Small Cap Value Report (Thurs 4 Nov 2021) - SNWS, TPFG

4th Nov '21 by Jack Brumby

92 comments 9572 reads

Good morning, it's Paul & Jack here with the SCVR for Thursday.

Agenda:

Jack's section -

Smiths News (LON:SNWS) - business in structural decline but predictable cash flows, large revenues, a low PER, and reassuring turnaround progress mark this out as a value opportunity worth paying attention to.

Property Franchise (LON:TPFG) - solid quarterly results from the UK's largest property business. Along with Belvoir (LON:BLV) and M Winkworth (LON:WINK) , these are robust, cash generative companies that could grow steadily over the long term, although some concerns over property market prospects likely persist.

Explanatory notes -

A quick reminder that we don’t recommend any stocks. We aim to cover trading updates & results of the day and offer our opinions on them as possible candidates for further research if they interest you. Our opinions will sometimes turn out to be right, and sometimes wrong, because it's anybody's guess what direction market sentiment will take & nobody can predict the future with certainty. We are analysing the company fundamentals, not trying to predict market sentiment.

We stick to companies that have issued news on the day, with market caps up to about £700m. We avoid the smallest, and most speculative companies, and also avoid a few specialist sectors (e.g. natural resources, pharma/biotech).

A key assumption is that readers DYOR (do your own research), and make your own investment decisions. Reader comments are welcomed - please be civil, rational, and include the company name/ticker, otherwise people won't necessarily know what company you are referring to.

Jack’s section

Smiths News (LON:SNWS)

Share price: 38.9p (+1.04%)

Shares in issue: 247,700,000

Market cap: £96.4m

This is the UK’s largest distributor of newspapers and magazines. It’s a structurally declining business, but still a large one with over £1bn revenues, long-term contracts, and predictable cash flows.

The group’s in turnaround mode, with Tuffnells and its pension scheme now offloaded. Bank debt is reducing and dividends are resuming. So it looks like what needs to happen is happening. Still, the shares trade now on an historic PER of less than 4x.

It’s perhaps not the sort of company you’d want to hold forever, but it’s very possible at these levels that the recovery progress is not priced in.

Preliminary results

Performance ahead of expectations, with dividends restored

…

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abtan

4th Nov '21

Litigation Capital Management (LON:LIT) (I hold)

For anyone interested Litigation Capital Management (LON:LIT) have now generated:

c.$AUD 9m /£5m of Operating Profit from just 2 cases in H1.
The Gross Profit generated so far this year ($16.3m) effectively covers all operating expenses for the Full Year (last FY OPEX was $13.7m.)
$AUD 22m (£12m) of Operating Profit in the last 10 months.
For context the current market cap is £130m.

---
At year end the company had $AUD 135m of investments deployed in cases.
The 2 cases won so far this period cost $AUD 7.7m to fund, so there is still $127m invested in cases that are yet to conclude.

AnonymousUser894098

Yes sorry I mean the price target on the Stockopedia page collated presumably from an average of broker forecasts perhaps?

portugull

I watched a Presentation by Smiths News (LON:SNWS) today hosted by the Investor Meet Company and one important point I picked up was that Smiths News expects to receive £8 million early in the New Year as a result of the sale to Legal & General of their Pension Scheme.

This will be another significant cash receipt in enabling the Company to rapidly reduce their Bank debt. I hold.

rmillaree

Ten Entertainment (LON:TEG)

I am content holder too at present (350p could be an exit price for me if seen soon).

I am not getting too carried away with the exceptioanl lfl stats - there has to be some sort of reversion to the mean at some stage here - albeit if more stuff is booked online they may have had some efficiency gain sfrom covid which would seema bit bizarre.

Just need the current duopoloy with Hollywood Bowl to continue - ie we dont need any new entrants coming in charging silly low prices. It does seem like this company has a decents sector niche at present .

Rusty2

Yes I see now. I would not take much notice of broker forecasts, not very reliable in my opinion.

davidjhill

yeah agree. I expect lfl to moderate too, though frankly even at +10% lfl going forward would give a very nice investment return. Have a similar price target of 330-370p for now. Cash generation looks very strong. Let's see how the Christmas period plays out.

Ah - Sorry, I see what you mean now. I thought you were referring to a fall. I generally ignore price targets from brokers, though if Gattaca (LON:GATC) can deliver on revenue and profit expectations then I guess a PE of 15 + cash of around 70p might equate to something similar. Seems market remains sceptical though.

It is an illiquid stock this so any move down / up is probably somewhat exacerbated.

Tortoise investor

Does Numis set out any EPS expectations or profitability indications?

RDHOWARTH

For 21, 22, 23... EPS 4.4, 10.8, 14.1 off PBT 5.5, 16.1, 21.1....

tindrum

What are people's thoughts about Property Franchise (LON:TPFG) options? There were 300,000 at 1p taken up in May of this year. The share price was rangebound between 2014 and 2020, and has only picked up this year at a time when the market has been pumped up by Government intervention. The options scheme is even more generous at £BLV. I quite like the look of both companies, but would welcome other people's thoughts.

ken mitchell

TCan’t fathom why none of us seemed to realise pre £ELTA demerger what with hindsight seems blindingly obvious!

Instead of an IPO in 3rd quarter it became a much less attractive demerger in 4th quarter. And why the name change from excellent well known brand name TGI to Hostmore? And why Unbound instead of Hotter Shoes? Also that Numis failed to promote the demerger was obvious to some investors (but not this one!) and hence presumably the selling and falling share price ahead of the demerger. Add the switch to AIM and the fact that brokers and presumably most investors big and small , were unprepared for and unaware that the demerger was happening and are still unaware, so no wonder it ended up a complete shambles with a further fall in the ELTA and Hostmore share prices post demerger, instead of the gains many of us had expected.

IF Paul is still confident about his valuations then both Hostmore and ELTA could be stunning buys at current prices. Anecdotal evidence shows TGI sometimes fully booked. I added to my Hostmore stake yesterday.

GloucesterBob

some cracking comments today's unfortunately have no idea what stock they refer to.

Come on guys/gals use a ticker, it's not hard.

JESSE LIVERMORE

Dear oh dear Ken, I guess you can prove anything if you choose your own facts?!

16 June : Further to the announcement on 21^st May 2021 of its intention to demerge TGI Fridays ("Fridays"),

Hostmore PLC is the name of the new parent company for Electra's hospitality brands Currently they have two brands - Fridays & 63rd+1st.

Unbound is the parent company for Hotter Shoes. There are plans to develop beyond footwear, hence the need for a parent company

Apologies, I stopped reading your post beyond the fourth sentence. It started poorly, & was getting worse!

Richard Goodwin

Thanks Abtan

For any interested in the hybrid property market, here is an extract from the TwentyCi quarterly property report:

https://www.twentyci.co.uk/wp-...

Purplebricks (LON:PURP) (I hold)

Interesting comments on Strike Nebraska1977, thank you.

I genuinely wonder how their no fee proposition will fare with the market so slow right now. And how much of an advantage a "free service" will have next to a company like Purplebricks (LON:PURP) which is now offering a money-back guarantee if they don't sell your property?

Another thought - will Strike's freelance LPEs be leaving for the stability of more permanent income in these slow times?

I should also add that I have no idea how Strike is being funded. The last time I looked at their accounts at Companies House, they were haemorrhaging cash. I know they have deep pocketed funders though, so perhaps this isn't a long term concern.

As a side note I think it's important to point out that Strike's free service is definitely not comparable with Purplebricks' paid service.
The last I checked, Strike would actually be more expensive than Purplebricks if a vendor decided to buy all the Strike add-ons for the comparable service.

Cheers

Hi Gino123

You said:

"And numerous current and former agents who hired by Purplebricks that were classed as self-employed are preparing legal action against the company. They argue that, despite their formal status, they acted as employees and are therefore entitled to holiday pay and pension contributions."

I think it's worth highlighting that:

these issues have cropped up many times for Purplebricks (LON:PURP) over the years and as far as I know have always been settled out of court. In any case, the change in employment status will minimise this risk going forward.
any successful litigation here would be a wider issue generally and impact any company that "employs" freelancers, not just the hybrid estate agents.

"Where will PURP open today?"

Well, that was a terrible day. I'm now back to my buy in price and remain unsure of what to do next.

I must admit that I thought the share price might fall when an update came out, owing to a weakened property market, but I wasn't expecting such a drastic -37% fall.

A part of me feels like selling and buying back in when the property market starts showing signs of improving.

Another part of me feels like topping up, based on the following:

Instructions are down, but my understanding from today was that the company still plans to be EBITDA positive this year.
The EV after today's fall is just £43m (+ a stake in HomeDay), which seems, well, a little too low.
I like the new money back guarantee proposition.
I think this is a game changer, because it makes me want to use it vs the previous model of paying £1,000 upfront and possibly not selling my property
Every estate agent will be suffering at the moment, so the most important thing is market share.
Based on the TwentyCi report I posted on this page about 20 minutes ago the market share for the hybrid market is up 1.3% vs 2 years ago - it's still going in the right direction and Purplebricks (LON:PURP) is one of the big players.
It's a shame that a company specific market share wasn't revealed today.

For me a growing market share for Purplebricks (LON:PURP) is the most important thing right now; sadly we won't know this information until next month.
The company still has a lot of cash on its balance sheet and a major backer in Axel Springer. The downside risk seems minimal.
The risk from "employing" freelancers is gone.
ARPI is continuing to increase based on the update today.

Any counter thoughts to the above would be most appreciated.

Property Franchise (LON:TPFG) (no position)

One thing to note from today's update is that there appears to be quite a drop in Hunters revenue from Q2 to Q3 (the acquisition was March 19th, 2021, so it's actually Q2 + 11 days.)

This drop could highlight an underlying weakness, seasonal trends or I've made a mistake somewhere.

That aside, it seemed like a good update, with strong Ewemove territory sales.
No position yet, but I do wonder if I should have one.

5th Nov '21

Purplebricks (LON:PURP)

any successful litigation here would be a wider issue generally and impact any company that "employs" freelancers, not just the hybrid estate agents.

Ref your point 2 abtan I would completely disagree - employment status disagreements happen all the time - they always have done and probably always will do and.The outcome pretty much always depends on the exact specifics of the arrangement between the two parties and and over the years outcomes have been randomly unpredictable when squabbles have happened.To date very few of these squabbles have set a precedent for other companies -imho there is close to zero chance that the purple bricks outcome will change much. All that tends to happen is that when companies lose well publicised cases others that engage similar tactics might panic and put staff on books. Imho purple bricks were probably always the wrong side of the line here - if bods are getting regular pay checks and do not have other customers on self employed basis and are instructed what they must do in their job roles arguing self employment exists is possibly more likely to fail than win. It might seem ridiculous that the bods who agreed to take on the self employed work can complain and change history but this can happen and has happened before.

as you say in point 1 I think there is almost zero chance that purplebricks will defend their prior stance to the hilt so I think the dispute will be settled to sweep things under the carpet.
in some respects if the bods are doing what they did previously and are now employees the act of making them employees may have confirmed their prior treatment was wrong practically speaking.

Small Cap Value Report (Thurs 4 Nov 2021) - SNWS, TPFG

Jack’s section

Smiths News (LON:SNWS)

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Jack Brumby

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