Small Cap Value Report (Thur 9 August 2018) - ARB, EKT, CARD, AA.

Thursday, Aug 09 2018 by

Good morning!

We are expecting news in the next day or so from House of Fraser, where Sky News reports that PwC has been negotiating on behalf of its lenders and bondholders, trying to arrange a buyout.

In the absence of a deal, the company is likely to fall into administration and threaten 17,500 jobs. A reminder of how tough things are out there!

Talk soon


Today I have been looking at:

Argo Blockchain (LON:ARB)

  • Share price: 12p (+1%)
  • No. of shares: 294 million
  • Market cap: £35 million

Agreement to Expand Mining Capacity

This report normally talks about "good" companies but I feel compelled to mention this £25 million IPO, another symptom of the mass mis-allocation of capital associated with cryptocurrency.

It's shocking to me that some blue-chip institutions were coaxed into backing it.

Let's suppose this was a venture designed to mine a few altcoins (non-bitcoin cryptos). That would be risky enough.

Firstly, crypto miners have to compete with other miners, all of the time. Most of the biggest mining pools are in China, where hardware and electricity are extremely cheap. Every coin they mine is a coin not available to any other miner.

Argo today announces that it has secured energy at 3 US cents per kilo-watt hour, which is at least a good start.

Secondly, you have to accept wildly fluctuating crypto prices. The same as a physical gold mine, your asset will become unprofitable as soon as the market price drops below the cost to mine.

So right off the bat we have a leveraged play on the price of cryptos and on our ability to assemble enough cheap hardware and electricity. It's far riskier than simply buying a few altcoins and hoping for the best.

But even that proposition wasn't risky enough for Argo Blockchain. It has gone one step further and created the new concept of "Mining as a Service", invoking the bubble hysteria…

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

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Elektron Technology plc is a holding company. The Company is engaged in designing, manufacturing and marketing products that connect, monitor and control. It operates in two segments: Connectivity, and Instrumentation, Monitoring and Control (IMC). Connectivity comprises two complementary product families: Bulgin and Arcolectric. The Company's products are helping its customers to quantify real-world environments, process this data and act on the results. Its products include sealed connectors, Switches, indicators, battery, fuseholders, ophthalmic instruments, nanopositioning and sensing equipment, and vehicle power management systems. The Company's Checkit offers a wireless solution providing work management software and automated monitoring. Its subsidiaries include Elektron Technology Corporation, Elektron Technology PTE Ltd, Elektron Technology UK Ltd and Elektron Technology (Shanghai) Trading Limited. more »

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Card Factory plc is a specialist retailer of greeting cards, dressings and gifts. The Company operates through two segments: Card Factory and Getting Personal. The Card Factory segment retails greeting cards, dressing and gifts in the United Kingdom through a network of stores. The Getting Personal segment is an online retailer of personalized cards and gifts. Its physical store network operates in three areas: single cards, non-card items and Christmas box cards. Its single cards include individual cards for everyday occasions, such as birthdays, anniversaries, weddings, thank you, get well soon, good luck, congratulations, sympathy and new baby cards, and seasonal occasions, such as Christmas, Mother's Day, Father's Day, Valentine's Day, Easter, thank you teacher, graduation and exam congratulations. Its non-card offerings include gift dressings, small gifts, party products and other non-card products. The Company operates through a chain of approximately 800 Card Factory stores. more »

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AA plc is a United Kingdom-based roadside assistance company. Its segments include Roadside and Insurance. Roadside consists of two divisions; Roadside Assistance and Driving Services. The Roadside Assistance division helps stranded motorists at the roadside or at home utilizing a workforce of approximately 2,900 patrols attending on average around 10,000 breakdowns daily. The driving services division consists of its driving school and the British school of motoring and DriveTech. Its insurance segment comprises of insurance services, insurance underwriting and financial services division. The insurance services division consists of its insurance broker which sells motor and home policies, operating a diverse panel of underwriters. Its insurance underwriting underwrites motor and home insurance policies which originate from its insurance services segment. The financial services division provides competitively priced savings, loans, credit cards and mortgages. more »

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27 Comments on this Article show/hide all

Trident 9th Aug '18 8 of 27

Slight clarification Card Factory (LON:CARD) cited 'extreme weather conditions' as well as consumer weakness for lower profit guidance. So it could have meant cold snap as well hot phase.

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JohnEustace 9th Aug '18 9 of 27

Is the issue for Card Factory (LON:CARD) that we just don’t send cards so much any more? Their low cost model is attractive but they are in a market in secular decline due to smart phones.

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iwright7 9th Aug '18 10 of 27

In reply to post #389539

I looked at Elektron Technology (LON:EKT) H1 for the 1st time too, but came to a different conclusion to.... for a basic manufacturer of commoditised electrical connectors, the valuation seems a little racy.   

I  don't have 1st hand knowledge of the Bulgin product range, but the Quality metrics indicate a widening Moat, and the company has announced it will beat market expectations for the full year.  Perhaps others know of the Bulgin product line and can comment?   Ian  

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Andrew L 9th Aug '18 11 of 27

Graham, In case of interest this company floated recently BigDish (LON:DISH). On face value it does't look very attractive to me. So might be worth just ignoring. Alternatively, it might be highlighted as a risky IPO and want to be wary of for now. Someone seems to be hyping up the company on lots of bulletin boards which is not a good sign IMO.

House of Fraser - Thanks for pointing that out.  I think it is an interesting case of asking: what is risk?  Value investors might have gone for established retailers as their P/E's were low.  Amazon looked expensive and the shares were very volatile.  However, Amazon's business risk was much lower than high street retailers.  This is because it was able to undercut established retailers on price.

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JohnEustace 9th Aug '18 12 of 27

In reply to post #389574

I’m not so sure the Bulgin products are commoditised. They look to me like the sort of niche products where quality and reputation will come first for a lot of people. No point penny pinching on a connector that’s going in a harsh environment that you don’t want to have to send someone back to.
It’s the sort of thing where a design engineer in days past would just have pulled their catalogue down from the shelf and would have taken some persuasion to look anywhere else. These days that may be internet based but the thinking will be the same.

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Graham Neary 9th Aug '18 13 of 27

In reply to post #389484

I'm having a look, cheers Mercury. G

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peterg 9th Aug '18 14 of 27

Re ARB (and can someone remind me how to enter a stock name and ticker in a post - I keep forgetting and I can't find it defined)!

To make money, Argo will have to find a sufficient quantity of amateurs who want to hire its mining equipment, in order to cover the costs of assembling this equipment and make a profit.

Isn't this a potential risk reduction? Not a company I'd go near with a very long bargepole, but if you are going to get into crypto mining perhaps this is way to go. It's the old line about the people who made money from the Alsakan gold rush were the one who sold the shovels!


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Graham Neary 9th Aug '18 15 of 27

In reply to post #389604

The shovel-seller equivalents are those who sell the computer hardware to Argo. Argo is equivalent to the guy who owns the mine. G

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Banzii 9th Aug '18 16 of 27

In reply to post #389604

and can someone remind me how to enter a stock name and ticker in a post - I keep forgetting and I can't find it defined

I too spent ages searching for a help/how to on this before finding it bottom right of the text entry box for a comment.  It's a £ sign before the ticker.  Think the ticker needs to be upper case and followed by a space.  Ones with numbers don't work.


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Graham Neary 9th Aug '18 17 of 27

In reply to post #389614

And the data centres who are leasing their servers to Argo - they are also equivalent to the shovel sellers. Argo is the entity which has to put all of this server capacity to good use on behalf of its customers, or it will be left holding the bag. G

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Nick Ray 9th Aug '18 18 of 27

People have been offering "mining as a service" since the days of GLBSE (the "Global Bitcoin Stock Exchange" which was needless to say not a regulated stock exchange) - and indeed they have been failing to turn a profit doing it since then too! The problem is that there are only a fixed number of bitcoins to be mined every ten minutes. If people create ever more powerful miners the system adjusts automatically so that the same number of coins still get mined. You are running to stand still. In effect mining always becomes sufficiently expensive that it is no longer profitable.

However the really bizarre tail-wag-dog aspect of bitcoin seems to be that as mining gets more expensive, the price of a bitcoin increases to "justify" the mining costs. If ever there was "a coin for providing a great advantage, but nobody to know what it is" (to paraphrase the South Sea Company) it has to be bitcoin.

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Trident 9th Aug '18 19 of 27

In reply to post #389569

I think JohnEustace that regarding Card Factory (LON:CARD) that is an issue that has been kicked around many times before, but is never resolved. Perhaps the real question is whether the mechanism for the products Card Factory (LON:CARD) sells of retails stores etc, is the most economic.

At the moment because of their structure, they have bricks and mortar retail exposure, retail staff costs, subject to wage minimum regulations, and pound/dollar headwinds, as well as customer appetite questions.

They are still very profitable , just less so, with a healthy dividend (albeit financed through borrowing as much as by healthy cash generation). Unfortunately, it is not easy to say whether they are really positioned for long term decline businesswise, but arguably their from the share price perspective, investor seem to be taking a gloomier view, and at some point, that may signal value in the short to medium term.

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fwyburd 9th Aug '18 20 of 27

Re Card Factory (LON:CARD)
Thanks Graham for another great review. I put CARD on my watchlist after your last review and have been watching for a good entry point. Now charts are just one tool I use (not always successfully I might add) to decide when to dip my toe in and with CARD I would caution against doing so yet. Today's price of 190 has taken it well below the three remaining resistance points that underpin its price of 210, 203.4 and 203. Until it bottoms out and shows sign of moving up, I would not buy.

By contrast, GAME Digital (LON:GMD) has been sliding relentlessly over the past few months and looks like it has not only bottomed out, but at today's price of 28.6, has broken out of its lower 27.8 resistance band. This suggests an upward trend which will signal an even stronger confirmation if/when it crosses 32.95.


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JohnEustace 9th Aug '18 21 of 27

In reply to post #389634

The other issue for Card Factory (LON:CARD) that I have seen mentioned elsewhere is that the supermarkets and discounters are increasingly competing with them by offering equivalent ranges.

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MarkOR 9th Aug '18 22 of 27

+ve. I was personally quite surprised (on the upside) by the modest LFL declines a Card Factory (LON:CARD). When stacked up against other retailers this seems like relative outperformance. I believe people will continue to buy physical cards, so that their recipients can decorate their mantlepieces
+ve. it seems that the board is quite happy paying more dividends (80m) than FCF to equity (60m), and therefore levering up a bit each year. This can't go on for ever, but doing this whilst rolling out 50 more stores (5% annual growth in outlets this year) means that it's a fairly scalable model with room for further coverage, so CFO should catch up in due course
-ve. Shame that it can't seem to deliver performance online. I am much less worried about the digital threat to greeting cards, but it would be additive if CARD upped it's game in this channel.

I am a holder. And will top up more today.

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Weasel 9th Aug '18 23 of 27


Just checking, you describe Argo Blockchain (LON:ARB) as

"Another symptom of the mass mis-allocation of capital associated with cryptocurrency."

"It's shocking to me that some blue-chip institutions were coaxed into backing it."

"a leveraged play on the price of cryptos"

You use Charlie Mungers quote about Cryto coins as "turds" and you end with this...

"I assume that very few people have gambled a significant portion of their life savings on this stock. If there are any, I think it's fair to ask them: aren't there more entertaining ways to risk going broke than this?"

So............You're saying it's a screaming buy and I should invest all my life savings, re-mortgage the house, and spend my evenings on street corners to earn a few extra Pounds (actually more likely to be 'Pennies') to invest in it as well!? ;-)

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Ben1 9th Aug '18 24 of 27

In reply to post #389584

If I may offer some insight in to Bulgin products. The last company I worked for was a small supplier of specialised communications equipment, and used Bulgin connectors on some of the equipment and connecting cables.

They are good quality but not by any means the only connectors than can be used in harsh environments, nor are they necessarily the best for all environments or applications. We didn't use them everywhere on our products. There are better and more expensive connectors, and there are cheaper ones too. I would regard them as commodity items rather than specialised. They are middle of the road in terms of performance (assuming some degree of ruggedisation is necessary), and price.

I suppose I should caveat the above with saying that I wouldn't necessary claim to be an expert on all their entire range. So I can only speak for the types we used.

Hope that is helpful.

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gus 1065 9th Aug '18 25 of 27

In the spirit of “every dog having its day”, I was pleasantly surprised to log in and find that Ascent Resources (LON:AST) , one of my mad money O&G penny share punts was up about 130% on the day. I took a small punt on this Slovenian gas explorer a few months ago when a discounted placement was offered via Primarybid (nice idea this platform, but so many of their offerings appear to have hit the buffers). Seems the company may finally be close to resolving their licence application with the local authorities (although that has been promised before) and the shares have perked up accordingly.

Same magnitude of rise again tomorrow and I might just about be back to break even ....!


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RichardK 9th Aug '18 26 of 27

I recently discovered a further use for crypto-currencies in addition to money laundering, tax evasion, drug dealing, etc,

A friend showed me a blackmail threat. Payment was demanded in bitcoin. The threat was ignored.


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ambrosia 9th Aug '18 27 of 27

In reply to post #389524

10% down today and the price of gold at a recent low, ouch

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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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