Small Cap Value Report (Tue 1 May 2018) - CNCT

Monday, Apr 30 2018 by

Good evening/morning,it's Paul here.

Right, let's try to get this article back on track, somewhat late.

There was very little of interest actually, on the day.

Connect (LON:CNCT)

Share price: 55p
No. shares: 247.7m
Market cap: £136.2m

(at the time of writing, I hold a long position in this share)

Unaudited interim results

Connect Group, a leading specialist distributor, is today announcing its Interim Results for the six months ended 28 February 2018...

Here are the financial highlights, which look rather disappointing to me (this is the first time I've seen the numbers, writing on 2 May 2018, as I was too busy to look at them on the release date of 1 May 2018).


If we assume that H2 might be the same as H1, then it looks as if full year adjusted EPS could come in around the 10p level. That's a good bit lower than the forecast consensus of 13.7p.

I can't find any recent broker research on this, to assist me in valuing the shares.

Dividends - the very high yield was a key reason to hold this share. Surprisingly, the interim divi of 3.1p has been maintained. However, the comments below suggest to me that management could be warming up shareholders to potential future cuts in divis;

The interim dividend has been held at 3.1p.

Looking ahead, in the light of the disposal of Books and Education & Care divisions, the Board will carefully consider the optimum allocation of the Group's excess free cash, balancing the capital requirements of the business and shareholder returns with an ambition to reduce net debt over time.

CFO steps down - as mentioned recently, I'm taking an increasingly dim view of FD departures.

Outlook - my finger was hovering over the "sell" button, but the outlook comments below have made me stop and think - this is a lot of business, for only £136m market cap;

Expectations for the full year are unchanged from the trading statement issued on 22 January 2018, with Full Year Adjusted Profit Before Tax in the range of £42m-£45m.

It's great to see companies spelling out precisely what profit expectations are. This helps investors value the shares.

Divisional performance - Tuffnells seems to be…

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Connect Group PLC is a United Kingdom-based distributor operating in newspaper and magazine wholesaling, and mixed freight distribution. The Company operates in three segments: Smiths News, DMD and Tuffnells. Smiths News segment distributes newspapers and magazines to retailers across England and Wales from its 39 distribution centers. DMD segment supplies newspaper and magazines to airlines and provides inflight services. Tuffnells segment provides next day business to business (B2B) delivery of irregular weight and dimensions consignments. Smiths News distribution network includes six hubs and 33 satellite depots. DMD supplies printed and digital media to travel points. Tuffnells provides parcel freight services for small and medium-sized enterprises. The Company’s subsidiaries include Smiths News Holdings Limited, Dawson Media Direct Limited and Tuffnells Parcels Express Limited. more »

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33 Comments on this Article show/hide all

Gromley 1st May '18 14 of 33

Connect (LON:CNCT)

Just a quick note as I'm travelling, the pensions still are in a small deficit on the acturial basis so they are making small top up payments. However the point made is valid that even once actuarily positive they cannot access the surplus.

The surplus would need to become much larger before it would be possible to buyout & recover any remaining surplus.

Nevertheless a surplus is better than a deficit, but nothing to get too excited about.

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ridavies 1st May '18 15 of 33

Safestyle UK (LON:SFE) have made another announcement this morning, probably / possibly the most significant in recent months, this stock has a very high institutional level of holdings, and I would guess that the company have been very involved with them on the best way forward which they, the institutions, find most palatable after having seen the paper value of their holdings fall from around 300p a year ago. In the last 2 announcements including today's., the Chair and CEO are changing. A very strong NED has moved into the Chair role, and 'after a thorough search' a new CEO has been appointed. No rush then, thorough search, but gratifyingly he starts today and the CEO up to yesterday is going to stic around and hopefully contribute towards increasing the value of his near 3m shares closer to that 300p paper value of a year ago. The company seems to be demonstrating the determination to fight back against the new aggressive competitor (which incidentally is funded by the person who left top management of Safestyle UK (LON:SFE) 5 years ago). The next 12 months should be very interesting, and we may hear even more at the AGM on the 30th May. Any extra positive news welcome! Thoughts Paul/anyone else?
PS On my second visit to Mello Derby, what a great experience. In some ways, I wish I lived closer to Beckenham for the regular meetings - but I dont! Many thanks to David and others.

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nigelpm 1st May '18 16 of 33

In reply to post #359488

Agree with all of that Peter and Gromley's point on the Pension - however there is some potential hidden value here in the longer term that isn't currently accounted for on the balance sheet - that's the point I was trying to make.  Yes, it's not available now but it's absolutely not correct to say it hasn't got value.

Certainly not convinced enough to buy more post results but there will be an opportunity here.

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xxx 1st May '18 17 of 33

LSE:NASA produced their fy figures today, its an IT company that you have previously commented on, but seems to have a low profile. It is loss making and I cant work out what it might look like in 5 thoughts appreciated !

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Julianh 1st May '18 18 of 33

Congratulations Paul. Have they found the best way to recognise you at last? First some Mello awards and now a gong. Have you chosen a title yet? Lord Scotty has a good ring to it. Or Lord Small Cap of Scockopedia? It will be good to have a second Lord at the next Mello.
Enjoy your visit to the House of Lords.

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ridavies 1st May '18 19 of 33

In reply to post #359743

Hi Paul
Further to these suggestions, I assume that it is to have tea with Lord Lee and I hope that he feels that your performances so far justify some decent cake, which I think he mentioned at Mello he only gives to special people.

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cjg 1st May '18 20 of 33

In reply to post #359458

Andy - i agree with your assessment of XLMedia (LON:XLM) - its one of my core holdings. My view is that the share price is being impacted by:

1/ The recent Facebook issues and potential ramifications which have impacted the sector.
2/ The placing in January and dilution (without as yet any meaningful acquisition news)
3/ The company's cautious approach to forecasting ("we like to underpromise and overperform") - with 2018 forecast eps currently showing a small reduction on those achieved in 2017.
4/ This is an overseas based company which will prob deter some potential purchasers/institutions.

I attended the post results presentation and the CEO confirmed that he sees continued strong growth (both organic and via acquisitions) opportunities. I think the market is waiting to see some form of evidence/ confirmation that historic growth trends have continued into 2018.

Stocko likes the quality (rank 95). 

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cidunn 1st May '18 21 of 33

In reply to post #359303

I hear you Phil, however I still remember a very well-known *now struggling* fashion retailer telling me (a jumped-up 22 y/o high on the tinterweb) circa 1998 that no one will ever buy clothes on the internet and to be honest with you that was the opinion of most people in that world. Now I’m not suggesting for a minute VR is a better experience, I’m just conscious technology often disrupts and wins in precisely the areas we thought it couldn’t… One to watch from the side lines.

All the best,

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matylda 1st May '18 22 of 33

Next year at Mello - Lord Lee and Lord Paul :)

Blog: Briefed Up
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ACounsell 1st May '18 23 of 33

Hi Paul,

If you are having tea with Lord Lee be interested to hear first hand about his views on the Beaufort Securities administration and the implications of PwC's proposal to 'hit' client accounts over £150,000 to pay for the process! (he raised the issue in a question in the House of Lords this week). What is more PwC estimate the administration will cost c. £100m for handling £550m in client assets (compares to press estimates of £100-£120m in fees for the Sainsbury's & ASDA merger - seems more than a bit excessive!0. More important are the implications for client cash and investments in the event of a broker becoming insolvent. I thought the general 'legal' view was that any client cash and investments were 'ring fenced' and could be handed over to another broker/asset manager. Apparently PwC have been approached by more than party but in cahoots with the FCA have rejected the offers! If this is allowed to create a precedent than investors will have to be pretty confident of the financial strength of a broker or asset manager. It also adds a further 'risk-factor' to the planned IPO of A J Bell which, though well run and conservatively financed, is likely to be the online broker used by many Stockopedia subscribers. Hope you enjoyed the afternoon tea!

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runthejoules 1st May '18 24 of 33

Lord Lee's going to give him the lowdown on Communisis and he'll announce a huge purchase tomorrow... now that I've sold it.

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WarrantStar 1st May '18 25 of 33

Hi Paul Some people reckon that the best things are worth waiting for.
In the case of your SCVR I agree!

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john652 1st May '18 26 of 33

In reply to post #359803

I also like XLM a lot, not easy to understand what they do is probably another reason for the price, CEO has bought 70k of shares at around the lows of 150p this month.

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samanddee 1st May '18 27 of 33

Paul - hope you had a good time do tell us of the experience sounds fab! Something different from enlightening us on shares...the Mello host btw was fabulous - how do we teach the youth of today on these matters?

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MarkOR 1st May '18 28 of 33


Re: Daily newspaper deliveries. The two? remaining operators in this space really need to consolidate.  Connect is one of them.

Re: Pension Surplus. Could this value be realised by investing the pension assets in long dated and low risk bonds (lowering he investment risk) and then selling the matched assets and liabilities to a pension consolidator for cash, realising some of the surplus as cash.  Not sure what Trustees think about this type of trade. Anyone an expert?

I am a holder, although I waiver between CNCT and Trinity Mirror as the value stock to buy in this sector.

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markpulsford 2nd May '18 29 of 33

Could you take a look at the Q1 trading update for Plus500 (LON:PLUS) . The market cap is getting pretty big now but I think you have mentioned it in previous reports.

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Paul Scott 3rd May '18 30 of 33

In reply to post #359358

Hi gus,

Morning Paul.

As an occasional punter in Mobile Streams (LON:MOS) (I think it’s still in the BMUS portfolio), I wondered if you had any views on today’s announcement of a tie up with Aptoide for their new crypto-currency app?

Look, it's just a punt. I've got over 2m shares, so I can't get out, and don't want to try, as that would kill the price.

If MOS can inject some pizzazz into it, with some crypto-bollox, then great!

Despite all the doom & gloom, MOS still has net cash. Who knows what might happen?

Management have done an interesting job in the past, before.

So for me, it's just a write-off and a call option on something interesting possibly happening.

It's clearly crap though, as things stand now.

Regards, Paul.

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FREng 3rd May '18 31 of 33

In reply to post #359818

As it's a quiet day, and we are doing anecdotes ...

At a joint meeting of the government's IT and Comms Technology Foresight panels in the 1990s, I asked a main board director of BT what he thought the impact of the Internet would be on BT. He said "iThe Internet uses our infrastructure. If it causes us any business problems, we'll just shut it down".

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Richard Cockbain 3rd May '18 32 of 33

Paul, your reports are never "rubbish" and always insightful... thanks.

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ridavies 3rd May '18 33 of 33

In reply to post #359888

Re XLMedia (LON:XLM), a little bit cynical perhaps, because I too am a long time holder and bit disappointed in SP at the moment to say the least. However, look at CEO's recent purchases this way. He buys a modest amount at xp, the SP rises by say yp, and his paper share value - because he has several million shares - rises much more than the full cost of his modest purchase! A rather less cynical approach is to say whenever he gets any spare cash, he cant think of a better place to put it than into the company he runs. I prefer the latter argument..........sometimes!

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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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