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

29th Aug '19 by Graham Neary

27 comments 8327 reads

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.

Churchill China (LON:CHH)
GYM (LON:GYM)
Watchstone (LON:WTG)
Brickability Group
Duke Royalty (LON:DUKE)
McColl's Retail (LON:MCLS)

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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MrContrarian

29th Aug '19

My morning smallcap tweet:

PZ Cussons (LON:PZC), Frontier Smart Technologies (LON:FST), Watchstone (LON:WTG)

PZ Cussons (PZC) sells Greek ops Minerva for £41m, 12.4x EBITDA. Will cut group pretax but 1.8m. Also sells Polish personal care brand, Luksja. No figure for that one. Why? Cap £881m.
Frontier Smart Technologies (FST) Science Group has now re-started discussions with Frontier to effect a statutory merger. Science Group has 70% of Frontier.
Watchstone Group (WTG) files counter-claim against Slater & Gordon. Usual court battle knockabout stuff.

GrahamF

Hello Graham. GYM (LON:GYM) may be an interesting one to look at today. Interims show expansion is continuing on track based on roll out of new sites and acquisition of two competitors. The question in some ways is, when the expansion slows and capex and expansion costs moderate and the estate matures will this turn out to be a highly profitable business or just mediocre? I think it is a good time for this type of business to be expanding as they should be able to acquire new sites at good prices as retailers and restaurants go bust. On the other hand, gym membership is discretionary expenditure that people may cut back on if there is a recession.

I hold.

abtan

Hi both Grahams

I was just taking a look at GYM (LON:GYM) myself.

I remain a huge fan of the concept and overall the results look good. The #1 thing that puts me off investing right now is the debt which continues to increase. The company drew down an additional £2m from its £60m facility, of which it has now drawn down £50m.

I understand the reasons for the draw down but it won't be possible to continue its current expansion pace and bring debt down quickly at the same time, which is the scenario I would be hoping for.

As an aside I am also slightly put off by the 3 site closures mentioned in today's report. The group says that they don't anticipate any more, but then of course they would say that. It would also explain the odd fact that End of Year members (796k) was lower than Average members (797k).

No position for now, but a keen observer.

A

The Phoenix

Any chance of a circle back over Headlam (LON:HEAD) Graham, looks ex growth but maybe a decent income stock and balance sheet appears bullet proof possibly one to start accumulating on any big down days.

ambrosia

M&S is about to be relegated out of the FTSE 100, doesnt really need discussing, I just though it was interesting and a sign of the times. I bet most of you have owned it at one time or another

JohnEustace

I saw that Costco had to shut their Shanghai store early on the opening day due to overcrowding. It reminds me of the famous quote by one of the Costco founders when Jeff Bezos asked for advice in the early days of Amazon.

“There are two types of retailers, those that spend their time figuring out how to charge their customers more, and those that spend their time working out how to charge their customers less.”

I would put M&S in a third category - they spend their time figuring out how to charge their customers more for less. Which puts them on the wrong side of history.

Old ManFit

My daughter joined one of the London gyms temporarily, she was impressed with it and suited her shift work - GYM (LON:GYM)

Impressive how the Company makes a profit on a net membership fee under £12 per month (on roughly 760K members used average). Must be a tight run ship.

Up sell looks seems low at roughly £1-£4 per member per month (depending if you use historic or forecast) on top (which seems very low). Presumably the gym crew are supplementing income with PT to make up wages and the gym is taking a cut, which keeps wages in a manageable range and crew if they are making enough.

At some point saturation point on population density to gym will be hit, though doesn't mean it wont sit with steady profits for a while, looks interesting, PE is a little high for me though.

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

Churchill China (LON:CHH)

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Graham Neary

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