Small Cap Value Report (Thur 9 May 2019) - DFCH, Swiss Watches, WTG, WATR, CCT, SDRY, CAY, WRKS

9th May '19 by Graham Neary

42 comments 9209 reads

Good morning!

Quite a few things to look at today.

Distribution Finance Capital Holdings (LON:DFCH)
Watches of Switzerland (ticker unknown)
Argo Blockchain (LON:ARB)
Watchstone (LON:WTG)
Water Intelligence (LON:WATR)
Character (LON:CCT)
Superdry (LON:SDRY)
Charles Stanley (LON:CAY)
Versarien (LON:VRS)

Financial Reporting Council

The FRC has imposed sanctions against Laura Ashley Holdings (LON:ALY) 's accountant in relation to its work on that company's accounts for FY June 2016. Fines were reduced to reflect "an exceptional level of co-operation" by the accountancy practice and its audit partner.

I've been criticising the authorities for taking up to a decade to resolve cases such as this. Bravo to the FRC for the quick turnaround on this investigation.

Distribution Finance Capital Holdings (LON:DFCH)

Placing price: 90p
No. of shares: 106.6 million
Market cap on admission: £96 million

Admission to trading and first day of dealings

The share price has popped higher on the first day of dealings for this brand new financial stock.

Distribution Finance provides working capital for businesses, in partnership with major manufacturers. Its primary customers are the dealerships who sell equipment into business. The types of things it finances include mopeds, motorbikes, RVs, marine craft, industrial and agricultural equipment.

I was interested to check whether pricing might be attractive but the admission document tells me that the company's book value at December 2018 was just £54.6 million. I don't think that any of the IPO proceeds are going to the company.

The IPO is a demerger from TruFin (LON:TRU) that is designed to help DFCH in its application for a banking license, enabling it to offer retail and SME desposit facilities.

Long-term, it is hoping to achieve ROE of 25% with a £1.2 billion receivables book. It wants to develop a wide range of working capital solutions for business - invoice discounting, finished goods financing, etc. And it will accept leverage…

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leishylegs

9th May '19

Hi Peter,

I don't think Graham has finished the report yet so I am sure comments on Water Intelligence will arrive in due course, as planned.

Richard

mojomogoz

Hello Frederick

I've got no opinion on Arrow Global (LON:ARW) positive or negative. I've been meaning to look at it and never got round to it.

My only view is that the "real" fundamental short sellers seem to have stuck against it and even increased their position and it is the run it by the numbers and hedge against long short sellers that have reduced (which they probably would with positive momentum)

Michael Tee

Phil,

Thanks for this information. Did you come by this information in response to a direct email to Air Partner or is there an RNS I have missed? It is strange that the shares have not dropped considering the information silence from Air Partner and no sign of the results.

Michael

Hi Ned,

I have also now contacted Air Partner directly.
Received the following reply:
'The results are due out this afternoon'. Again no explanation.

Michael

Edward John Canham

Hi MBFP

Air Partner (LON:AIR)

I sent them an e-mail and they replied quite rapidly.

I'm surprised by the muted SP movement ( remember Staffline (LON:STAF) ) and my theory is that the "city" had been advised they were not coming out this morning FWIW.

Phil

john652

Hi Graham,

Also very interested in Character (LON:CCT) if you can fit it in based on ISA’s comment:

‘There is some stuff in the middle of the report about problems with the new acquisition, looks like some re-capitalistion may be required to satisfy banking covenents, with a deadline of this Aug. Would like to see Grahams's take on this.’

Character (LON:CCT) management are often rightly criticised for excess pay, but they have been running the company for a long time, own a lot of shares ( I think) and steadily deliver, so far. They have very good customer relationships and are at risk of loosing a license when up for renewal, but so far haven’t. Solid balance sheet and good yield and good momentum.

Thanks Phil.
I hope your theory is right, and I think it probably is, but it is disappointing especially in light of last year's debacle. You would think they would do everything they could to get it right now.
Let's hope this afternoon doesn't mean 4.30!

Graham Neary

Hi julian,

I've covered Water Intelligence (LON:WATR) now.

I've not spotted all the red flags mentioned by others, but I still have a few concerns which are holding me back from opening a position in it.

Cheers

Graham

Zipmanpeter

Re £Superdry – great to hear some diversity of viewpoints. My take and concerns were different again.

Dunkerton’s desire for ‘more options online’ = more complexity in the supply chain - why is one of the strategy reasons why the MBA professional managers clashed with him (first pushing him out and then being ejected themselves). Personally, I think Dunkerton is right here (against my own classic FMCG experience & MBA training). The new online digital world demands variety that is supported by fast fashion cycles ….requiring flexible, near to home but more expensive suppliers vs lower cost Far East ones (another point of strategic difference).

However, IMHO, the real issue behind the poor £Superdry performance has been poor product. For the last 12 months this has got botched and occured when Dunkerton was ostensible involved but in reality exiting day to day involvement and rowing with the rest of the board. Quality of design suffered as energy was focused elsewhere.

Renovated product is due this summer (eg on-trend LBTQ+ ‘rainbow’ sweatshirts) and, critically, this autumn (eg transitional waterproof rain jackets to hedge bets on weather better). Jackets/Sweats were 56% of sales in 2018 in the key AW season. Hopefully, these innovations will be kept and be complemented with some ‘heritage’ designs now his old design partner is also being brought back.

But I also expect today’s profit warning will include considerable discounts offered to shift poor product and some prototype write-offs. Dunkerton will surely ditch planned Kidswear introduction and reduce deviation into ‘premium’ edits and women’s dresses etc (where Superdry has no real heritage) which is all to the good.

Another watchout is Europe. Majority of sales are now in Europe (UK <30%, US/China/ROW are still nascent development markets desite former mgt’s hubris). Lack of growth there if their economies struggle is going to hurt - especially in wholesale and franchise store sales.

Finally, again IMHO there is going to be a big write down of store assets and impairments in all mature geographies. Again Dunkerton had at least some input over these decisions over the last 3-4 years but can blame it on the old board.

In total, I think there may be up to £30-50Mn of bad news in the full year results being a combination of this year impacts of write-offs/discounts/exceptionals including the costs incurred in the Board war and the impairments that the property review will flag up. However, the balance sheet is very strong now with little debt so this can be managed.

So net, ne, 6months from now, Superdry will be selling renovated product from impaired stores and with extra online skus available - so LFL sales/profits are highly likely to go positive.

Personally, I did not want Dunkerton back but most importantly the management conflict and distraction is now gone and the business can move forward. Really good chance Superdry can recover its mojo to a large extent as I think the brand itself has been dented but not broken. So slow, steady but not spectacular share price recovery and good divis while we wait

I do not hold yet but will likely buy now or after the year end results are declared.

(Edit - need to learn to write faster as Graham has now also opined since I started my comment!)

Separately, any views on the hostile originally nil premium Non-Standard Finance (LON:NSF) takeover of Provident Financial (LON:PFG) by anyone?

Much mud being expensively thrown by both parties. At the offered 8.88:1 ratio, NSF shares are now valuing PFG at around a <10% discount to the market yet >50% of shares (Invesco/WF/Marathon who hold BOTH NSF & PFG shares currently are (still) declared in favour of the takeover vs only 14% against (Schroders from Monday).

Industrial logic says NSF are right and they offer a better strategy (and possibly mgt) through bolting on Everyday Loans branch network and Guarantor lending brands GB / TrustTwo to Vanquis Bank whilst selling off Moneybarn/Satsuma and de-merging Loans@Home. But intervention from the Competition Authority a real risk. This may cause PFG shareowners to hold back support to avoid risk.

I hold (too much) NSF else I would be buying NSF now either for the very long term or as a cheap way to own some PFG (which I think is on the road to recovery).

Hi John, CCT says in relation to Proxy that there is "an element of under-capitalisation of its business and, that this will be required to be addressed".

I haven't looked into it in detail but I don't think Proxy is very big so it shouldn't be too expensive. G

ACounsell

All I will say is that Plus500 (LON:PLUS) passes 11 Stocko screens, has fallen 73.5% from its 52 week high and has a momentum score of 3!! Clearly meets your "sucker of suckers - to good to be true screen!

I just sent another email to Kate Patrick at Air Partner as I am not impressed with the lack of results so far today (I hold):

It is now getting very close to the market close and still no results - an hour to go to the market close
Why, if the results were only intended to arrive this afternoon, were investors not informed? .
Results RNS are expected to appear at 7am.
It has not been fun to be an investor in Air Partner since April last year.
This is not the way to bring back investor confidence.
I would appreciate a reply to these questions from Air Partner.

Just for interest on this subject ran a screen to filter shares with greater than 10 screens met. Top of the league were 4 housebuilders Barratt Developments (LON:BDEV), (13), Bellway (LON:BWY) (13), Redrow (LON:RDW) (15) and top of the league Persimmon (LON:PSN) (16). Only other entrants were Lonmin (LON:LMI) (11) and the aforementioned Plus500 (LON:PLUS) . Anyone for a housing market crash?

Julianh

Thanks rmillaree
Better to have the small pain of missing out on a successful investment than the much bigger pain of taking a loss if the red flags turn out to be justified.
julianh

rmillaree

Water Intelligence (LON:WATR)
Graham
I've not spotted all the red flags mentioned by others, but I still have a few concerns which are holding me back from opening a position in it.

and

it conducts close to zero R&D. So while it considers itself a technology company rather than a support services company, it is not currently developing any new technologies. And I don't know if it actually owns any proprietary technology.

I don't know how material the sums involved are but there is the potential "conflicting interests" with regard to the agreements with PSS that may carry royalty payments once the relevant threshold is exceeded.

from prior year annual report

25 Related party transactions
PSS was a former owner of ALDHC and ALD until the reverse merger in 2010 that created Water Intelligence. PSS is now an affiliate of Water Intelligence and hence is a related party. PSS provides a technology license to Water Intelligence and ALD on terms favourable to Water Intelligence and ALD. The license is royalty-free for the first $5 million of sales for products developed with PSS technology.

*Patrick DeSouza and Michael Reisman are directors and shareholders in Plain Sight Systems, Inc. (PSS)

also

During the normal course of operations there are inter-Group transactions among PSS, Water Intelligence plc, Water Intelligence International, ALDHC and ALD. The financial results of these related party transactions are reviewed by an independent director of Water Intelligence plc, the parent of Water Intelligence International, ALDHC and ALD

I would feel a lot more comfortable if Patrick DeSouza only had his fingers in one of the two pies rather than both the company and PSS. Ok i am guessing this a non material historical remnant of a situation but it isn't ideal when bods have 2 fences they can sit on.

seadoc

Graham, Versarien (LON:VRS) "It's little wonder that VRS is leading the way in the supply of RNS announcements" Brilliant and too true.

sharw

So there we have it. Air Partner (LON:AIR) results issued at 17 45. If they had initially said that the results would be between market close today and open tomorrow there would not have been the panic with people making phone calls and ditching shares "in case it is bad". In the event underlying eps came in at 9.6p cf forecast 8.5p

Outlook - "I am pleased to be announcing a robust set of results, which I believe mark a turning point for the Group. We have taken the steps required of us to strengthen the business and made significant progress over the last year. As a result, we're reporting good organic growth, with a very strong performance in the US, strong Freight trading, a growing contribution from Consulting & Training and several new office openings. In addition, we have added excellent experience to our Board, invested in key management positions and appointed new auditors. This progress now leaves us well positioned to execute our stated strategy for growth."

So all they've got to do now then is sort out investor relations!

Gromley

Yes rmillaree ,

You spotted the same thing that finally turned me off here.

If I understood the chain correctly Patrick DeSouza owns the IP on which Water Intelligence (LON:WATR) make their living.

Now of course this could just be a legacy of the way they came to market, or not.

I cannot help being reminded of Safestyle UK (LON:SFE) , where senior managers were able to leave whilst carrying with them much of the value, in that case it was illegal, in this case I think it could be entirely legitimate.

I have no wish to besmirch Mr DeSouza by saying that he would do anything underhand, but the suspicion that he could is quite enough for me.

As the growth now looks to be substantially lagging the valuation I don't even feel that I'm passing up a future bagger by being fussy - we shall see.

shanklin100

10th May '19

With Water Intelligence (LON:WATR) presenting at Mello next week, it sounds like there will be no shortage of questions.

Small Cap Value Report (Thur 9 May 2019) - DFCH, Swiss Watches, WTG, WATR, CCT, SDRY, CAY, WRKS

Financial Reporting Council

Distribution Finance Capital Holdings (LON:DFCH)

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Graham Neary

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