were filed for year ending December 2017. The company does not look healthy at all to me.

Saw a nice Twitter message regarding Duke today "Hi Duke, we can’t pay”
#Duke - “No prob, we’ll restructure the deal, get some better security and you can waste some more money on an investment in the booming restaurant industry”
P&D - “great, the finance industry are relocating to Ireland, we’ll open it there.”

Overall its a reminder that Duke Investments can carry an awful lot of risk and interest payments reflect that..18%

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Andy Stafford 29th Aug 13 of 27

In reply to post #508461

Hi Abtan,

With regards the three site closures, I took a different view. I saw it as strong management prepared to make tough decisions to ensure the portfolio of sites is strong and profitable. 

Long term holder.


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Trident 29th Aug 14 of 27

In reply to post #508521

I think it was in The Times yesterday that said much of the supposed attraction of UK stocks based on currency movements was less true than the undervalue of earnings in particular stocks i.e that they represented to some extent a 'bargain' opportunity when bidders approach.

To apply this rather than a currency model, for the FTSE would seem to require the overall P/E ratio to be a more important factor.

Not saying I have a view, just thought it was another dimension to add.

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rmillaree 29th Aug 15 of 27

In reply to post #508526

McColl's Retail (LON:MCLS)
"McColls strikes me as being in structural decline and with an unsupportable level of debt. Any strong views out there?"
I would tend to agree with you Jaknife but there are others who post here who are positive about this companies prospects. The main problem i would have other than general trading is the very poor balance sheet that is loaded up with loads of liabilities that need paying - in any sort of cash crunch or reduction in trade activity and i fail to see how shareholders would come out with a penny. Why invest here when other similar companies at least have some positive NTAV as  a backup plan.

I am guessing holders are well aware of the shareholder wipeout possibility - presumably on the flip side if they could get profits back up to 15-20 mill a yearish and up the dividend then things would probably be much rosier shareprice wise at that level - so potential 100% upside as well as 100% downside too - i deffo don't like the risk reward here though personally.

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tomps3 29th Aug 16 of 27

Empresaria (LON:EMR) reported H1 19 results last week. Here's a presentation given to investors, last week, by the new CEO & the CFO.  (40 mins).

This gives a sense of the new CEO, and her strategy, with a focus on sales and costs.  The CFO gives a comprehensive picture on the financials.

(If you want something shorter, the piece to camera which went out with results is here.)

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Graham Neary 29th Aug 17 of 27

In reply to post #508461

Hi abtan, good points on GYM (LON:GYM). I've also been weighing up the site closures. No position but this is worth keeping an eye on IMHO. G

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Housemartin2 29th Aug 18 of 27

In reply to post #508536

With Duke Royalty (LON:DUKE), a key consideration is the quality of the security held. In the P&D case it is fixed and floating charge against the holding company (as I read it). Clearly it has tangible assets and one hopes that Duke Royalty (LON:DUKE) is savvy about the group cross
guarantees. It is held as the senior debt.
As far as the 18% rate is concerned, this does clearly reflect usual interest risk but it also reflects the quasi equity risk in these (potentially) very long term loans but without the recipient incurring equity dilution, either current or future.
Whether targeting the hospitality industry at this stage in the cycle is wise position to take is open to discussion !
Long Duke Royalty (LON:DUKE)

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Gromley 29th Aug 19 of 27

In reply to post #508561

McColl's Retail (LON:MCLS)

there are others who post here who are positive about this companies prospects.

I'm not sure about your use of the plural, but to mis-quote the late Derek Jameson; "do you mean me? You surely do!"

Personally I am actually quite pleased with today's update , as it vindicates my decision not to buy when we last looked at this in February . It was frustrating to see the share-price rise by 40% in the following month, but I put that down to premature hope of a takeover by WM Morrison Supermarkets (LON:MRW) . With the share-price now c. 15% below the level in February that looks a decent call, although it was emotionally challenging to retain the view that that was not "the turn". (it would have been nice to ride that wave, but I have no allusions that I am a good trader)

The fact that the share price has scarcely moved today, suggests that the market was wise to the likely poor performance (there were plenty of clues in the industry data, Kantar for example.)

I think we are all quite jaded about companies "blaming the weather"  but it seems to me that there is a significant "beer & barbies" effect that treats supermarkets, and particularly convenience, when the sun shines. I think investors in this sector would do well to assume indifferent weather and treat sunshine as a bonus, if supermarkets etc. could produce a view of underlying poor weather performance that would be great.

Whilst I do accept that the weak balance sheet and high level of debt are significant risks I cannot really see any evidence for Jaknife's view that they are in "structural decline", neither given the impressive cash-flow do I consider the level of debt to be unacceptable - I think it would take a "black swan" far worse than they suffered last year to cause any crisis.

I note that the company "anticipate results in line with expectations for the full year." I find that easier to believe than the statement by Fulham Shore yesterday. To achieve flat revenues from a position of -1.2% YTD Q3 and -3.6% in Q3 is challenging, but even if they miss slightly on revenues I suspect they can achieve the profit number.

I am still sitting on the sidelines for now as I think there is every chance that poor sentiment will weigh down the share price in the near term, however I remain of the view that I am likely to be a buyer in the not too distant future. The Q4/FY trading update around the beginning of December, would probably be my next decision point, barring anything dramatic in the meantime.

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doublelutz 29th Aug 20 of 27

In reply to post #508596

Duke Royalty (LON:DUKE) - borrowing money in any shape or form where it costs me 18% is alien to me. Surely if the borrowers are sound and they have any sort of security they could borrow at a fraction of that rate.

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Golspie 29th Aug 21 of 27


Did the MACF report ever get written?

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David Bagley 29th Aug 22 of 27

MCLS - not a business I know a great deal about but as a convenience store I would expect its customers to be less price sensitive (preferring the convenience for odd items) than mainstream supermarkets. It will have a high depreciation charge and hence, probably, reasonably strong cash flow. It pays a whopping dividend – 8% – so, provided the dividend is not at risk, it ought to give a reasonable long-term return from here.Pity the poor souls who bought at 300p however!

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Jeffay 29th Aug 23 of 27

Would be interested to hear your views on McColl's - the share price has been really weak recently, following a heartening run up earlier in 2019 - so where next? As a recovery stock in an unloved sector, I get the feeling shareholders will have to wait many years to see a decent return - is that your view? The failure of Palmer & Harvey holed McColl's below the waterline, so even the acquisition of circa 300 Coop convenience stores hasn't moved the needle.

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LovelyLovelyGorgeous 29th Aug 24 of 27

£DUKE, the restaurant in Dublin has pretty good reviews on facebook and trip advisor. The website for it is horrific though.

I note that on 14th August P&D were being congratulated in an RNS by the company, with no mention of the RESTRUCTURING that had been completed in July. I am even more certain that the restructuring was forced on £DUKE. 

I wonder if the terms of the existing agreement contained terms that stopped P&D from refinancing elsewhere and that it was cheaper (!) for them to pay the 18%,  after all the whole point of a restructure is to consolidate debts and the ongoing servicing fees.  

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melody9999 30th Aug 25 of 27

DUKE - actually I think the RNS was positive.

Duke has restructured its investment, which now totals £2.75 million, by moving the entire Royalty Agreement from the Pearl & Dean Group, a UK and Irish cinema advertising business, to its parent company, Step Investments Limited ("SIL"). So increases the security of the investment.

The £2.75M is a small part of the £50M+ in the DUKE portfolio, so a small partner.

Incidentally, was in Dublin last week and it is a vibrant place...lots of restaurants of course but lots of full restaurants.

Looking forward to the results which DUKE advised in recent TU: "will show a significant uplift in the financial results over the prior year, with revenue and cashflow from operations in line with market expectations"

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sherpa 30th Aug 26 of 27

In reply to post #508616

Well said. If it looks too good to be true, then it usually is. These kind of rates shout 'distressed borrower' to me and I wouldn't want a company owning a portfolio of these heading in to an economic downturn.

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xcity 31st Aug 27 of 27

In reply to post #508726

Not convinced shifting an agreement to a parent increases security. Parent gets into difficulties, sells the successful subsidiary as its most marketable asset and security is reduced. Everything depends on the terms of the agreement. I have no knowledge of Duke or this agreement, simply commenting on a general principle.

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

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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