Small Cap Value Report (Thur 6 Dec 2018) - Brexit, BOO, EVE, TED, IPX, CLG, PCF

Thursday, Dec 06 2018 by

Good morning!

The market continues to suffer the blues, i.e. it's in the red with the FTSE down by more than 100 points this morning.

The Dow Jones lost 800 points yesterday (about 3%) and while it remains at an elevated level, those sorts of daily movements aren't good for an investor's nerves.

The two major issues in the US are

  1. their entire market is overvalued vs. historical norms, and
  2. the Fed wants interest rates to get back to a more normal range (but the President does not).

The situation in the UK is very different - in fact, it's pretty much the exact opposite. We don't have that problem of wild overvaluation, even though the Bank of England has shown no real ambition to get interest rates back to normal.

In other words, relative to interest rates, UK equities are amazingly cheap at the moment. The obvious explanation for this is Brexit uncertainty.

I've seen some of this first-hand, among friends. International investors are getting scared out of UK property and UK savings accounts by the doomsday predictions of a disorderly Brexit.

But for an economic contrarian who specialises in UK equities, it's a great time. I can buy into a market (the FTSE) that is hated by international investors at a level that has made no progress at all in 18 years.

Admittedly, its valuation was over-cooked in 2000, and that was true again in 2007. But it's much less likely to be overvalued on the third attempt, nearly twenty years later!

Don't get me wrong - I do expect turbulence around Brexit. The vote in Parliament next Tuesday could, in the words of a fellow investor, be "the point of maximum pessimism". It feels like the strange and unusual politics around Brexit have been building up to some kind of a crescendo - perhaps the final movement is about to begin.

With my customary macro intro out of the way, let take a look at some shares.

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

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Boohoo Group PLC, formerly plc, is an online fashion retail group. The Company is based in the United Kingdom and has a presence in the United Kingdom, the United States, Europe and Australia, selling products to almost every country in the world. The Company owns the boohoo, boohooMAN, PrettyLittleThing, Nasty Gal, MissPap and Karen Millen and Coast brands. These brands design, source, market and sell clothing, shoes, accessories and beauty products targeted at 16-30 year old consumers in the United Kingdom and internationally. more »

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eve Sleep PLC, formerly eve Sleep Limited, is an e-commerce company. The Company is focused on direct to consumer European sleep brand which designs and sells eve-branded mattresses and other sleep products. The Company has six products, including foam mattress, topper, pillow, sheets, protector and duvet. The Company’s foam mattress made are up of three layers: a base layer of high-density foam, which provides support and durability; a middle layer of open-celled foam, which encourages air flow; and a top layer of next-generation memory foam, which moulds around pressure points and then springs back once the pressure is released. The Company's protector product is made of 100% cotton and a Neotherm membrane. The Company’s sheets product offers unbeatable comfort and sublime softness. more »

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Ted Baker Plc is a United Kingdom-based global lifestyle company. The Company offers a range of collections, including menswear, womenswear, global, phormal, endurance, accessories, audio, bedding, childrenswear, crockery, eyewear, footwear, fragrance and skinwear, gifting and stationery, jewelry, lingerie and sleepwear, luggage, neckwear, rugs, suiting, technical accessories, tiles and watches. The Company operates through three segments: retail, wholesale and licensing. It operates stores and concessions across the United Kingdom, Europe, North America and Asia and an e-commerce business based in the United Kingdom, primarily serving the United Kingdom and Europe, with separate the United States and Canadian sites dedicated to North America, and a separate site serving Australia. The Company's wholesale business in the United Kingdom serves countries across the world, particularly in the United Kingdom and Europe. The Company operates both territorial and product licenses. more »

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

57 Comments on this Article show/hide all

johnsmith68 6th Dec '18 38 of 57

In reply to post #425308

Thank you very much for the links Howard. Much appreciated.

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Wimbledonsprinter 6th Dec '18 39 of 57

In reply to post #425313

I think the effect of domestic politics on the recent stock market recently can be overstated. (Not to say it won’t be important in the future.) The FTSE all share index is down year to date currently around 11%, which is almost identical to the falls in the Eurostoxx 50 and the Japanese market (Topix). Chinese stocks and a number of emerging markets seem to be down more than 20%. It is the US that stands out as the exception at being small up for the year (at least before today’s open), which may be driven by higher US growth and the EPS growth from the US corporate tax reductions.

AIM stocks have recently fallen much more than the broader UK market but that seems to me to be part of the end of (hiccup in) the “momementum trade”, which also seems to be an international phenomenon.

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LovelyLovelyGorgeous 6th Dec '18 40 of 57

In reply to post #425303

#CLG Thankyou Graham. I could find nothing after digging around either. I think I will contact the company and see what they have to say.

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lyndhurst25 6th Dec '18 41 of 57

I feel cheated that the founder of Ted Baker isn't actually called Ted Baker. A bit like when I discovered that Mr Kipling isn't a real baker. I'm out.

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Merlotman 6th Dec '18 42 of 57

Thanks for covering Ted Baker (LON:TED) despite it not being small cap
It appears on my buy screen and is at a tempting price for a quality brand but I wasn't convinced by today's update. Looking at the bricks and mortar retail sales the percentages imply a 4% decline which in turn implies a 9% decline taking into account the new space. (would be easier if they simply published the actual numbers rather than us having to work this out ourselves)
However what really puts me off at the moment is the cash flow. The divis have been generous but have not been covered by FCF since 2010. Consequently debt has increased every year since 2012. Paying divis from debt is a red flag for me.

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clouds 6th Dec '18 43 of 57

In reply to post #425253

It's a shame Manolete Partners have such limited financial information in the IPO admission document. From what is given it seems strange that the investment in cases in FY18 was only £0.2m, and in FY17 only £0.5m, given how much was invested in prior years. For a growing business, I would have expected the investment in cases to keep increasing.

Given Burford's success, it seems an interesting area to look at, but need more information. Initial figures don't seem too appealing.

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alpha2 6th Dec '18 44 of 57

In reply to post #425263

I was talking to a friend yesterday who was around at the creation of the Ted Baker brand and his tales of Ray Kelvin's physicality toward both men and women were hair raising.
I would tend to caution as any really negative #metoo allegations could lead to a dramatic fall off in TB woman's sales.

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alpha2 6th Dec '18 45 of 57

In reply to post #425313

See my reply below about the allegations. My friend who witnessed this is 68 so not a snowflake!

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LovelyLovelyGorgeous 6th Dec '18 46 of 57

Clipper Logistics (LON:CLG) The £2.8m from Hamsard relates to property services. Hamsard, owned 100% by Mr Parkin, director of CLG, is set up to buy and sell own real estate. Hamsard executed a Debenture in favour of Together Commercial Finance Limited and such Debenture creates a charge over a freehold plot of land in Ivatt Way, Peterborough. Such land just happens to be occupied, presumably on lease, by Clipper Logistics (LON:CLG).

I wonder what controls there are to ensure that this dealing is all correct and reasonable. In view of the lack of detail in the Interims I am a little suspicious.

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threeputt 6th Dec '18 47 of 57

Seems to be a consensus here that the market & shares will flop materially when (not if) parliament turns down May's Brexit proposal. Am I short sighted in the belief that this could already be seen as a certainty and priced in ? We remember the bull run the market went on after Brexit was announced, and this being December with a potential Santa Rally to come, I'm wondering if the market could see it instead as an opportunity that Brexit will be reversed or put to a 2nd vote (until the market sees the reality come January blues) ?

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dfs12 6th Dec '18 48 of 57

In reply to post #425398

I can't see anything suggesting that Brexit is having any short term influence over our markets at all. Just look at all the markets in the world. They are all down in unison and by pretty much the same order of magnitude. Either Brexit is driving the whole world or it has been priced in long ago (or it's viewed as largely irrelevant). My money is on it being priced in/irrelevant. Look at the direction of the FTSE 100 and 250 around the 2016 referendum and you'll notice that the markets started rising before the shock result. Although I'm struggling to work this whole thing out I reckon 2 things are near certain... 1. May's deal won't get through and 2. We won't be having a hard/no deal Brexit (as a vast majority don't want it). So that leaves low impact Brexit and staying in as the only options. Both of which are probably ok.

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Zipmanpeter 6th Dec '18 49 of 57

In reply to post #425223

Thanks to rmillaree for notice of equity raise by Trakm8 Holdings (LON:TRAK) This was predicted on separate, well researched dedicated thread on TRAK and for me now makes TRAK look a good if still risky bet.

TRAK has declined from >100p for most of the last 18months, to around 60p at interims in Aug to around +/-20p now. This recent decline has mostly IMHO been based on the risk of it running out of cash as it transitions to a pure telematics business and following a bad 6 months of UK sales plus one off impacts of exit from contract work and loss of contract in Iran and more generally the overall market sell off. It has just recently brought a lot of new products to market and has some great customers and supporters like the AA, Direct Line and Iceland as well as a decent less glamourous but probably more profitable set of SME customers.

The equity raise by Trakm8 Holdings (LON:TRAK) announced today will see 10Mn shares issued priced at 22p (gross proceeds £3m but company gains net £2.2m) . This will provide cash to be used ‘primarily to fund general working capital requirements’ as it scales up and invests in automating its local production of telematic devices.

Interestingly, the shares will be taken up by Micolise Ltd and TRAK Directors. Microlise, who will have 20% of the shares if the deal is approved is a private UK owned telematics company headquartered in Nottingham whilst TRAK is based in Birmingham. TRAK CEO John Watkins, other DFounder Directos and, most meaningfully the TRAK CFO, Jon Furber will also participate. Watkins (family)/Founders are all in but Furber is taking up 540K shares ie £119K of his own money.

Microlise Ltd are especially interesting as they are larger but similar in size to Trak overall (2017 revenue £45Mn vs TRAK at £29Mn) and claim to be mostly non-competing being focused on UK HGV market.

Some £43Mn of Microlise’s £45Mn turnover, in accounts to June 2017 filed at Companies House, is in the UK but no split is given between HGV, Light commercial vehicles (TRAK current base) and automotive/Insurance (TRAK's aspiration). Microlise also have offices/operations in India, Australia, UAE and France and TRAK’s PR puffery talks up the opportunity for complementary reselling and sharing of resources as it seeks to internationalise.

Microlise also look more stable and profitable than TRAK having made solid profits of on revenue of £2.1 on £45Mn in 2017 (and £4.3 vs on £37Mn in 2016). This included £1.2mn to set up in India. Also, and unlike TRAK, 100% of R&D expenses are written off in the year they are incurred and they spend £4-5Mn ie similar to TRAK . External bank loans >1 year was only £1.1Mn.

Given the high fixed and R&D costs involved, in a sensible world Microlise and TRAK might further combine down the line combine further, keep TRAK’s listing and make significant direct savings whilst providing a better, wider service to big customers - a much more attractive investor proposition. TRAK also make big claims about their tech – if true this is a fast route to using on more vehicles and building all important scale.

This might also be a way to ease out / downweight weaker key managers and bring in a more normal, less family orientated management structure at TRAK ie replace the COO Mark Watkins, son of CEO John Watkins or Watkins himself who might otherwise have gone if TRAK were not his baby, given results of last couple of years.

Egos, politics and potential impacts on key individuals will probably get in the way but there is a lot to go after.

Having watched TRAK's price descend for a long time but still seeing the potential, I finally took the plunge today and bought at 20p, hoping that TRAK now have the time and cash to move to solid scale profitability, including completing their factory build and emerge profitably into whatever the post Brexit world has to offer them.

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WhaleHQ 6th Dec '18 50 of 57

In reply to post #425408

That’s a fair point I had been associating the recent dip in UK equities with the uncertainty around Brexit without truly appreciating the current international equity funk. I think Brexit is certainly playing a part though (evidenced by builders on mid-single digit fwd PE ratios for example) but I agree with threeput in that if May loses the upcoming vote it really isn’t going to blindside anyone. With this in mind I have been dialing up my exposure to UK equities even buying the ftse 250 index (perhaps foolishly) over the last couple of weeks and am now down to around 30% cash.

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LeoInvestorUK 6th Dec '18 51 of 57

Impax Asset Management (LON:IPX), Graham said:

If I held these shares, I'd have some concern about the outflow from Impax NH. Though it is understandable in the sense that some clients might have had concerns over the change of ownership, and active fund flows in general have been very weak in the US.

I agree, and interrupting Ian Simm's excellent presentation at Mello, I asked about what I politely phrased "customer churn" in the PAX business following acquistion. The answer was that they have not seen increased customer churn. This I took as bad news as it means it is not a one-off or short-lived effect.

They are sensitive to the poor apparent performance of PAX and immediately before I asked my question Ian said that PAX were "slightly below" (I think expectations?) and that it their funds are a mixed bag with some funds seeing outflows, whereas others are doing well and seeing inflows. I suggested that over time this meant "bad" funds would shrink and the "good" ones grow, improving the aggregate figures. I think it was then he pointed out that they couldn't really close / restructure funds until the earn out period had expired (a caveat: I thought this last bit so profound that I failed to include it in my notes). IPX have closed funds before and so a potential positive in terms of profitability at some point in the future.

The biggest concern from me is industry-wide downward pressure on fee levels, the size of their niche and competition from tracker funds. More about this below.

When asking my question, Tamzin thrust a microphone into my hand, at which point I realised I was in the PI World room. Therefore you will hopefully be able to find the full presentation here in the next few days or weeks:

In the meantime, here are the remainder of my notes. Please bear in mind that my opinion going into the presentation is that they are a great company, worth about 190p in benign market conditions, i.e. slightly overvalued at the time and more so now. Accordingly some confirmation bias may be present:

  • Growth limited to 2x current AUM without generalising to "unconstrained" funds [which I think will be more commoditised, lower margin, lower quality earnings]
  • Negative carbon
  • St James Place - a bit delayed
  • Div will increase gently until debt [from acquisition] substantially paid down
  • Growing market share for responsible / do no harm
  • BNP Paribar shareholding not a blocker to a takeover
  • AMC [Management charge] - Turned very few away 0.5%
Blog: LeoInvestorUK
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WDWombat 6th Dec '18 52 of 57

I am extremely sceptical regarding you comparison of the values in the US and UK markets. Since 1989 the Dow Jones is up by a factor of 10, the FTSE 100 by 3.3. Yet if you compare (roughly) like for like current valuations on comparable stocks - I looked at Procter & Gamble and Unilever, Glaxo and Pfizer, Lloyds and Bank of America - they are surpisingly similar. And away from the old indices into newer areas we simply have not had anything to compare to the big growth stocks of the past 40 years - where are the UK equivalents of IBM, Microsoft, Apple, Amazon, Google et al. They don't exist. The US home market is so much bigger, the promotion and adoption of technology so mush easier and faster. I think the interest rate differentials reflect the relative vibrancies of the two economies as much as anything.

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pka 6th Dec '18 53 of 57

In reply to post #425463

"And away from the old indices into newer areas we simply have not had anything to compare to the big growth stocks of the past 40 years - where are the UK equivalents of IBM, Microsoft, Apple, Amazon, Google et al. They don't exist."

I would argue that Arm Holdings was a fantastic UK equivalent of those US stocks. Its chip designs are used in virtually every modern mobile phone in the world. Unfortunately the UK government and the investing institutions, with their usual short-term mind sets, allowed it to be taken over two years ago by the Japanese company, Softbank.

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skinner66 6th Dec '18 54 of 57

i had arm holding i got at 41p 20 years ago,, just put 2k into it,, never watched much maybe once every 2 years, untill got a check 2 years ago sold out to big company i got £17 per share,, 82k.. for 2k investment.. nearly passed out

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skinner66 6th Dec '18 55 of 57

hence now im studing shares,, reading books ,, naked trader being the best , others books  now   plus investipedia do  good  stuff,, but robbie is great for easy reading,,

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Bonitabeach 7th Dec '18 56 of 57

In reply to post #425378

Ted Baker (LON:TED)

Raising more than hair now.  "Leave of absence"


No position

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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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