Small Cap Value Report (Thur 3 Jan 2019) - AAPL, NXT, VEC, COST, FCAP

Thursday, Jan 03 2019 by

Good morning!

The following section was written by Graham Neary:

Continuing our China theme from yesterday, I note that Apple (US:AAPL) has blamed an "economic deceleration, particularly in Greater China" as its Q1 revenues are expected to come in 8% lower than the forecast it made only two months ago.

There are multiple layers to this story.

As many of you will have heard, the CFO of Apple's Chinese rival, Huawei, is currently on bail in Canada while the US seeks her extradition over alleged dealings with Iran.

This comes as Huawei is now beating Apple into second place in global smartphone sales for the first time.

There can be little doubt that US-China relations have frostened. Zero Hedge reckons that Apple is "indirectly accusing China of boycotting Apple products".

It's a grim situation and Apple's market cap is still so big ($700 billion) that it can seriously affect the US stock indexes, whose sentiment then leaks over to the UK indexes. The NASDAQ is down more than 2% in after-hours trading and FTSE futures look set to open in the red tomorrow.

Maybe not such a good morning after all!

End of Graham's section

The rest of today's report is written by Paul Scott:

Good morning! Haha, I see Graham got the date wrong, and originally put in 2018! I've corrected it now to 2019. Great to see that it's not only me who struggles with date changes.

Graham has passed me the reins. I hope we haven't confused too many people by sharing the report writing today.

Happy New Year to everyone! Let's hope the markets are a little more kind to us in 2019 than they have been in the last few months.

Just to reiterate, neither Graham or myself are traders. We tend to pick stocks we think are good, and take long-term positions in them. From time to time, some of those shares will go wrong. Over time though, the trajectory should be upwards. We're not trying to time the markets, that's not what we do.

I just thought it would be useful to clarify all this, given the comments last week from a reader who helpfully, and kindly, pointed out that my portfolio is not doing terribly well at the moment. With friends like that .... !

On to today's news.

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Apple Inc. designs, manufactures and markets mobile communication and media devices, personal computers and portable digital music players. The Company sells a range of related software, services, accessories, networking solutions, and third-party digital content and applications. The Company's segments include the Americas, Europe, Greater China, Japan and Rest of Asia Pacific. The Americas segment includes both North and South America. The Europe segment includes European countries, India, the Middle East and Africa. The Greater China segment includes China, Hong Kong and Taiwan. The Rest of Asia Pacific segment includes Australia and the Asian countries not included in the Company's other operating segments. Its products and services include iPhone, iPad, Mac, iPod, Apple Watch, Apple TV, a portfolio of consumer and professional software applications, iPhone OS (iOS), OS X and watchOS operating systems, iCloud, Apple Pay and a range of accessory, service and support offerings. more »

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NEXT plc is a United Kingdom-based retailer offering clothing, footwear, accessories and home products. The Company's segments include NEXT Retail, a chain of over 500 stores in the United Kingdom and Eire; NEXT Directory, an online and catalogue shopping business with over four million active customers and international Websites serving approximately 70 countries; NEXT International Retail, with approximately 200 mainly franchised stores; NEXT Sourcing, which designs and sources NEXT branded products; Lipsy, which designs and sells Lipsy branded younger women's fashion products, and Property Management, which holds properties and property leases which are sub-let to other segments and external parties. Lipsy also sells directly through its own stores and Website, to wholesale customers and to franchise partners. The Company's franchise partners operate approximately 180 stores in over 30 countries. more »

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Vectura Group plc is engaged in research, development and commercialization of therapeutic products and drug delivery systems for human use. The Company's products include Ultibro Breezhaler (European Union (EU) and Rest of World (RoW)) - LABA-LAMA; Seebri Breezhaler (EU and RoW) - LAMA; AirFluSal Forspiro (EU and RoW) - ICS-LABA; ADVATE (Global) - Antihaemophilic Factor (Recombinant); Adept (Global) - Icodextrin; Anoro Ellipta (Global) - LAMA-LABA; Relvar Ellipta/Breo Ellipta (Global) - ICS-LABA, and Incruse Ellipta (Global) - LAMA. Its product pipeline includes VR588, VR475, VR647, VR942, VR179, VR736, VR096, VR876, VR315, VR506, VR632, Seebri Neohaler and VR465. Its dry powder inhalers (DPI) include GyroHaler, Lever-operated, Open-inhale-close and Unit Dose DPI. Its smart nebuliser delivery systems provide targeted inhalation therapy for applications where precise and targeted delivery of a drug to the lungs is needed. Its smart nebulizer delivery systems include AKITA JET and FOX. more »

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40 Comments on this Article show/hide all

alterego 3rd Jan 21 of 40

Regarding Next (LON:NXT) , whatever the preferences of the public for on line shopping, it is imperative that the experience is satisfactory. My own experience was not and although this is just one example, it suggests that Next have some way to go to achieve the reliability of, say, John
I ordered a toaster from Next (agreed, not clothing) in late November, due to be collected in store. n email arrived saying it was ready for collection but on arrival in store, there was no toaster. They could not explain why so cancelled my original order and initiated a new one for free delivery to my home. A week or so later, it had not arrived so I phoned. "That order doesn't seem to be happening" they said and offered to cancel and re-order. They also said they would "monitor" the order to make sure it was fulfilled. Another week passed but still no delivery so I phoned again. "It's due for delivery on Saturday" they said. It didn't arrive so I phoned again. A new delivery date was given and behold, the toaster arrived as promised. All in all it took about three weeks. and lots of aggravation. There was no evidence that anyone was "monitoring" my order and I never received any email about the delivery.

NEXT time (sorry) I'll shop where I can be confident of fulfilment.

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dfs12 3rd Jan 22 of 40

Adding a bit of detail to Costain (LON:COST). More attractive that it might first appear (in my opinion). Costain (LON:COST) are moving away from being a small margin contractor into a specialised "smart infrastructure business". Sounds like PR speak - but they are already a big player and the potential market is massive.

They have completed smart motorway projects and others are in progress and planned. Consider the scale and potential for smart energy, water and transport. These are the areas Costain (LON:COST) work in. The are regularly winning big new contracts as shown by the current order book. Selling services into a new and unexploited sector is so much more profitable than tendering for construction projects against other big building firms.

Consider some of the financials:
Improving net margin: 2.25% against 1 yr ago: 1.78%
Profit to sales ratio of 0.21 (so you could buy the whole business for one fifth of turnover)
High yield of 5.16% and great dividend cover of 2.38
Net debt to market cap of -23%. I.e. equivalent to cash in the bank equal to 23% of the market cap.

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Ramridge 3rd Jan 23 of 40

Re Next (LON:NXT) NEXT is a quality company and there is no doubt in my mind that it will thrive in the long term. However I am not sure how resilient it will be in 2019. Here is what today's trading statement says:

"Any sales forecast made in January comes with a high degree of uncertainty. This year uncertainty
around the performance of the UK economy after Brexit makes forecasting particularly difficult. We
have not factored into our sales estimates the potential benefits of a smooth transition or the
downsides of a disorderly Brexit." 

I don't view this as a boilerplate statement. What it says to me is that with a smooth transition, the upside could be spectacular because the current sp has been beaten down severely. A quick look at the sp chart will convince you of that. However in the case of a disorderly Brexit, the sp fall could get worse. But it would be asymmetrical in my opinion, in favour of the upside.
Having made a quick turn over the past two days (8%) , I shall wait and see which way the wind blows. If the probability of an orderly Brexit increases, then I shall be a serious buyer. Otherwise, as Timarr put it so succinctly , I'll continue to look for dirt cheap, not just inexpensive.

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doublelutz 3rd Jan 24 of 40

In reply to post #431958

Great comments to which I concur. Please let us know after you have bought into the next great early-stage idea so we can join you!

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Howard Adams 3rd Jan 25 of 40


Quite a noticeable new contract win for WANdisco (LON:WAND) (up 13% at time of typing).

This is a partial extract from the RNS.

$565k contract for multi-cloud and multi tenancy use cases

WANdisco (LSE: WAND), the LiveData company, is pleased to announce it has secured its first multi-cloud contract with one of the largest mobile network operators in the world (the "Client"). The agreement is valued at approximately $565,000 and will see the Client deploy the Company's patented Big Data and Cloud product, WANdisco Fusion for Multi-Cloud ("Fusion").

$565k contract for multi-cloud and multi tenancy use cases

I just bought a minute holding. It's been rising since early December on other healthcare contract wins as well.


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cmpeckham 3rd Jan 26 of 40

Paul: "Remember that Next doesn't really have any debt either - because its customer loan book is larger than its external debt."

Apologies if this has been discussed before but I find that view hard to reconcile with the figures.

Plus: would we say a bank didn't really have any debt if its customer loans were larger than its debt?

Plus: what value would there be in a pile of UK consumer debt following a messy Brexit?

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nicobos 3rd Jan 27 of 40

In reply to post #431958

Michael - great post; it's good when others can add comments from their own personal experience / expertise. It's what makes this investment community so valuable !

One quick question - you mention that you "built a tourist attraction which is going well and will do even better next year."

I'm intrigued - what is this attraction and how did you go about creating one !?



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barnetpeter 3rd Jan 28 of 40

Interesting comments about on line and in store. I am interested in this from the letting / estate agent side. Purple bricks seems to be struggling yet not as much as say Countrywide...the largest high street agent. If business is bad it will affect all.

Food delivery is growing fast and yet the papers were full of stories of people unwrapping home delivered turkeys on Xmas day only to find them rotten. Yuk! I got my meat delivered but only from a local farm outlet because I knew it would be fresh and top quality. It was. Cost a bit more but the quality was superb. Best Xmas dinner ever. So I think there will always be pockets of wife told me that very few women would buy a hat on line for instance. The other issue I would flag up is tax. At some stage the government will have to change corporation tax to equalise the costs. Next must make a big tax saving by closing down stores and moving on line but I cannot see that lasting.

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sharmvr 3rd Jan 29 of 40

In reply to post #431958

Great insight - thanks Michael. I too am curious about your tourism business.

I had a chance to meet a commercial property director at Property Partner and he concurred about retail and how a small shift online can cause problems.
He was more bullish on retail reit and specifically Intu (which he thought was one of the best bargains in the whole property sector, discount as owner wants an exit).
Without any great experience in the sector, I would tend to concur on retail being a bargepole although there will need to be consolidation which could result in profits for the more opportunistic amongst us.

Disclosure: own Tritax Big Box Reit (LON:BBOX) Primary Health Properties (LON:PHP) Regional REIT (LON:RGL) Warehouse REIT (LON:WHR)
Rgl has retail exposure, but represent <10% of their assets. All the above except PHP were bought in Q4 18

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CliveBorg 3rd Jan 30 of 40

In reply to post #431813

I believe IQE do not only supply Apply phones, so other phone manufacturers usurping Apple's pre-eminence shouldn't affect too much in the long run. However, I know there are other contributors who are more knowledgeable than I on this subject ..

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timarr 3rd Jan 31 of 40

In reply to post #432018

Hi Ramridge

I don't view this as a boilerplate statement. What it says to me is that with a smooth transition, the upside could be spectacular because the current sp has been beaten down severely. A quick look at the sp chart will convince you of that. However in the case of a disorderly Brexit, the sp fall could get worse. But it would be asymmetrical in my opinion, in favour of the upside.

I agree that there could be some upside with a smooth transition, but I don't think you'll see any huge growth because even the best deal available will have some economic effect. Next included a very interesting section on their Brexit preparations in their half-year report so this is already in the public domain:

In conclusion, as long as:

·     ports and customs procedures are well prepared for the change, and
·   tariff rates are adjusted to ensure no net increase in duty costs to consumers

We believe we can manage the business to ensure no material cost increases or serious operational impediments.

Firstly this needs to be taken in the context that Simon Wolfson, the CEO of Next, is a vocal Brexit supporter, so you'd expect his company to prepare well and be positive. However, the analysis presented is well worth a long read. My take on it, after due consideration, was:

  1. Next are as well prepared as they can be, given the uncertainty.
  2. In the event of a no-deal there will be disruption to their business, it's not possible to quantify this. There are some weasel words included to hedge against that risk ("no intrinsic reason").
  3. Next's preparations are extensive but have clearly required a lot of thought and analysis for a business with relatively simple supply chains.
  4. Next have hedged their currency exposure for the next 18 months, so if there is a deal and sterling recovers then they won't see any immediate impact.
  5. The complexity of managing a business with a more complicated supply chain presumably would be more difficult.
  6. While a business of Next's size and value can afford to make these kinds of preparations for events that may never happen it would be significantly harder, and presumably more expensive, for smaller and more complex businesses to do so. I doubt many have done so, probably for cost reasons.

Taken all in all this scared the willies out of me.

As Next's position on the worst case hard Brexit is already known you'd imagine that the market is pricing that in. Most likely the depressed share price is due to general market conditions, flat profits and a reduction in consumer confidence as well as online competition. I don't see any of that changing post-Brexit - although a flash crash in that event would throw up a lot of interesting opportunities!


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Samsgrandad 3rd Jan 32 of 40

Re Huawei and Apple

Another layer to this conversation is that Huawei are also a big manufacturer of phone infrastructure equipment, ie the kit installed in lights-out buildings routing phone calls as data between the base stations. The US Gov are using every bit of leverage they have to prevent the spread of Huawei equipment with the possibility of Chinese spyware monitoring calls. Presumably because Uncle Sam is already doing it, they are well aware of the risks.

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andyfwwrench 3rd Jan 33 of 40

In reply to post #431953

On the flip side - delivery is as inconvenient to as many people as it is convenient. Even worse is the thought of ever having to return something. For some people I know that only shop online their process seems to be risibly more time consuming than going to a physical store. So ultimately a balance will be struck, but there is certainly far too much retail real estate as of now.

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covkid 3rd Jan 34 of 40

In reply to post #432088

So what's really inside that new Huawei phone...................and we worried about Apple collecting data on us...................

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cholertonandrew 3rd Jan 35 of 40

Thanks Paul. Happy new year.


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Michael C 3rd Jan 37 of 40

In reply to post #432043

Sorry for delay, been offline today. Not the right place for a long answer but I'll try to make it relevant. My wife and I bought a derelict 22 acre smallholding in 1993 and built a paid-entry visitor attraction. Costs and regulation then were nothing compared to now but even so we went over budget and had to open before it was fully developed. It took a lot longer to become profitable than we expected - we both had to take part-time jobs to make ends meet. In the end it was OK and there was an MBO in 2014 following which we retired. It hasn't been a great investment but it's doing well now and quite often young parents show us their kids and tell us they remember coming as a kid themselves, and how much they liked it. So that's nice.

Investment lessons:
1. Start-ups and early stage businesses - it usually costs more and takes longer to achieve success than anyone expects. (When I look at big projects like HS2 I just feel sick - that thing is going to cost at least twice what they think). I have been following Seedrs and Crowdcube for ages - 90% of what I see there is unadulterated bargepole.
2. Businesses with fixed costs can in theory make a lot once the costs are covered and the majority of revenue flows to the bottom line. But in a lot of cases the costs turn out to not be fixed at all and rise almost as fast as revenue.
3. If a business isn't portable it's best to buy the freehold of any property you need - that's one thing we did get right. But beware of buying property for a business that is portable. For years Marks and Spencer (LON:MKS) were the lynchpin of the High Street and benefitted by owning their own properties. More recently that has tied them to locations which are no longer right, and their properties are worth a fraction of what they were at the top.

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Jack Corsellis 3rd Jan 38 of 40

Do people think that Apple will be able to regain it's $1 trillion MCAP due to such strong branding?

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jonesj 4th Jan 39 of 40

I haven't been around Next checking labels, but the low cost sources for garments are places like Cambodia, Bangladesh and so on. Since these are not in the EU, I wouldn't expect much direct disruption for Next.

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timarr 4th Jan 40 of 40

In reply to post #432258

I haven't been around Next checking labels, but the low cost sources for garments are places like Cambodia, Bangladesh and so on. Since these are not in the EU, I wouldn't expect much direct disruption for Next.

You don't have to speculate, you just have to read Next's own analysis:

For the purposes of NEXT, GSP status means that we pay lower or no duty on importing goods from countries such as Cambodia, Bangladesh, India, Vietnam and Sri Lanka. Goods from countries benefiting from GSP account for 53% of our total stock.

3% of imports are covered by EU trade deals, which presumably will be lost, 31% are covered by WTO tariffs and 10% are from the EU and Turkey, and attract no duty. In total that means an extra £20 million in costs for Next assuming that the GSP status mentioned above is maintained and they're unable to pass on costs.

The report is interesting as it does give an insight into the preparation needed by a relatively straightforward business with an EU import / export challenge. In Next's case this includes setting up German and Irish companies, accurately estimating demand across the UK, EU and Eire, bonding the German warehouse, updating computer systems to handle the additional workload and hedging currency exposure over an 18 month period.

My take on this is that larger companies, with deeper pockets and better organisation are likely to be the short term winners. The BoE reckon that two thirds of companies hadn't made any preparation by end last November.

The one thing I don't understand in the Next report is that they seem very concerned about tariff rates even though the actual impact on them is very small. The issue is that WTO tariffs on EU goods in this category would be set at 11.8%. After reading a few times I came to the conclusion that this isn't Next's issue but a broader one - as they say:

For example: in 2017 there was an estimated £1.1bn26 receipt of customs duty from clothing and footwear (around 32% of all duty in the UK).  If tariff rates were to remain at their current level of 11.8% and be applied to clothing and footwear imports from the EU and Turkey (as will be required under WTO rules), we estimate that UK Government revenues would rise by £1bn.

This is their CEO making a case for reducing all tariffs to balance the impact - i.e. reducing the overall tariff rate for all countries to 5.8% would mean that the government's income remains the same, but non-EU countries see a tariff fall.  Eminently sensible, but given that the government appears to be unable to distinguish a ferry company from a pizza delivery service I can't say I'm hopeful in the short-term.


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About Paul Scott

Paul Scott

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »


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